Small Business Money Matters

If you have employees, then you need to carry workers' compensation insurance. That's the law.

Unfortunately, many small business owners don't know a lot about their workers' compensation commitments. It's to your benefit to understand how workers' comp works, where you can get it, and how much it will cost you.

Here are some of the most commonly asked questions about workers' compensation.

What is workers' compensation?

Workers' compensation insurance, often called workers' comp, covers your employees when they are made sick, injured or killed on the job. Benefits include medical expenses, lost wages, vocational rehabilitation, and death benefits.

For example, if you had a painting company and one of your employees fell off a ladder, your workers' comp coverage would pay the medical bills, any necessary physical therapy, and roughly two-thirds of the wages lost while the person recovers from the injury.

Workers' comp exists both as a way to benefit injured workers and as a way to protect employers. Before workers' comp laws existed, serious injury to an employee could bankrupt an employer. Workers' compensation is a no-fault insurance system. Negligence on the part of workers or employers is not an issue in paying benefits.

What companies need to have workers' compensation?

In general, if your company has employees, you need to carry workers' comp insurance. Requirements vary from state to state -- each state has its own workers' comp laws, as well as its own administrative and legal structure for handling claims and disputes.

Several states don't require workers' comp insurance for very small companies -- those with fewer than 3-5 employees. Sole proprietors and partnerships are also usually exempt. Think twice before you exercise this option. Without coverage, you may be sued by an injured worker for medical and disability costs, plus damages.

Some states also require workers' comp only for employees in "hazardous" occupations. What falls under the "hazardous" category, however, can vary widely, so speak with your state agency or your insurance broker for information on which employees you must cover.

There are some professions that are usually exempt from workers' compensation coverage. These include farm laborers and domestic workers.

How do I find out my state's workers' compensation requirements?

Since workers' comp requirements are set by the state government, they can vary greatly from state to state.

Your insurance agent or broker should be able to provide workers' compensation details of your state's requirements.

How do I purchase workers' compensation?

In most states, employers may buy their workers' compensation insurance from a private insurance company. This is often referred to as the "voluntary" market for workers' comp.

However, workers' comp is available only through a state-run fund in six states -- Nevada, North Dakota, Ohio, Washington, West Virginia, and Wyoming -- creating a virtual monopoly. If you live in one of these six states, you have no choice but to buy your policy from the government-run fund.

Another 13 states operate government-run funds that compete with private insurers; you have the option of going to either. They are: Arizona, California, Colorado, Idaho, Maryland, Michigan, Minnesota, Montana, New York, Oklahoma, Oregon, Pennsylvania, and Ohio.

Why might a private insurance company not want to write my workers' compensation policy?

Although you must have workers' compensation coverage, private insurance companies are under no obligation to sell it to you. They each have their own underwriting guidelines and regularly reject business.

Rejection usually occurs for one of three reasons:

High risk

Some industries, such as construction, roofing and window washing, are considered high hazard. The higher the hazard, the greater the potential for costly claims.

High claims history

Companies that have a history of high workers' comp claims activity will find it difficult to find insurance from private companies. Insurers maintain that this level of claims indicates a lack of attention to safety.

Small size

Start-ups and many small businesses find themselves being rejected because they are either too new or too small. Insurers maintain that these companies are difficult to insure and they can't make a profit from small policies.

If my company cannot get workers' compensation coverage from a private insurer, where do I go?

Every state has a mechanism for providing workers' comp insurance for companies that can't get it elsewhere. In most areas, it comes in the form of an "assigned risk pool" that acts as the workers' comp insurer of last resort.

If you use the assigned risk pool, you must apply for coverage with the state agency that administers workers' comp. Applications are then assigned to an insurance company that agrees to do business with the assigned risk pool.

You do not want to be in the assigned risk pool if you can avoid it. Assigned risk plans almost always cost more than private insurance, and you will probably receive poorer service and less attention.

How are workers' compensation costs determined?

There are three primary factors that will determine your workers' comp premiums:


Most states use a classification system developed by the National Council on Compensation Insurance that lists more than 600 different types of businesses. Each business classification has its own premium rate stated in dollars and cents per one hundred dollars of payroll. The higher the hazard potential, the higher your premium. Watch your classification carefully. If your company is misclassified -- a home furnishings designer who makes decorative pillows who is listed as "bedding" manufacturer, for example -- you may end up paying higher premiums than you have to.


Rates for the same classification vary from state to state, and even within states. Much of this has to do with the disability benefit levels that each state law requires. Again, higher weekly benefits mean higher rates.

Experience rating

If you pay more than $5,000 in annual workers' comp premiums, your rates will be affected by your claims history. Insurance companies use what is called your "experience rating," which compares the claims history for your company to that of other companies in your industry classification. The greater your number of claims, the higher your premiums.


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Small Business Money Matters - Workers' Compensation FAQ

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