Workers’ compensation insurance is a helpful policy for employers because it covers medical bills, rehabilitation costs, and lost wages for employees who are injured on the job or experience a work-related illness.
In most states that require coverage, workers’ comp also protects the employer from employee lawsuits related to workplace injuries or illnesses. The price can vary depending on your business’ location, industry, and payroll.
Key Takeaways
- Workers’ compensation insurance requirements vary by state, but it is required in every state except in Texas and South Dakota.
- Workers’ compensation cost is calculated using a formula that includes the payroll, industry, and claims history of your business.
- Some states are monopolistic, meaning they run workers’ comp, and other states are nonmonopolistic, meaning there is an insurance market for the coverage.
- Each state has a different threshold for when the insurance is required and which employee qualifies for insurance.
It’s essential to find an insurer you can trust with your business. The Hartford, through its agents, will work with you to get the right policy for your individual business needs. Get a free quote online in minutes or call to speak with an agent.
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Accurately representing the actual cost of workers’ compensation is difficult because your company’s payroll directly impacts the calculation of the premium. The workers’ classification risk also influences workers’ compensation insurance costs. As the risk of an employee being injured increases, the rates go up, exceeding thousands of dollars annually.
Most insurers will helpfully give you an idea of what it costs to purchase workers’ comp. Two insurance companies, Insureon and Next Insurance, report that the average monthly cost of workers’ comp for its customers is $45 a month; however, 20% of Next Insurance customers pay over $120 a month. The Hartford reports an average monthly cost of $81, and Progressive Insurance states that its national average is $117 monthly.
Another expense associated with workers’ comp is the cost of a work-related injury. According to the National Safety Council, the average workers’ comp injury is $41,757. Other averages include:
- Motor vehicle crash-related injury costs $89,152
- Slip-and-fall incident is $49,971
- Workplace-suffered burn injury costs $52,161
(Reference for statistics in this section: National Safety Council)
Those numbers point to the importance of carrying workers’ compensation insurance coverage. Not only can a business be fined by the state government for not properly insuring its employees, but the cost of an injury can potentially bankrupt a company if it isn’t insured.
How Is Workers’ Compensation Insurance Cost Calculated?
The workers’ compensation insurance formula is what insurance carriers use to determine how much premium a business will pay. The formula considers the business class code (think: job type), the total payroll, and the claims history (referred to as the experience modifier rate or EMR).
Below, we explain each element of the workers’ compensation cost formula further:
- Class codes: A job is assigned a class code to determine the level of risk. Because of the importance of this number, every small business owner should review how their company classifies workers. The National Council on Compensation Insurance (NCCI) manages the class codes for 38 states. The remaining states use either their rating bureau or operate as a monopoly for workers’ compensation.
One company can have several different class codes. For example, a construction company can have a class code for its receptionist that differs from the class code for its roofer.
- EMR: An EMR is a multiplier that starts at 1.0 and is used to determine whether an employer should pay more or less for coverage based on the number and types of workers’ comp claims they’ve had. If the number is below 1.0, its rate will go down; likewise, if the number is above 1.0, its rate will go up.
- Payroll: The gross payroll of the company is calculated and then divided by 100.
Workers’ Compensation Insurance Coverage
Because workers’ compensation isn’t federally mandated, there are some differences in coverage and requirements for each state.
For example:
- Ohio business insurance: Workers’ comp is required for every operation with one employee—whether the employee is part-time or full-time. It does not provide liability protection for employers, so they would need to purchase stop-gap insurance.
- California business insurance: Family members are considered employees, and coverage for contractors will depend on the industry. Heating, ventilation, and air conditioning (HVAC) contractors, for instance, must be covered. Others must pass what California calls the “ABC test” to see if they are eligible.
- Massachusetts business insurance: If you employ a domestic servant—including a nanny—and they work 16 or more hours a week, then you are required to provide workers’ compensation insurance for them.
However, all workers’ compensation coverage includes these shared benefits:
- Lost wages: Workers’ compensation helps employees by giving them a percentage of their wages when they are not working during their recovery.
- Medical expenses: Workers’ compensation insurance pays the cost of medical care, including occupational and physical therapy.
- Death benefit: Surviving family members can receive a financial benefit from an employee’s income loss.
- Legal costs: Covering the employers’ legal costs and fees if an employer sues them for negligence.
Most states cover employees who travel to another state for business purposes, but you may find that the extent of the coverage changes by state. This question should be raised during the quote process—but if it isn’t, then business owners with traveling employees should discuss their situation with their agent.
While state laws may differ in a work-related injury, so long as the employee is performing job-related activities on-site or at a client’s location, workers’ compensation insurance will cover the injury.
What Workers’ Compensation Insurance Doesn’t Cover
Due to the state-by-state nature of workers’ compensation, coverage can differ based on location. For example, some states limit coverage to injuries directly related to an employee’s job duties. Some common claim denials include:
- Self-inflicted injuries
- Injuries due to employee roughhousing
- Injuries sustained while commuting to or from work
- Injuries sustained during voluntary recreational activities
- Injuries sustained while committing a crime
- Injuries sustained when an employee violates company policies
- Drug- or alcohol-related injuries
Common Workers’ Compensation Insurance Exemptions
In addition to specific scenario-based coverage exclusions, workers’ comp also has exemptions for certain types of jobs, meaning they are ineligible for workers’ compensation insurance benefits:
- Independent contractors: Independent contractors are not business employees, so they are ineligible for workers’ comp benefits—unless the state specifically dictates that they qualify. For example, when dealing with Florida business insurance, contractors and subcontractors on a construction project are considered employees.
