What is Workers Compensation Insurance?

Workers compensation insurance is an insurance policy that covers costs associated with workers who become ill or injured on the job. Workers compensation insurance can cover a worker's medical expenses, a portion of a worker's lost wages, or a worker's rehabilitation costs due to a job-related illness or injury. Some workers compensation insurance policies even pay benefits to a worker's family if the worker is killed in a job-related accident.

Workers compensation insurance is regulated by state governments, so the requirements will vary based on where a business is located. Generally, most businesses in most states are required to hold a workers compensation insurance policy to protect their workers from costs associated with an accident on the job. Workers compensation insurance benefits employers, too. Workers compensation insurance policies are designed so that if a worker becomes ill or injured due to his or her job, the employer is protected from liability. In other words, the worker's expenses are covered by the workers compensation insurance policy and the employer is protected from lawsuits.

Although most employers are required by law to purchase workers compensation insurance, many have a choice between buying a private plan or buying a public plan through the state. Some states require businesses to buy the public plan. Businesses in other states may want to look into trade organizations that sponsor workers compensation insurance programs, as these sometimes offer opportunities for saving on the cost of insurance premiums.

Which employees a business needs to cover depends on which state the business is located in. You may be required to have workers compensation insurance to cover contractors who do work for you, even though they are not full-time, salaried employees. Usually businesses are not required to purchase workers compensation insurance to cover the owners of the business, so partnerships and small, employee-owned companies are often exempt. However, business owners have the option to purchase workers compensation insurance to cover themselves if they so choose.

Maintaining a safe workplace helps keep the cost of workers compensation insurance down. Just as with other types of insurance, such as homeowners or auto insurance, premiums are higher if the risk of filing a claim is higher. This also means that workers compensation insurance will cost more for workers whose jobs entail a greater risk of danger, such as drivers or construction workers.

Workers Compensation State Insurance Funds

One way to obtain workers compensation insurance coverage is by purchasing a plan through the state government. In 2009, half of the states in the United States offered a public option for employers to purchase workers compensation insurance. Four of these states (Wyoming, North Dakota, Ohio, and Washington) required employers to use the public option and had no private options available. Despite being available in only half of the country, public workers compensation insurance accounted for one-quarter of the U.S. workers compensation insurance market.

States that offer public workers compensation insurance have policies that are tailored to a variety of businesses. Large and small businesses alike can find workers compensation insurance plans to meet their needs through the state. In many cases, state-funded workers compensation plans are utilized most often by businesses that would otherwise have difficulty purchasing a private plan. These include extremely small businesses or businesses in industries with a high risk of filing a claim. Generally, the more dangerous an employee's job is, the higher the workers compensation insurance premiums that employers need to pay. These high-premium products are not as common in the private workers compensation insurance market as other workers compensation policies, so industries such as transportation or construction, which have a high level of risk to employees, opt to purchase a public workers compensation insurance policy. Some trade organizations even recommend to their members public workers compensation over private workers compensation.

The amount of public workers compensation insurance available varies by state. Many state programs take in over a billion dollars in premiums from employers that purchase public workers compensation insurance. The assets available for claims filed under public workers compensation insurance policies are even greater. The funding available in your state for public workers compensation policies will depend on how many businesses purchase the public option, which in turn depends on competition with the private sector and the nature of the industries in your area.

One benefit of public workers compensation programs is that they tend to promote safety more ardently than private policies in order to prevent claims. The intention of public workers compensation insurance programs is not to make a profit, but rather to help employers run their businesses. In that sense, it is in the state program's interest to keep the cost of premiums down by decreasing the number of claims filed.

Private Insurance

All states require that businesses operating within their borders have workers compensation insurance policies in order to cover the medical costs and a percentage of lost wages of any employee who is injured or becomes ill due to job-related circumstances. This not only protects the employee, but also protects the employer from a potential lawsuit. One avenue by which employers can purchase workers compensation insurance is through the private sector. In twenty-five states, there are also state-funded workers compensation programs available. In twenty-one of these states, state-funded workers compensation, which is not for profit, competes with private workers compensation insurance policies, and business owners can select whichever policy they decide best suits their needs. In four states, however, businesses are required to purchase workers compensation insurance through the public funds available and do not have the option of buying private workers compensation insurance. What Is Workers Compensation Insurance?

