Workers Compensation Insurance

An Umbrella Plan

One can never predict the next mishap. You may install lots of safety equipment. Yet, it does not completely rule out the possibility of workplace accidents. But there’s one safe bet to deal with such uncertain events —workers compensation insurance. Workers compensation insurance is compulsory in almost all the states (except Texas). Hence, it is better to know all about the policy before you start shopping for one. 

In this article

What Is Workers Compensation Insurance?

Workers compensation insurance is a policy that offers cash and medical benefits to your employees in the events of injury and illness. Furthermore, it also provides death benefits to the survivors of the deceased employee, if the death occurs due to workplace mishaps. That is to say, workers compensation covers medical payments, loss of wages, rehabilitation costs, and death benefits.  

Do I Need A Workers Compensation Insurance Policy?  

Workers compensation insurance started as a bargain between employers and workers during the 20th century. People didn’t like the tort system as a workers compensation mechanism for occupational illness, injury and death because under the tort system, the employer’s liability for workplace injury was decided by judge or jury.

Hence, this insurance developed as a bargain whereby workers were guaranteed a no-fault benefit for occupational hazards. However, they had to give up the right to sue their employers. Today, every state law requires you to have workers compensation insurance, except Texas. Although, in Texas, employers without this insurance are exposed to litigations for employee injury, death or illness.

According to the Annual Statistical Supplement (2017), in 2015, the total workers compensation benefit payments amounted to nearly $62 billion. The breakdown looked like this: $31.1 billion for medical payments and $30.7 billion for wage loss compensation. The payouts are so large because workers compensation insurance has an extensive amount of coverages.

how much does workers compensation insurance cost

Coverages of Workers Compensation Insurance

Workers compensation is a win-win policy for both employers and employees. It protects employers against hefty lawsuits. On the other end, it covers employees from medical expenses arising out of workplace accidents. Therefore, the coverages of workers compensation insurance come in two parts:  

Coverage A: Workers Compensation Insurance 

Medical payments 

Medical payments include costs of immediate treatment such as ambulance fees, emergency room admission fees, hospital fees, surgery costs and other medical bills. According to the Social Security Office of Retirement and Disability Policy, medical benefits amount to three-fourths of total workers compensation cases.

Here’s an example of how workers compensation works. For instance, one of your employees trips in your warehouse and breaks their leg. Without insurance, the employee could sue you and you would most likely be held responsible for their medical bills. But with workers compensation insurance, your insurer will pay for costs such as ambulance rides, x-rays, prescriptions, and physical therapy, and other medical expenses.

Disability benefits 

Injuries from a dangerous work environment can cause temporary or permanent disabilities. Such events can lead to employees’ inability to work at the same level as they did previously. In severe cases, they may not be able to return to work at all.

Temporary total disability is when workers cannot work at all until they make a full recovery. Usually, the benefit period is in effect from their time of injury to the day they return to work after their full recovery. In most states, workers compensation equals two-thirds of the total pre-injury wage of the worker.

Temporary partial disability is when injured workers can return to work, after some medical improvements. However, they perform a reduced amount of job responsibilities, considering their physical condition. Consequently, they get a reduced salary. However, workers compensation provides temporary partial disability benefits.

Permanent total disability is when someone is maimed even after receiving maximum medical care. Subsequently, they are no longer able to work at all. Moreover, workers compensation provides permanent total disability benefits to such workers. Such cases are quite limited.

Permanent Partial Disability is when permanent impairments do not completely limit one’s ability to work. In some states, workers compensation begins when workers achieve maximum medical improvement. While in others, the permanent partial disability benefit is an extension of temporary disability benefits.

Vocational rehabilitation 

In instances where workers are unable to continue working at a job due to permanent disabilities, the workers compensation policy covers training costs. Such costs include schooling expenses and other training expenses. Training prepares the workers to work in other fields.

Death benefits 

Workplace accidents can sometimes cause employee deaths. Workers compensation helps you offer benefits to the bereaved family. The benefits cover funeral expenses. They may also include long-term income replacement costs. The benefit amount depends on the earnings of the deceased employee and the number of his/her dependent survivors.

Coverage B: Employers Liability Insurance 

Employers liability coverage protects you from lawsuit expenses. While coverage A covers expenses related to workplace accidents, coverage B covers settlement costs, and court and attorney fees. Coverage B includes:

Third-party action 

For example, an employee may get injured while operating a machine in the workplace. As a result, the employee can file a lawsuit against the manufacturer. However, the manufacturer may file a case against you, claiming that the equipment was poorly maintained. Your employers’ liability coverage protects your wallet from the legal expenses incurred when defending your company.

