Workers' Compensation Insurance: Requirements, Coverage and Cost Factors

The NAIC says workers' compensation typically covers an injured employee's medical expenses, rehabilitation costs and lost wages. NAIC small business insurance guide.

The NAIC also describes the trade-off behind the system: in exchange for state-mandated medical, disability income, rehabilitation and death payments, injured employees agree that they will not be allowed to sue their employers. NAIC workers' compensation overview.

Benefit types and amounts come from state law. The California Department of Insurance (CDI) lists five basic benefit types in California: medical care, temporary disability, permanent disability, supplemental job displacement and death benefits. It says California temporary disability benefits are designed to replace two-thirds of lost wages, up to the current maximum prescribed by law. For another state, use that state's agency. CDI workers' compensation guide.

The two parts of a standard policy

CDI describes a workers' compensation and employers' liability policy in two parts:

• Part One, workers' compensation: The insurer agrees to pay the benefits imposed on the employer by the workers' compensation law of the state or states listed on the policy's declarations or information page. Check that every state where your employees work appears there.
• Part Two, employers' liability: This part protects the employer when an employee's injury or disease is not subject to the workers' compensation laws.

CDI also explains the "exclusive remedy" rule: generally, an injured employee covered under the workers' compensation laws cannot sue the employer for damages in civil court. In California, that protection applies only when the employer is properly insured. An illegally uninsured employer can face a civil action in addition to the workers' compensation claim. CDI workers' compensation guide.

In most states, having employees triggers a duty to provide workers' compensation, but each state writes its own rule. The NAIC summarizes coverage as mandatory for most employers in every state except Texas. NAIC workers' compensation overview. State agencies show more variety than that summary: South Dakota and Wyoming are also exceptions, and states with a mandate set different employee counts and industry rules.

These state examples show the range:

Going without coverage where the law allows it has consequences. The Texas Department of Insurance explains that coverage limits an employer's liability if an employee sues, except when gross negligence results in a fatality (TDI employer resources). South Dakota's labor department encourages employers to carry coverage to avoid a civil lawsuit (South Dakota employer responsibilities).

For the rules in other states, use our state-by-state requirements guide and the state insurance guides, then confirm the current rule with the state agency. The state requirements checker builds a list of questions to take to that agency for each state where you operate.

Who counts as an employee

The counting rules matter as much as the threshold:

• Florida counts business owners who are corporate officers or LLC members. In non-construction work, sole proprietors and partners are not employees unless they choose to be included on a policy. Florida Division of Workers' Compensation.
• California lets a sole proprietor buy coverage for themselves, but the inclusion must be stated in the policy or added by endorsement. California DWC FAQ.
• Washington's Department of Labor & Industries (L&I) tells businesses that if they have workers, "whether they are employees or independent contractors," they might be required to provide workers' compensation. Washington L&I coverage requirements.

Before relying on a headcount, ask the state agency how it treats owners, officers, part-time and seasonal staff, family members and contractors. Paperwork alone may not decide it: Washington L&I says "A 1099 form is a federal form and has no bearing on Washington state workers' compensation coverage," and that a UBI or contractor registration number "does not automatically make a worker an exempt independent contractor." Washington L&I on independent contractors.

Penalties: a California example

California's Division of Workers' Compensation says failing to have coverage is a criminal offense. Under Labor Code section 3700.5, it is a misdemeanor punishable by a fine of not less than $10,000, up to one year in county jail, or both. The state also issues penalties of up to $100,000 against illegally uninsured employers, and a stop order can prohibit the use of employee labor until coverage is obtained. Ask your own state agency about its enforcement rules. California DWC FAQ.

In four states, employers buy workers' compensation from a state fund rather than from private insurers. North Dakota's Workforce Safety & Insurance (WSI) says North Dakota is one of four exclusive state funds, with Ohio, Washington and Wyoming. It says all employers in North Dakota must purchase coverage from the state fund rather than from private insurance companies. In the other 46 states and the District of Columbia, WSI says employers can buy from private insurers or competitive state funds, or self-insure. WSI agency overview.

NCCI, the rating organization, also names these four as monopolistic states that administer their own rating plans and rates. NCCI ABCs of Experience Rating. The NAIC's list of jurisdictions served by a monopolistic state fund adds Puerto Rico and the U.S. Virgin Islands. NAIC workers' compensation overview.

The details differ within the group:

• Washington: L&I says Washington does not allow private workers' compensation coverage. Employers buy from L&I or become certified self-insured employers. Washington L&I coverage requirements.
• Wyoming: The Wyoming Department of Insurance calls Wyoming a monopolistic state, but says certain exempt employers and employee groups may buy coverage from private insurers. Wyoming Department of Insurance.

If you operate in one of these states, ask the state fund and a licensed insurance professional whether your coverage includes employers' liability and, if not, how to obtain it. Ask the same question about employees who travel to work in other states.

