What Is Workers’ Compensation Insurance? The Complete Guide

Workers’ compensation insurance has an exciting and gritty history, and we primarily have Germany to thank for our modern laws protecting workers’ rights. If you’re ever on Jeopardy or want to impress a date with your knowledge, you may be interested to learn that Chancellor Otto von Bismarck is credited as being the first to bring accident insurance to the masses. In America, the idea of insuring worker injuries has been around since 1911; it’s widely held as the most successful social insurance program ever implemented nationwide.

Okay, maybe exciting and gritty weren’t the right words. Either way, workers’ comp can be a bottom-line issue for you and your small business. Do you need it? Most likely. It’s legally mandated in 49 states. Do you want it? Yes! Protecting your employees and yourself is a win-win.

Read on to learn everything you need to know about workers’ compensation insurance.

What Is Workers’ Compensation Insurance?

Workers’ compensation insurance, or workers’ comp, is an insurance policy bought by a company to provide benefits to people who have been injured on the job or become ill due to the job. Workers’ compensation insurance pays medical bills and covers loss of income for injured and ill employees, and it also provides much-needed lawsuit protection for the employer.

It is a legal requirement for businesses to provide workers’ compensation in some capacity in 49 states. Each state’s full-time employee minimum requirement is different, so check state laws.

Texas is the lone holdout. The state often does not require private businesses to purchase workers’ comp, but there are exceptions if:

• Your business involves transporting commercial freight (motor carriers)
• You engage in contractual work for a governmental agency or construction for a public employer, such as a city or county

If you decide not to purchase workers’ compensation insurance, you need to notify the Division of Workers’ Compensation (DWC) of all injuries and illnesses that your employees suffer on the job. You must also fill out and submit form DWC005 by April 30th every year. All things considered, you may want to consider protecting yourself with a policy anyway.

What Workers’ Compensation Covers

If employees are injured on the job, they are entitled to workers’ compensation protection. Even if your workplace seems relatively safe, accidents can and do happen. Most workers’ compensation policies cover the following:

• Medical Bills: The accumulated medical costs related to the work injury.
• Missed Wages: If your employee has to miss work, workers’ comp can cover lost wages.
• Ongoing Care: If the accident or injury needs consistent medical care, that medical care is covered.
• Funeral Costs: Yes, in the devastating event that an employee loses his or her life at work, the policy covers the cost of interment.
• Illness: If something at work is causing an illness, covering the medical bills for that is also part of the policy.
• Repetitive Injury: An injury of the back or chronic carpal tunnel issues can relate to this category. If the injury is caused by a repetitive action at work, medical care for that injury is covered.
• Disability: If the accident or injury has caused permanent disability to the employee, the policy will cover both medical bills and lost wages.

What Workers’ Compensation Doesn’t Cover

While workers’ comp policies cover many situations, not everything is covered. You might need to cover the following scenarios with a different insurance policy:

• Commuting Accidents: Traveling to or from work is not covered under the workers’ compensation umbrella. Car accidents could be covered under a commercial auto policy or an employee’s personal car insurance policy. Traveling injuries aren’t a workers’ compensation claim.
• Voluntary Work Outings: If you don’t require your employees to be at an event, but they attend the event of their own volition, injuries that happen during the outing are not covered by workers’ compensation. For example, if a group of workers goes out to happy hour, that’s not a work event and workers’ compensation doesn’t apply. If the boss invites everyone for an optional hike during a work retreat and someone sprains an ankle, that’s on the employee too. Keyword: optional. If you make people do things as an employer and they hurt themselves? That’s on you.
• Injuries Due To Intoxication: Under most policies, intoxication negates workers’ compensation benefits. But if employees attempt to claim those benefits by denying that they were intoxicated, be ready to prove that they truly were. Check with an experienced lawyer for details if the injured employee is found to be intoxicated while at work.
• Workplace Horseplay: Routine injuries and accidents are covered; however, if your employees are using equipment improperly or joking around and fall down, those antics aren’t going to net them workers’ compensation rights. (This also goes for any injury that an employee receives while committing a crime, too! Which is an interesting, but apparently important legal distinction. Crime doesn’t pay.)

How Workers’ Compensation Insurance Works

If an employee is injured at work, they must report the accident to their boss and then seek medical attention. After the injury is disclosed, the employee will tell any medical professionals involved in their care that the injury or illness is work-related. The visit will be categorized as such when billed to insurance.

Once the employee has received medical attention or proof of ongoing medical intervention, he or she can start the claims process with your business’s insurance agency.  

