Workers’ compensation insurance is a type of business insurance that covers the cost of medical bills and lost wages for employees who are injured on the job.
Although each state sets its own rules on workers’ comp, most states require employers to purchase this important coverage if they have a certain number of employees. Depending on the state, business owners can work with their insurance agent to get coverage from private companies, such as Hourly, or from state funds.
Workers’ compensation insurance benefits both the employee and the employer. Employees are given the means to receive prompt medical treatment following a work-related injury and workers’ compensation claim. In return, businesses aren’t sued for those injuries.
But where can you buy this all-important coverage and how much does it cost? We’ll go into all that and more, so read on!
Where Can I Buy Workers’ Comp Insurance?
You can generally purchase workers’ compensation coverage from several different sources, depending on the state they live in and how workers’ comp is structured in that state. Options include:
Licensed Insurance Companies
Many companies purchase workers’ comp through a licensed insurance company—sometimes the same one that carries their general liability insurance, but not always. We recommend working with an insurance agent or broker to determine the amount of insurance coverage you need to comply with state laws.
Keep in mind that an agent represents insurance companies, and works on their behalf, while a broker works on behalf of their clients, and does everything possible to find the best coverage for them. A broker may also suggest coverage limits and help you make important decisions about your policy.
State-Funded Compensation Programs
In some states, workers’ comp coverage may also be purchased through a state fund. In California, for example, this would be the State Compensation Insurance Fund. This fund competes with private insurers and serves as a last resort for companies that are unable to find private coverage.
In a few states—North Dakota, Ohio, Washington, and Wyoming—state-funded programs are the only options available for business owners, as private insurers are not allowed to offer workers’ comp coverage. In most states, however, including California, you will have the option of choosing between a private carrier and a state-funded program.
Self-Insurance
One final option is available to larger businesses. Companies with a net worth of at least $5 million and net income of $500,000 annually may apply to the state to self-insure in some states. This option would require the company to administer its own workers’ comp claims.
How Much Does Workers’ Compensation Cost?
As you might imagine, the cost of a workers’ compensation policy varies greatly depending on how many employees you have, your claims history, and what sort of work your employees do. An employer that does high-risk work is likely to pay more for their policy than, say, a company that hires mainly office workers.
In addition, workers’ compensation insurance cost is regulated by rating bureaus. In California, the Workers’ Compensation Insurance Rating Bureau (WCIRB) issues recommended rates regularly.
According to the National Academy of Social Insurance, workers’ comp cost $1.17 per $100 of covered wages nationally, while in California it was $1.61. Note: Their most recent data is from 2019, and these are averages.
As you can see, costs are listed as a number out of 100: You pay X dollars for workers’ comp per $100 of your payroll cost. So, if your payroll totals out to $100,000 a year, and your business is based in California, you would be looking at an average workers’ comp cost of $1,610 annually. Remember this is the average—there are other factors that affect your own company’s rates. They include:
- The number of employees you have.
- Your total payroll.
- State laws and regulations.
- Your workers’ comp class codes. These are numbers that are assigned to different professions based on the risks associated with that job. So, if you have a worker who does roofing, which has a high risk, their number will be different from your accountant’s number. High risk numbers tell your insurer that they should charge more for workers’ comp because there is a greater chance of having someone file a claim.
- Experience modification number. This rating is assigned to your company based on your loss history and past experiences.
- Safety program: If you have a stellar safety program that you run regularly, you may qualify for a discount.
Most workers’ comp premiums are based on estimated payroll, and you must wait until the end of the year to find out if you’ve overpaid or—worse—underpaid for your policy. If you underpaid, you could owe your insurance company a significant amount of money so you can get up to date with your premium payments.
Hourly, however, bases your workers’ comp payments on the exact amount of each month’s payroll. They can do this because their online platform links the two business functions together: payroll and workers’ comp. So you end up paying what is actually owed, no more and no less.
Who Needs Workers’ Compensation Insurance?
Each state, as we noted above, sets its own rules about who needs to purchase a workers’ comp insurance policy. In California, for example, all businesses based in the state are required to purchase workers’ comp if they have at least one full-time or part-time employee.
