As a business owner, workers’ compensation is an essential part of running your business. Not only is it required in many states, but it is one of the best ways to protect your business financially.
No matter what, it is one of the policies you should have in your business insurance arsenal. Start with our guide for all you need to know about workers’ compensation coverage.
Workers’ Compensation Definition
Workers’ compensation insurance provides protection for both the employer and employee by providing compensation to employees if they are injured at work. For example, if an employee slips and falls while working, workers’ compensation can pay for their injuries and any lost wages.
Key Points
- Workers’ compensation insurance pays for medical expenses and lost wages due to an injury or illness that occurs at work.
- Most states require employers with at least one employee to carry workers’ comp insurance.
- The price of a workers’ comp policy is based on the company’s total annual payroll, the level of risk involved in each job category and the employer’s prior claim history.
- The calculation to determine workers' compensation costs is as follows: (Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate = Workers’ Compensation Cost
Workers’ Compensation Insurance Terms to Know
When learning about workers’ compensation insurance, there are many terms thrown around. Here are all the terms you may need to know in regard to workers’ compensation insurance:
AOE/COE
AOE and COE are both acronyms used very commonly in workers’ compensation. AOE stands for arise out of employment and COE stands for course of employment. In order for an injury to be covered under workers’ compensation insurance, the injury needs to have arisen out of employment or during the course of employment. These terms are important to understand when determining whether an injury would be covered or not.
Average Weekly Wage
The average weekly wage is sometimes abbreviated as AWW. This term refers to an employee’s wage-earning capacity given what they were earning before a workplace injury.
The formula for this can vary by state, so it is essential to know the law of whichever state you are employed in. However, the Department of Labor does post the national average weekly wage by fiscal year, which can be helpful to know as well.
Cumulative Injury
A cumulative injury is also known as a repetitive strain injury. This term is used to describe an injury to a worker that results from completing the same task over an extended period. An excellent example of this type of injury would be carpal tunnel. Cumulative injuries for employees are on the rise and are very common workers compensation claims.
Experience Modification
A critical component of determining the price of a workers’ compensation policy is an employer’s prior experience. An experience modification factor is applied to either increase or decrease the price of a policy, depending on the frequency and severity of prior workers’ compensation claims an employer has had.
First Report of Injury
Most insurance companies will require an employer to complete a first report of injury form once they are notified an employee is hurt. It must be completed within 10 days of the reported incident or from the date the employer first learns of the incident.
This first report of injury form gathers as much information about the incident and the injured employee as possible. It is used in determining for which benefits the employee is entitled.
Waiver of Subrogation
A waiver of subrogation is a clause that can be added to a workers’ compensation policy. This clause states that your insurance carrier cannot recoup any money owed from a negligent party. For example, if your employee is injured on a job site, your workers’ comp insurance may pay for any medical expenses incurred as a result.
However, in most cases, they would then attempt to subrogate or collect that money from the party responsible for causing that accident. With the waiver of subrogation clause, they would be unable to. The downside to having this waiver is that any claims paid by your insurance carrier can result in an experience modification factor that increases the price of your policy.
Workers’ Compensation Classification Codes
Classification codes are another way in which workers’ compensation policies are priced. Each type of job is assigned a 4- to 5-digit classification code. These classification codes help determine the risk associated with that job and the price to charge. You can view examples of class codes here.
Workers’ Compensation Class Codes
Class codes are another way to refer to classification codes. The National Council of Compensation Insurance (NCCI) routinely conducts reviews of classification codes for consistency. Its website is an excellent resource for class codes and which are most appropriate to use.
Workers’ Compensation Rate
Workers’ compensation rates are often presented as a specific cost per $100 of payroll. For example, a rate of $1.05 would mean that a business with $100,000 in payroll would, in theory, pay $1,050 a year for workers’ comp insurance. These rates are determined by a rating bureau and set by each state.
Remember that experience modification factors are also considered to determine the price of a workers’ compensation policy. The experience modification factors are applied after the rates are calculated.