Each state has a mandated window of time during which a claim can be filed, so employees should know the time restrictions regarding a claim. The employee will receive their benefits when the insurance company approves the claim. Benefits often include:

• Reimbursement for medical expenses
• Rehabilitation costs
• Two-thirds wages for while they’re absent from work

By paying into an insurance plan, your insurance company handles the claims and benefit payouts for you.

Who Needs Workers’ Compensation Insurance?

If you have at least one employee, odds are you need workers’ compensation insurance. If you’re an independent contractor or a sole proprietor with no employees, you’re exempt, but the moment you start employing others, you’re legally obligated to provide workers’ compensation insurance in most states. (Again, unless you live in Texas.)

Since state laws differ wildly on the level and delivery method of benefits, it’s best to check with someone familiar with the laws of your specific state as you start to move forward. Some states say one full-time employee is enough to warrant coverage and others say you can wait until you have three or four full-time employees.

How Much Is Workers’ Compensation Insurance?

Business insurance costs are often a priority for small business owners. Like most policies, the price of workers’ compensation is going to depend on your small business. Before giving you a quote, insurance providers will take into consideration your business’s:

• Income and payroll (your premium will reflect a portion of covered wages per $100 paid to your employees; the average is $0.50 for every $100)
• Number of employees
• Industry
• Risk categorization
• Claims history

The average price of workers’ compensation insurance for a small business is in the ballpark of $47 a month, which comes out to $560 annually. But be aware that the premium you pay will depend heavily on the above factors. Risk categorization is especially important: just as an example, a hairdressing business will most likely pay thousands of dollars less a year than a roofing or construction company. Why? Roofing and construction jobs are simply more dangerous.

Don’t let that deter you from acquiring the right coverage, though. Being underinsured can be just as devastating as lacking insurance altogether. Sometimes work safety programs will lower premiums for businesses looking for a way to lower their insurance costs. Ask your insurance company if there are verified ways to save.

State guidelines differ, too. It’s best to check with your state first before buying a policy to see how much coverage you might need. (For example, in Alabama, you don’t need workers’ compensation insurance until you have five full-time employees. However, if you have an employee injured on the job and you aren’t insured, the costs could bankrupt your business.)

Buying Workers’ Compensation Insurance

So, you’ve weighed the pros and cons, and you’re ready to start your search for insurance. Let’s go through the process of how to get workers’ compensation insurance from start to finish.

1. Determine How Much Workers’ Compensation Insurance Coverage You Need

Time to crunch some numbers! You should familiarize yourself with your state’s minimum coverage requirements, at the very least. Look into your payroll and estimate how much your full-time employees are being paid on an annual average. A good policy should be able to cover two-thirds of their yearly pay.

Generally, you’re only going to need workers’ comp for your W-2 employees. Yes — even part-time employees fall under that umbrella.

2. Have The Necessary Documents Ready

If you’re pursuing brand new coverage through a different insurer, there’s a good chance you’ll be asked to provide an insurance loss run. On the other hand, if you’re being insured for the first time, you’re going to need documents that show your business’s income, location, payroll, and number of employees.

3. Find an Insurance Provider And Start The Conversation

Now that your information is ready to go, it’s time to talk with an insurer. The good news is that workers’ compensation insurance is available from most major insurance companies. Some companies, like Hiscox and Coverwallet, offer bundling between liability and workers’ compensation which is another way to save money. (If you’re currently insured, check with your agency to see about bundling plans.)

Certain states, however, do not allow businesses to purchase workers’ comp insurance through private insurers. If you own or operate a business in North Dakota, Ohio, Washington, or Wyoming, then you must pursue workers’ compensation coverage through a state fund. (So, in essence, your insurance would be provided by the state your business is registered in.)

4. Get Your Quote!

This is the part you’ve been waiting for. If everything meets your expectations, it’s time to officially purchase your policy and give yourself a high-five! And of course, you can also comparison shop before making the commitment to an insurance provider.

The Bottom Line On Workers’ Compensation Insurance

Workers’ compensation might be mandatory (check those state laws), but there are no drawbacks to protecting your employees and yourself in the case of a work-related accident or injury. We have that great Otto von Bismarck (did you remember that for your Jeopardy question?) to thank for championing workers’ rights and reminding us that a business is only as strong as its employees.

So, what should you know about workers’ comp?

• It’s almost certainly mandatory
• Your business is stronger with worker protection
• Workers’ compensation might cover things you can’t think of or prepare for
• Not having workers’ compensation could cost you your business
• Small businesses with fewer risks will pay less money for policies

Protect the business and the people you love by looking into adding workers’ compensation insurance.

Workers’ Compensation Insurance FAQs