- Family members: Immediate family members are often exempt from coverage because they might only be helping the business out from time to time and don’t count as actual employees. For New York business insurance, family members are considered employees and fall under the workers’ comp requirement.
- Limited liability company (LLC) members and corporate officers: LLC members and corporate officers often aren’t viewed as actual business employees, but many states allow them to opt into coverage or even require it. For instance, when it comes to Michigan business insurance, corporate officers, LLC members, and partners are considered employees, and so workers’ comp insurance coverage is required for them.
How Does Workers’ Compensation Insurance Coverage Work?
Workers’ compensation insurance provides coverage to employers when their employees suffer workplace injuries or occupational diseases. The coverage limits the employer’s risk of lawsuits or fines, and at the same time, employees have the support they need to recover from an injury, including surgery, rehabilitation, and disability pay.
It is a no-fault coverage, meaning it will pay regardless of whether an employee or employer contributed to the loss. Employees usually cannot sue their employers while collecting workers’ compensation benefits. Should an employee claim their injury results from employer negligence and file a lawsuit, many workers’ compensation policies carry employee liability coverage that protects the employer in those scenarios.
If an employee gets hurt on the job, it is essential to file a claim with your insurer promptly. Provide the employee with the appropriate paperwork and guidance and comply with state law on reporting work-related injuries and illnesses.
Whether your business offers health insurance benefits to its employees, nearly every state requires a business to have workers’ compensation insurance. Companies that do not comply can be subject to hefty fines, and because each state is different, check with your insurer on your state’s specific requirements. Business owners without employees may want to consider self-employed workers’ compensation.
Which Workers’ Compensation Insurance Company Is Right for You?
Common Workers’ Comp Injury Statistics
When it comes to work, a workers’ comp claim isn’t always as straightforward as overexertion. A series of unfortunate events can also lead to an injury:
- The workplace injury that led to the most days away from work these past few years was exposure to a harmful substance. Harmful substances include electricity, COVID-19, and many things in between.
- The most common type of injury is overexertion and bodily injury. This is the type of injury you might expect in a workers’ comp claim; for example, Bob goes to move a box in the warehouse and hurts his back, or Linda the receptionist gets carpal tunnel from typing and using her mouse all day, every day.
- The third most common workers’ comp claims are slip-and-fall claims. This can include tripping on the same level of a building or falling from one level to another—like a construction worker falling off scaffolding. Importantly, workers’ comp does not cover jumping, as that is a controlled and intentional action.
(Reference for statistics in this section: National Safety Council)
Ways to Get Workers’ Compensation Insurance
As with other business insurance policies, workers’ compensation is available on the open market. Workers’ compensation providers fall into one of four main categories:
- Private carrier
- Commercial insurance providers can offer workers’ compensation policies. This option is best if you need to buy multiple policies, such as a business owner’s policy (BOP) or general liability, and your workers’ compensation.
- The best workers’ compensation companies seek to train employers on safety and make buying and paying for workers’ compensation insurance easy.
- State fund
- If your business is in a high-risk industry or has existing workers’ compensation claims, obtaining insurance from your state fund might be the right choice.
- Not all states have a fund. However, Ohio, North Dakota, Washington, and Wyoming require businesses to purchase workers’ comp from the state fund.
- Self-insurance
- This may be an option for your business, depending on the state. If the state allows self-insurance, they require businesses to meet specific financial requirements or have a bond and hire an administrator.
- Typically, you also need to demonstrate a commitment to loss control and conduct a feasibility study.
- Professional employer organization (PEO)
- If your EMR isn’t great and your existing premiums are too high, it may be best to consider a PEO.
- Instead of an individual quote that factors your claims history, you’ll benefit from your employees being pooled with other employees. That results in a group rate that can be lower than what your business might qualify for on its own.
Frequently Asked Questions (FAQs)
Due to the confusing nature and sometimes seemingly contradictory requirements of workers’ comp, we’ve put together some of the more commonly asked questions.
Because workers’ comp is required in 48 states (Texas and South Dakota do not require it), the odds are likely that if it isn’t currently required for your business, you will need it if your business grows. However, since workers’ compensation insurance is state-regulated and there are many exceptions, it’s important to check your state’s rules.
Many companies operate across state lines. If yours has employees living or working in more than one state, you may need additional workers’ comp coverage. Businesses with remote or distributed teams should carefully research each employee’s workers’ compensation insurance requirements by state to ensure you’re legally operating there.
The easiest way to help manage your workers’ comp premiums is through proactive risk management. Since claims are part of the formula that calculates workers’ compensation insurance cost, keep your workplace as safe as possible to minimize claims. Typically, businesses with fewer claims see lower workers’ compensation premiums.
On an annual basis, insurers will audit your company. The purpose of this audit is to ensure the payroll hasn’t changed since the workers’ compensation policy was purchased. The result will be either a bill for an additional premium (if your payroll has increased) or a dividend or refund of some premium in the event the payroll has shrunk.
Bottom Line
Workers’ compensation insurance is an important policy that helps protect your business from liability and, at the same time, takes care of your employees should they get hurt on the job. As coverage is mandated for businesses in nearly every state, it is something you don’t want to overlook as a small business owner.
By working with a workers’ comp insurance specialist, business owners can manage costs while having the proper coverage. The Hartford can help with a fast, no-obligation quote.
