For most business owners, the concept of insurance is not a foreign one. It’s something they’ve likely dealt with throughout their personal and professional lives. For that reason, it’s not uncommon for them to have at least a basic understanding of how the common types of business insurance work.
There is, however, one kind of business insurance that causes no shortage of confusion for many business owners, managers, and HR professionals: workers’ compensation insurance. The reason it’s so confusing is that it’s governed by a thicket of state by state legislation, with little to no cross-border standardization to make things easier.
To help, here’s a business owner’s guide to workers’ compensation insurance. In it, you’ll learn everything you need to know about this oft-misunderstood but vital type of coverage, so you can keep your business in compliance with local law and financially protected from the cost of an employee accident should one happen.
What is Workers’ Compensation?
Workers’ compensation refers to the mechanism that helps to cover an employee’s lost wages and medical costs in the event they’re injured on the job. For businesses, that mechanism comes in the form of an insurance policy from either a private insurer or a state-controlled fund, depending on the business’s location. Critically, it covers employee injuries or illness arising from their jobs, regardless of who’s at fault. That means it protects the business from liability even if an accident occurs due to employee negligence.
How Does Workers’ Compensation Work?
In the event that an employee is injured on the job (or suffers a work-related illness), one of the first steps they’ll often take is to file a workers’ compensation claim. For a business, this is actually the preferred outcome, because in most cases the injured employee forfeits their right to sue their employer for damages as a condition of their own claim. Once filed, the claim is investigated by the employer and their insurer to determine that a legitimate injury occurred and that it should be covered by the business’ workers’ compensation policy. If approved, the employee may receive:
- Medical care
- Permanent injury compensation
- Payment for wages lost due to the injury
- Retraining costs (if the injury would prevent them from resuming their original job)
- Survivor benefits (paid to family members if the injury resulted in death)
The specific types and amounts of benefits an employee may receive depend on the state the business calls home, or the location of the workplace where the injury occurred.
Which Businesses Require Workers’ Compensation Insurance?
In general, all businesses with non-owner employees must have some form of workers’ compensation insurance. That’s because it’s a requirement in all US states except for Texas, where employees of businesses without coverage must pursue a personal injury claim against their employer if they’re hurt on the job. The only real variance in the other states’ laws is with regard to the minimum number of employees a business must have before coverage is required, as well as the specific exceptions each state lays out (Ex. babysitters, farm workers, domestic workers). Beyond that, workers’ compensation law throughout the country follows a familiar form, calling for a business to purchase coverage from a private carrier or a state-operated fund.
What About Multi-State Businesses?
Businesses that have a presence in or frequently operate in multiple states face an additional level of complexity when it comes to workers’ compensation insurance. In fact, depending on which states are involved, there can be a near-infinite number of rules and regulations that apply. In general, however, whichever state the business principally operates from is considered its “home” state for insurance purposes. That means their insurance coverage will be geared towards the requirements of that state. If the business has employees elsewhere, they must also carry coverage appropriate for that location as well.
This may be accomplished with a single policy underwritten by an insurance carrier that’s licensed to operate in all of the required states, or via maintaining a separate policy for each individual jurisdiction. In such situations, things become considerably more confusing if an employee has a claim, as they may choose to file a claim in their home state, the state where the injury occurred, or in both, as the specific state laws permit. For that reason, it’s advisable for businesses with multi-state workers’ compensation exposure to seek expert help when determining their coverage needs – and to err on the side of caution if there’s any ambiguity in their legally mandated levels of coverage.
The Bottom Line
By now, you should have a clearer picture of how the workers’ compensation system works, and how it related to your business. It should be obvious that it’s a system that works to protect businesses from unforeseen financial risk, and works to prevent employee lawsuits in the event of an accident. That makes it a kind of coverage that’s quite beneficial for any business – even in situations where it may not be legally mandated.
Although the state laws on the subject may vary from place to place, they should be easy for any business owner to understand, especially for businesses that only operate within a single jurisdiction. The only major complications that can arise for companies with operations in multiple states happen where differing standards can be a chore to make sense of. The bottom line, however, is a simple one: workers’ compensation insurance is a good idea for businesses, so it’s well worth it to engage some expert help to craft a policy that covers every possible eventuality. If your business ever has to call on that policy, you’ll be glad you did.