Competitive state funds work differently. CDI says California's State Compensation Insurance Fund competes with private insurers and also acts as the insurer of last resort when private companies are unwilling to offer coverage. CDI workers' compensation guide.

The premium depends on what your employees do, how much you pay them, your claims history and the insurer. California's Division of Workers' Compensation lists industry classification, the experience modification, payroll and special underwriting or group adjustments among the factors. It says rates can vary from carrier to carrier. California DWC FAQ.

The NAIC says a new business's premium may be based on broad factors such as total payroll, number of employees, earnings per employee and type of work performed. For an established business, workplace safety history also contributes. NAIC small business insurance guide.

Classification

CDI explains that premium calculations are based on how employers are classified according to their operations, and on the rate assigned to each classification. In California, the Workers' Compensation Insurance Rating Bureau (WCIRB) develops the classification codes, and the Insurance Commissioner approves them. CDI workers' compensation guide.

Elsewhere, the rating organization may be the National Council on Compensation Insurance (NCCI), another independent bureau or, in the four state-fund states, the fund itself. NCCI ABCs of Experience Rating. Ask each provider which classification codes it used and why; a job title alone is a weak guide.

Payroll and the year-end audit

CDI describes the arithmetic: the estimated payroll for each classification is multiplied, per $100 of payroll, by that classification's rate. The result is the base premium, which rating plans and the experience modification can then increase or decrease. The final premium cannot be calculated until the policy term ends and the employer's payroll records have been audited; if payroll rose above the estimate, the employer owes additional premium. CDI workers' compensation guide.

The workers' comp calculator runs that arithmetic with payroll and a rate taken from your own proposal, and shows how a modifier you enter changes a premium subtotal. For a side-by-side look at proposals, see what changes a workers' comp quote. Before the audit, our guide to overtime, tips and bonuses in workers' comp payroll shows how the states it covers treat each kind of pay.

Experience modification rate (EMR)

NCCI's guide explains that experience rating compares an employer's payroll and loss experience with the average employer in the same classification. The resulting experience modification, often called the mod or EMR, can increase, decrease or leave the premium unchanged. NCCI says the calculation usually uses the latest available three years of data. Experience rating is mandatory for employers that meet a state's premium eligibility criteria, and those criteria differ by state. NCCI ABCs of Experience Rating.

Which organization calculates the mod depends on the state. NCCI says 39 jurisdictions have approved its experience rating plan. It names California, Delaware, Michigan, New Jersey, New York and Pennsylvania, along with the four state-fund states, as places where its plan does not apply. NCCI ABCs of Experience Rating. In California, CDI says a modification below 100% generally reflects better-than-average experience and one above 100% reflects worse-than-average experience. CDI workers' compensation guide.

To check the figures behind your number, use our guide to reading an experience modification worksheet.

Rates and the state system

California's Division of Workers' Compensation says premium rates are not regulated by the state there. The WCIRB issues advisory rates as the commissioner's licensed statistical agent, insurers file their rates with CDI, and rates can vary from carrier to carrier. California DWC FAQ. In the four state-fund states, NCCI says the fund administers its own plans and rates. NCCI ABCs of Experience Rating. Ask your state's insurance department or workers' compensation agency how rates are set where you operate.

Use these questions with each proposal:

1. Does each classification describe the work your employees actually do? In California, CDI points employers to an appeals process for classification and experience-modification disputes. CDI workers' compensation guide.
2. Is the payroll estimate realistic for each classification? Keep payroll records organized for the audit described above.
3. Does the modifier match your claims records? Ask which organization issued it and for which policy periods.
4. Which credits or debits were applied? CDI's glossary describes schedule rating as debits and credits that modify a base rate according to characteristics of the risk. Ask which safety measures the insurer considered.
5. Are proposals built on the same inputs? Compare classifications, payroll, modifier and employers' liability limits before comparing price.

Injuries to your employees fall under workers' compensation and employers' liability, the two policy parts described above. Commercial general liability, as the NAIC describes it, covers bodily injury, damage to others' property, personal injury such as slander and libel, and false or misleading advertising for which a business could be held responsible. NAIC small business insurance guide.

The two policies answer different questions, so ask how each proposal treats an injury to an employee and an injury to a customer or visitor. Our general liability coverage guide covers the other side of that comparison.

1. Get the employee medical care.
2. Report serious events to OSHA when required. OSHA says all employers must report a work-related fatality within 8 hours, and an in-patient hospitalization, amputation or loss of an eye within 24 hours. OSHA reporting requirements.
3. Notify your insurer or state fund. Follow the notice instructions in your policy, and file the forms your state agency requires.
4. Keep records. Note dates, witnesses, the work being done and every report you filed.

Employers without coverage still have reporting duties in some states. The Texas Department of Insurance says employers without coverage must report work-related injuries resulting in more than one day of lost time, all work-related illnesses, and deaths to its Division of Workers' Compensation. Texas Department of Insurance.