Explaining Workers Compensation Commercial Insurance

Workers Compensation: What Is It, And Must I Have It?


Workers Compensation coverage is a staple of commercial lines insurance. The thing is, not every business has to have it.

You should, but you might not have a statutory requirement.

Whether you’re a large corporation with 500 desk-jockey employees, or a small two-man plumbing operation out in the field, Workers Compensation law may apply to you. Within the United States, the rules may vary depending on your entity type and the size of your company.

What Is Workers Compensation?

Put in very simple terms, Workers Comp is insurance obtained by an employer on behalf of an employee. It provides benefits to employees who are injured because of something which happened on the job. If the employee has died, benefits may be payable to the family.

This includes lost wages and medical expenses, among other things. State law determines the rate at which Workers Comp benefits for lost wages/replacement income will be paid.

There need not necessarily be a single act that triggers a Workers Comp claim, such as a fall at a job site. I have seen Workers Compensation claims come about after issued festered for a long period of time. For example, a contractor’s employee suffering a degenerative back disorder that develops over years could be covered.

Components of the Workers Compensation Policy

A Workers Compensation policy contains several parts. First, a listing of states under which the policy will be subject to Workers Comp statute. This is the state in which the business has hired its employees, and could include other states where employees are present. Premiums are driven primarily by payroll, and different types of work are charged at a different rate. For example, paying office workers $500,000 in payroll will generate a much cheaper Workers Comp premium than $500,000 in payroll for electricians. Obviously, one has a much higher risk of injury or occupational hazards.

Second, it has Employers Liability insurance. This covers the employer, as opposed to the employee, for other liability not covered by Workers Compensation. It may include such things as loss of consortium (spouses can no longer get any action because of the work injury). Another possible claim includes consequential bodily injury, or a family member getting hurt because of the stresses or pains of the employee being hurt.

Finally, the policy may also include “other states insurance.” For instance, if your New York employee does a one-off job in New Jersey, if that state is listed, the employee can opt for the benefits under either New York or New Jersey statute. The only four states not included are North Dakota, Ohio, Washington, and Wyoming. Those “monopolistic” states mandate that Workers Compensation coverage must come from the state fund. You cannot obtain private Workers Comp coverage in any of these states.

Calculating The Basic Workers Compensation Premium

Based on the above, assume you have a business office, such as a local, friendly insurance gay-gency. You have ten employees, excluding yourself, and your employees are paid a total of $500,000 per year.

For the sake of simplicity, we assume you as a corporate officer, LLC member, or sole proprietor opted out. (However, if you run an insurance agency and you’re not incorporated, what the hell is wrong with you?)

Each type of worker operation is assigned a class code. Clerical employees, meaning your administrative cubicle prisoners, are under class code 8810. A detailed description of that is found here, and yes, insurance companies take these seriously. Several different clerical operations apply to this code.

Each code also has a rate per $100 remuneration (or money paid to someone). In Massachusetts, this rate is seven cents, as this is a very low-risk profession. Meanwhile, in Florida, the rate is 27 cents. This can differ by state, though most are part of the more uniform NCCI (National Council on Compensation Insurance). Let’s see what that $500,000 payroll looks like in both places.

Workers Compensation premium example

After this, there may be additional charges for increased Employers Liability limits, state surcharges, expense constants, and minimum premiums. If in Massachusetts, for example, your final premium won’t be exactly $350, but it might not be far off. Some insurance companies may also apply rate deviations, which in layman’s terms could mean a discount.

Who Has To Have Workers Compensation?

Laws on Workers Comp vary by state. For example, in Massachusetts, a business that has even one employee must obtain this coverage. To not do so invites fines and a possible “Stop Work Order” from the Department of Industrial Accidents. A sole proprietor, partner in a partnership, LLC member, or corporate officer is NOT considered an employee, but can be covered. Corporate officers can opt out of benefits if they choose, while sole proprietors, partners, and LLC members have no statutory obligation to cover themselves.

In this example, if you are a sole proprietor with no employees, you do not need Workers Comp. However, the realities of doing business may force you. You may sign a contract with a general contractor requiring you to have the coverage. The law says you don’t have to, but wanting the job might make you.

The NFIB (National Federation of Independent Business) has a great chart on state requirements for Workers Comp. In many states, it only takes one employee to trigger a legal requirement. North Carolina, for example, is a state where it takes more than three employees, full or part-time.

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