Workers’ comp ghost policy

A ghost policy is a type of minimum premium workers’ comp policy designed exclusively for business owners who don’t have any employees, but must legally or contractually provide a certificate of insurance (COI).

Contractors and solo business owners, who are typically exempt from workers' comp requirements, often purchase ghost policies as a way to satisfy requirements without having to pay for a full workers’ compensation policy.

Keep in mind, workers’ comp ghost policies don’t offer any real wage or injury benefits to anyone, including the owner. This means that any expenses from job-related injuries or illnesses would come out of your pocket, including ER visits, prescriptions, and lost wages.

When a client contract or state law requires a business to show proof of workers’ compensation insurance, many independent contractors, sole proprietors, and small business owners with zero employees opt for a ghost policy.

However, being a business owner doesn’t automatically mean you’ll need a ghost policy. And, if you do have employees, signing up for a ghost policy instead of a full workers’ comp policy could lead to serious legal and financial consequences for your business.

Here are a few instances where a ghost policy might make sense.

Some states require that every business provide proof of workers’ compensation insurance, even if you don’t have any direct employees.

For example, although most Florida businesses with four or more employees must have a standard workers’ comp policy, the state requires all construction-industry businesses—including one-person operations—to carry workers’ comp.

A ghost policy will typically fulfill these requirements without having to buy a full policy.

Some potential clients might require you to have a workers’ comp policy before they award you a contract. If you already have general liability insurance and no one else is working for you, you may not want to invest in a full workers’ compensation policy.

In this case, a ghost policy can help you win the contract.

Most general contractors require their subcontractors to provide their own business insurance. If you’re an independent contractor, a ghost policy can give you the certificate of insurance (COI) needed to win the job.

But remember, a ghost policy doesn’t offer any real insurance coverage, so make sure you have the right liability insurance for the work that you do, and the funds to cover any work-related medical costs out of pocket.

Many states’ workers’ comp regulations allow certain types of businesses—like sole proprietorships or one-person LLCs and S corps—to be exempted from their insurance requirements.

But, even if you are exempt, you may still need to show proof of insurance from time to time. A minimal ghost policy will fulfill that requirement while saving you money on premiums.

Certain businesses, like plumbers, electricians, and construction contractors, often need to show proof of workers’ compensation coverage—even if they’re a one-person business.

However, signing up for a full workers’ comp policy may not make sense for you—especially if you can cover your own medical expenses without insurance, or are at low risk of work-related injuries.

In that case, a ghost policy would allow you to provide proof of coverage and work the jobs you want.

Workers’ compensation ghost policies offer no real coverage for a minimum fee to meet legal or contractual requirements for your business.

But to get a ghost policy, you must meet two requirements:

• You must be the business owner
• You can’t have any employees

Since you, as the business owner, are exempt from workers’ comp requirements, and you don’t have any employees, no one in your company qualifies for workers’ comp benefits under a ghost policy.

Your insurance company can charge you only the minimum required premium because they know they won’t have to pay out a claim on the policy—since no one is eligible to file one.

Before you renew your ghost policy each year, your insurance provider will audit your business to confirm that you still don’t have any employees. Most ghost policies only have a one-year policy period, which may make them an even more appealing option if your business only needs them to meet a contract requirement.

If you do hire an employee while you have a ghost policy, you should inform your insurer immediately. Your policy will likely have a temporary workers’ comp provision that will cover you until you purchase an actual workers’ comp policy.

If you need to hire an employee, a minimum premium workers' compensation policy may be a good fit. This type of policy sets your premium charges at the minimum premium (i.e., the smallest amount of money that an insurance company will sell to a business).

However, if you don’t disclose your employees, your insurance company could retroactively charge you an additional premium for the full workers’ compensation policy rate from the time you hired your first employee. You could also face penalties from the state.

A ghost policy covers no one and provides no benefits. It only provides proof of workers’ comp insurance to fulfill the terms of a contract or meet your state’s business insurance requirements.

If you have employees and need real insurance protection, you should buy a full workers’ compensation insurance policy for your small business.

A workers’ comp policy covers medical costs and disability benefits for employees who get hurt or sick on the job. This coverage is also recommended for sole proprietors who are at risk of work-related injuries and illnesses, as most personal health insurance policies exclude coverage for injuries related to your job.

While many clients and a handful of states allow ghost policies, small business insurance requirements are constantly changing. It’s important to check your local laws and industry regulations before purchasing any policies.

Even if you work in a permissive state or for a customer that accepts ghost policies, you need to make sure that you’re classifying all your employees with the right job codes.

Misclassifying employees, such as by calling them 1099 employees, could lead to significant fines, legal liability for unpaid taxes and benefits, and criminal fraud charges. Plus, if an employee gets injured, you’re fully liable for their medical and disability expenses, which could be financially devastating for your small business.

It depends. While ghost policies are legally permitted in some states, they are illegal in many others.

For example, all contractors in California are required to carry workers' comp even if they do not hire any employees. A ghost workers' comp policy would not be sufficiently legal in this instance because ghost policies are not allowed in California. A small business owner who attempts to carry a ghost policy instead of a workers' comp policy could face consequences for being inadequately insured.

Because of the constantly changing nature of small business insurance requirements, it’s always better to carry a workers' comp policy rather than a ghost policy.

Not only will the actual policy protect you and your employees, but it will ensure total compliance should laws and regulations around ghost policies suddenly change in your state or region.

Examples of states that haven't explicitly banned ghost workers' comp policies include:

• Alabama
• Florida
• Georgia
• Illinois
• North Carolina
• Ohio
• South Carolina
• Virginia
• West Virginia

If you work in a monopolistic state, such as Ohio, North Dakota, Washington, or Wyoming, you typically cannot use ghost policies. These states run their own workers’ comp systems, mandating that all businesses buy their coverage through a state-run fund.

If you need proof of workers’ comp coverage but don’t have any employees, a ghost policy is a cost-effective option to consider. It can help you fulfill the terms of a contract or meet state requirements without paying a typical workers’ comp premium.

As each insurance carrier has its own requirements for writing a workers' comp policy, you may find that a ghost policy is one of the few options at your disposal to meet these requirements. However, ghost policies are not available in every state and may not be offered by certain insurance carriers.

If you think a workers’ comp ghost policy may be right for your small business, speak with an insurance agent to discuss your options. They'll help you find the most affordable option for your small business, and you may be able to get a certificate of insurance in as little as a day.

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