The state defines an employee as anyone who is working for a company through oral or written agreement, whether that employment is expressed or implied. This does not, however, include independent contractors. They work mostly on their own—a business can’t control how they do their job or their schedule. What’s more, the job can’t be part of a business’s typical work. Independent contractors receive a 1099 form from the company for tax purposes.
The takeaway? If you’re a small business, and you have employees, you will most likely need workers’ comprehensive insurance in most of the U.S. Like anything, there are some exceptions, but it’s always best to check with your insurance agent or broker first.
What Does Workers’ Comp Insurance Cover?
Since workers’ comp varies by state, coverage might look a little different depending on where you are. Let’s take California as an example though, since they have pretty broad workers’ comp requirements. In California, workers’ comp covers:
- Medical care: Your employee’s health insurance may not pay for care if the injury is work-related; this is when workers’ comp takes over to pay for medical expenses for an injured employee.
- Temporary disability benefits: If your employee is unable to work while undergoing medical care or rehabilitation, they may receive temporary financial support.
- Permanent disability benefits: If your employee is injured badly enough that they can never return to their job, permanent benefits would kick in.
- Supplemental job displacement benefits: This funding will help pay to retrain your employee or enhance their skills if they are able to work again, but not at the job they previously held.
- Death benefits: These payments would go to a spouse, children, or other dependents if the employee dies from injuries sustained at work.
What Isn’t Covered by Workers’ Compensation Coverage?
Just as important as knowing what workers’ comp covers is knowing what it doesn’t cover. Workers’ compensation laws in California, for example, state that this coverage cannot be used for injuries while your employees are commuting to and from work, for example.
Other exclusions include accidents that happen due to intoxication or drug abuse, and injuries that are intentionally caused. Exemptions are also included in most policies if the injury is caused by an employee who is not following a company’s stated policies for workforce safety.
What Is the Difference between Workers’ Comp Insurance and Liability Insurance?
Both workers’ comp and liability coverage are important for business owners, but they’re not the same thing. Workers’ comp, as we’ve noted above, is required in most states in the U.S., and covers medical treatments and care for injured workers.
Liability insurance, meanwhile, provides medical expenses and legal costs for a business if a third party—a customer, a vendor, or someone else—is injured on your business’s property, and it is determined to be your fault.
Liability insurance is not required by the state, while workers’ comp is. You may, however, be required to carry it by your own clients, lenders, or licensing boards. For example, if you own a construction company and bid on a large apartment complex project, you may be required to prove that you have liability insurance in order to submit your bid.
Liability coverage can be combined with other types of insurance in a business owners insurance (BOP) policy. A BOP policy features liability, as well as property insurance and other types of coverage that are not found in workers’ comp.
So, to put it simply, both types of policies may cover medical costs, but for different people. Also, while liability insurance may cover legal fees if a lawsuit results from an injury, workers’ comp does not.
Do I Need Workers’ Comp If I Am Self-Employed?
If you are operating a small business and you are the business’s only employee, you are not required by law to have workers’ comp insurance. But small business owners should still consider exploring whether a policy would be right for them.
There are a few reasons for this. First and perhaps most important, your personal health insurance carrier may not cover you for accidents or workplace injuries that happen while you’re on the job. You’ll need to ask your insurance agent or check your policy to find out for sure—look for a disclaimer in the policy documents regarding injuries at work, and if there is one, you would not be able to file a claim for an injury that happens on the job.
Secondly, if you are injured while working and need to take time off from your job, workers’ comp insurance will generally pay for your lost wages. Many independent contractors rely heavily on their weekly income, so it could take little time to find yourself in financial difficulties if you get hurt.
Third, in some industries, a contractor is required to ensure that all subcontractors they work with have workers’ comp insurance. So if, for example, you are an electrician who puts in a bid to work on a new apartment building complex, you might be out of the running if you do not have workers’ comp benefits, which you can prove with a certificate of insurance.
Shop Around for the Best Fit
It’s never a bad idea to shop around to find the best deals for, well, anything, from cars to a new winter coat. And that goes for workers’ comp insurance too.
Check with your current insurance agent or broker and take a look at Hourly, too. You may find it’s the easiest to get payroll and workers’ comp.
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