The Small-Business Owner's Guide to Workers' Compensation Insurance

Chapter 2: How Workers' Comp Insurance Works
Part 3: Where Do Small Businesses Get Workers' Compensation Insurance?

A. What Is a State Compensation Insurance Fund?

So you're on the market for Workers' Compensation Insurance. Depending on where you live, you may have a sea of options — or you may only be allowed to purchase coverage through the state's insurance fund.

About 20 states have their own competitive Workers' Comp fund, which means you can purchase from a private insurance provider or through the state program. According to A.M. Best New browser window icon., state funds write approximately 25 percent of all Workers' Compensation Insurance policies. California's and New York's funds are the sixth and seventh largest writers in the United States.

State funds write about 25% of all Workers' Compensation Insurance policies.

In a handful of states, you can only purchase Workers' Comp through the state's monopolistic fund. Read on to learn more about these two kinds of state-run Workers' Comp funds.

Competitive State-Run Workers' Comp Funds

The state's department of labor, commerce, or industrial relations usually operates Workers' Comp funds. Though these funds are often considered "insurers of last resort," many of these state systems are A-rated insurance providers (meaning they are financially solvent).

Small-business owners are guaranteed a policy from these funds if they can't receive coverage from private insurers (whose rates are typically more competitive). But state funds can compete in private markets, too. Some funds are fully independent, while others opt for the nonprofit status and tax breaks that come with it. Some nonprofit funds return surplus money to policyholders after paying off claims and operating costs.

Currently, there are 22 states with state-run Workers' Comp funds:

Note: most of these funds only write Workers' Compensation polices for employers in their home state. If a claim is made on your state-provided Workers' Comp plan, benefits are paid out by the state department responsible for administering the fund.

Monopolistic Workers' Comp Funds

If you live in Ohio, North Dakota, Washington, or Wyoming, know that your state's laws require you to purchase Workers' Compensation Insurance from their designated programs. In other words, you can't purchase insurance through private companies.

Employers who live in these four states can purchase coverage from their respective funds:

Monopolistic programs can run into solvency issues because they don't necessarily have to maintain surplus funds like private companies do. Instead, these programs rely on a "pay as you go" system because they can fall back on taxpayers' money and other state resources if the pool runs low.

Here are a few other issues you may run into when you must purchase Workers' Comp from a monopolistic state fund:

  • Red tape. Most claims are handled by the state agencies that administer the Workers' Comp coverage, which means the process may be time consuming.
  • Customer service problems. State agencies must process a high volume of claims, which means employers and workers can expect longer waits.
  • Lack of standardization. In monopolistic states, employee work classification codes or modification factors might not conform to the national norms.
  • Lack of coverage for out-of-state workers. If you need to cover employees in other states, you may need to purchase a separate policy. This is true for all Workers' Comp policies, though, as they are usually written for a specific state.
  • No Employer's Liability Insurance. Workers' Comp policies issued by monopolistic state funds don't include Employer's Liability coverage. You may be able to purchase the policy separately or add it on as an endorsement (called "Stop Gap" coverage) to your General Liability policy.

Next: Part 4: What Are Your Workers' Compensation Insurance Rights & Responsibilities?

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