4 Types of Workers Compensation Benefits
How is workers’ compensation a benefit to employees? Workers’ compensation policies offer 4 main benefits to injured or ill employees, including wage replacement, medical treatments, vocational rehabilitation and death benefits. Let’s breakdown each type to better understand the details.
1. Wage Replacement Coverage
Wage replacement coverage is the benefit that pays an injured or ill employee’s average weekly wage while recovering. The amount of money they are given is also dependent on the severity of the injury or illness. A partial disability will pay less than a total disability, for example.
Each state specifies the maximum weekly rate for which employees are eligible. How long you can receive these benefits is also dependent on the severity of the injury.
What It Covers
- Employees’ average weekly wage while they are recovering from a work-related injury/illness
- A certain percentage of their pay, depending on the severity of the injury or illness
What It Does Not Cover
- Unemployment benefits
- Lost wages due to intentional acts
- Lost wages for injuries that did not occur during employment
2. Medical Treatments Coverage
Medical treatments are one of the most significant benefits offered by workers’ compensation insurance. It pays for treatment or reasonable and necessary medical care needed due to an “on the job” injury.
What It Covers
- Doctor visits
- Medication
- Therapy
- Surgery
What It Does Not Cover
- Medical expenses for accidents that occurred off the job
- Medical expenses for accidents that occurred on the way to or from work
- Intentional acts that resulted in injury
- Illegal acts that resulted in injury
3. Vocational Rehabilitation Coverage
If an employee is injured so severely that they are no longer physically capable of completing their previous job, vocational rehabilitation may be necessary. The purpose of vocational rehabilitation is to ensure you can return to work with a job that you can do at a wage as close as possible to what you were being paid before the injury occurred.
What It Covers
- Vocational evaluations to determine skills and interests
- Development of a resume
- Job training
What It Does Not Cover
- Relocation expenses if the injured worker decides to move for a job
- Vocational rehabilitation for injuries from intentional acts
4. Death Benefits Coverage
If an employee dies due to injuries sustained on the job, workers’ compensation can pay for any funeral expenses or provide financial support to the family of the deceased.
What It Covers
- Funeral or burial costs
- Financial support to the late employee’s surviving family
What It Does Not Cover
- Funeral or burial expenses where death is caused from outside of work activities
- Life insurance
How Does Workers’ Compensation Work?
Each individual state highly regulates workers’ compensation insurance, and as such, how it works can vary by state. However, employers are often required to carry a workers’ compensation policy to protect their employees from a workplace injury.
Workers’ comp policies pay for medical expenses and lost wages due to an accidental injury that arises during employment. Whether insurance would cover injuries under workers’ comp is dependent on these facts.
In addition to wage reimbursement and medical bills, workers’ comp typically also provides benefits based on the following:
Temporary Total Disability
This type of injury results in the employee being unable to complete their job functions temporarily. In these cases, employees are entitled to a certain percentage of their average weekly pay, up to the average weekly pay, as determined by the State Board of Workers’ Compensation.
Temporary Partial Disability
If an injury results in an employee being temporarily unable to complete their full job functions but can work in a reduced capacity, this is said to be a temporary partial disability. With this type of injury, an employee can receive a reduced benefit based upon their wages up to a certain number of weeks.
Permanent Total Disability
As the name suggests, this type of injury results in the employee being totally disabled on a permanent basis. These are the more severe injuries that usually include the loss of use of limbs. In these cases, employees can receive weekly benefits depending on the type and extent of the disability as advised by the treating physician.
Permanent Partial Disability
These types of injuries result in an employee who has recovered from their injury but is left partially incapacitated. Similar to the permanent total disability, benefits for eligible employees will depend on the type and extent of the disability.
Where Is Workers’ Compensation Required?
Workers’ compensation is required in almost all states. The 2 exceptions are Texas and South Dakota. In these 2 states, it is not required by law for employers to purchase workers’ compensation insurance. However, both states do recommend doing so.