Dual capacity suit 

If your employee becomes injured or ill due to your business’ product or service, you are exposed to two potential lawsuits—workplace injury and product liability. Workers compensation insurance helps you deal with a dual capacity case like this. Following the unfortunate event, coverage A compensates for the employee’s illness and coverage B protects from the product liability suit.

Loss of consortium 

Suppose excessive work stress or any workplace injury makes your employee unable to perform home or childcare services. In such cases, Coverage B compensates the employee for the expenses to hire someone for home duties or childcare.

Consequential bodily injury 

An injured employee’s worsening health condition, for example, demands more caretaking from his/her spouse. In the process of caretaking, the physical and mental demands for caretaking could cause some health problems to develop in the spouse. As a result, the spouse can file a lawsuit against you. However, employers liability insurance covers such litigation costs.

Workers Compensation Insurance

When the lawsuit claims arises, make E&O insurance your savior!

Personalize Your Policy 

Endorsements are a great way to personalize your workers compensation policy. To clarify, they let you add, remove, or modify coverages to fit the needs of your business. Some common endorsements are: 

Waiver of subrogation 

For instance, you run a contracting business. One of the sub-contractors is injured on-site. Subrogation enables the sub-contractor’s insurer to compensate the injured. Later, the insurer can file a lawsuit against you. However, this endorsement limits such lawsuits from third-party’s insurers.

Stop-gap endorsement 

Monopolistic states limit workers compensation insurance to coverage A. In those states, workers compensation excludes employer’s liability insurance. However, you can add this endorsement to fill the coverage gap. Employers in monopolistic states are obligated to add stop-gap endorsement if they operate in non-monopolistic states.

Voluntary compensation endorsement 

Your business may hire employees who aren’t eligible to receive workers compensation benefits. For example- hiring independent contractors. Injury of a contractor can expose you to lawsuits. Fortunately, voluntary compensation endorsement extends coverage to such employees and prevents you from litigation.

what does workers compensation insurance cover

Exclusions You Should Know

Exclusions of workers compensation depend on the exemption law of your state. However, here are some common exclusions:

Drug and alcohol intoxication 

The workers compensation policy excludes any expenses due to damage caused by or injury of intoxicated employees. In fact, most states require the injured employees to take a drug and alcohol test.

Breach of policy 

Many events lead to a breach of policy. For example, intentional harm, non-compliance of minimum health and safety requirements, discrimination in the workplace, etc., void the policy. Consequently, insurers will provide no compensation on the grounds of breach of policy.

Non-work injuries 

Any injuries outside the workplace and not caused by the work environment are out of the scope of the policy. For instance, an employee getting injured while rock climbing during the weekend is not covered under the workers compensation policy.

who needs workers compensation insurance

How Much Does It Cost?  

The cost for a workers compensation policy is dependent on various factors such as:

  • Class codes of the industry
  • State regulations
  • Annual payroll
  • Nature of work
  • Claims history

The cost also depends on the coverages that your business requires. Furthermore, underwriting guidelines of the insurers and state law impact the costs.

Where Can I Get Workers Compensation Insurance? 

Employers exclusively finance workers compensation insurance. You can get workers compensation insurance from:

State funds: If you are operating in a monopolistic state (North Dakota, Ohio, Washington, or Wyoming), you need to buy the policy from the state funds. However, most other states offer it as an option.

Private insurers: Most states allow you to buy the policy from private insurers.

Self-insure: You need to show financial adequacy to carry your own risk.

Most Vulnerable Private Industry Occupations

According to Statista, in 2018, the private industry occupations most vulnerable to injuries and illnesses were:

  • Laborers
  • Truck drivers, and heavy and tractor-trailer
  • Cleaners and Janitors
  • Nursing assistants
  • Repair and general maintenance workers

Other Insurance Policies That Include Workers Compensation Policy 


What does it mean to be considered a monopolistic state?

There are four monopolistic states—North Dakota, Ohio, Washington and Wyoming. If you are from these states, you cannot purchase workers compensation from private insurers. In Ohio and Washington, you can self-insure. However, in North Dakota and Wyoming, you need to buy the policy from state funds. Remember that state funds typically exempt employers’ liability coverage.   

Not sure where to start? Why not get a quote!

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