Who Has To Carry Workers’ Compensation Insurance?
In many states, workers’ compensation is required for employers who have one or more employees. Each state has its own set of laws and guidelines around what counts as an “employee,” so it is best to check with your individual state to confirm.
How Is the Cost of Workers’ Comp Calculated?
To calculate the cost of a workers’ comp policy, insurers use a formula of:
(Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate = Workers’ Compensation Cost
Each state determines what the workers’ compensation insurance rate is for that state. For example, if a company’s annual payroll is $100,000 and the state’s insurance rate for workers’ comp is $1.06, the estimated price of the workers’ comp policy would be $1,060.
Many companies also offer a workers’ comp calculator to make this process of determining the price a bit easier.
Workers’ Compensation Claims Process
Now that you have been familiarized with what workers’ compensation insurance is, how does it work? Many insurers require employers to report an injury within a certain period of time, usually about ten days after the employer is first notified that one occurred.
Once an injury is reported, the employer should do the following:
- Advise the injured employee to seek treatment immediately.
- Complete a First Report of Injury form to submit to the insurer.
- Ask the injured employee to document the date, time and circumstances surrounding the incident.
- Send these completed forms to the insurer for reviewing the claim.
The physician who treats the injured employee can send any medical reports to the workers’ comp insurer for reimbursement once the claim is accepted.
Where to Buy Workers' Compensation
The best place to buy your workers' compensation will depend on your business, where your business is located and other factors. Use this resource from the Department of Labor to find contact information for your state workers' compensation board to learn more about what type of coverage you need before you buy.
The following are Benzinga's favorite workers' comp providers:
Best For:
#1 provider of workers comp for small businesses
securely through The Hartford Workers Comp's website
Best For:
Start-ups, the self-employed and small businesses
Best For:
Small businesses with both part and full-time employees
securely through Hiscox's website
Best For:
Bundling commercial policies
securely through Progressive Workers Comp's website
Best For:
Matching you to the provider that best fits your needs
get started through Tivly’s website
Find The Right Workers’ Comp Insurance
As a business owner, you want to protect your business in any way possible. Whether it is through obtaining professional liability, general liability, or any other type of commercial policy, insurance is the best way to do this.
When choosing what policies your business needs, do not overlook a workers’ compensation policy, and feel free to reference this guide for all you may need to know. Visit the rest of the workers' compensation resources from Benzinga here, including state-by-state guides to the best coverage in your area.
Try Simply Business
Best For:
Tailored coverage
securely through Simply Business Insurance's website
Simply Business offers a comprehensive suite of business insurance that specializes in making it easy to insure your business. Whether you’re looking for construction workers' insurance or liability insurance for your startup, Simply Business helps you find the best workers’ comp coverage at the right price. Don’t turn to a thousand different carriers when you can get help from Simply Business, especially when workers’ comp coverage can cut into your bottom line.
Tell Simply Business a little bit about your business and you'll get almost-instantaneous affordable quotes from top insurance providers to protect your business and safeguard yourself or other licensed employees. You can also look into business owner’s plans, additional liability insurance, commercial auto and more that will cover everyone on your team, and you can get covered in accordance with state law without overspending.
Building your business is hard enough. Let Simply Business make it easier. Get a quote from Simply Business today.
Frequently Asked Questions
A
If your workers’ comp claim is denied, you would be responsible for paying any medical bills outstanding. However, if you feel that your claim is legitimate, hiring a good workers’ compensation lawyer is also an option.
A
As an injured employee, workers’ compensation benefits are generally not taxable. In some situations, employees may be taxed on workers’ comp benefits, but it can vary by state. As such, it is best to research each state’s laws for confirmation.
A
Generally speaking, you are forfeiting your right to sue your employer by accepting workers’ compensation benefits after an injury. However, there may be cases where you can sue a third party if they contributed to your injuries at work (a product manufacturer, for example) in addition to accepting workers’ compensation benefits.