The cost of private workers compensation insurance depends on several factors. Employees who generally perform risky jobs will be more costly to insure than employees who spend most of their time in an office environment. Similarly, firms that have good safety records and that actively take steps to prevent employee injury or illness will lower their cost of workers compensation insurance. Educating your employees about safety procedures and reducing any hazards in the work environment will help reduce the cost of your workers compensation insurance premiums.

Generally, you will pay a percentage of each employee's wages towards workers compensation insurance premiums. The percentage you pay will depend on the nature of the employee's work. For example, to insure employees who do not perform physically taxing work, you may pay about 0.25-1 percent of the employee's wages for workers compensation insurance. On the other hand, you could pay up to 10-15 percent of an employee's wages for workers compensation insurance for employees who have a higher risk of injury, such as construction workers or drivers.

One advantage of purchasing workers compensation insurance through the private sector is that you can shop around for the policy that is best suited to your business. However, in some cases, you may find that your state-funded workers compensation insurance program is the most competitive. When shopping for workers compensation insurance, pay attention to how different insurance companies adjust their claims. You want to choose a company that allows you to work with the same adjuster each time you file a claim.

Self-Insurance

Self-insuring is one way businesses can ensure that their employees are covered by workers compensation insurance. Some states offer a public option and compete with the private sector. Employers can choose whichever workers compensation insurance policy best meets their needs, as long as the policy complies with state regulations.

In some cases, employers can choose to self-insure rather than purchase a public or private workers compensation insurance policy. Workers compensation self-insurance works by setting aside a pool of money that can be used to cover an employee's medical expenses and a percentage of the employee's lost wages in the case of a job-related illness or injury. Often, many businesses will pool their workers compensation self-insurance together. This increases the amount of funding available if a worker files a claim, and since it is unlikely that many workers will need to file claims at once, this helps businesses protect one another. Usually businesses within the same industry will create a self-insurance pool together, or businesses that provide similar services within different industries may choose to self-insure together. No matter what kind of businesses group together to self-insure, this process usually works best for businesses that hold a similar safety risk, so that the cost and risk are spread evenly throughout the pool of businesses.

Many businesses, especially small businesses, find that they spend less money on workers compensation insurance if they self-insure in a pool with other businesses rather than purchase a public or private workers compensation insurance policy. Self-insurance also works best for businesses with a very low risk of employees becoming ill or getting injured on the job.

Keep in mind that businesses save money through self-insurance on the assumption that few employees will file claims. Businesses should remember that while the cost of self-insuring will likely be less than the cost of paying insurance premiums, they may suffer a net loss if they need to pay workers compensation claims that are greater than the amount of money in the insurance pool. Because of this, businesses in riskier industries may be better off purchasing workers compensation insurance from the state or the private sector.

State regulations also determine which businesses are eligible to self-insure. If a business has a poor safety rating or is in a risky industry, that business may still be required to purchase workers compensation insurance through a public or private policy.

Factors To Consider When Purchasing Workers Compensation Insurance

Legal Requirements

State Insurance Funds Each state has its own legal requirements for workers compensation insurance; however, all states require that employers provide workers compensation insurance to their employees. This ensures that employees who are injured or become ill due to job-related circumstances have their medical expenses paid for and can recuperate some of their lost wages. This also ensures that employers are not crippled by the cost of lawsuits from employees who suffer a job-related illness or injury.

As of 2009, twenty-five states offered a state-funded workers compensation insurance program. Four of these states (North Dakota, Wyoming, Washington, and Ohio) required employers to purchase the state-funded plan and had no private options or self-insurance options available.

Many states allow businesses to self-insure, which is usually less costly than purchasing workers compensation insurance. However, each state has its own legal requirements for which businesses are eligible to self-insure. Generally, small businesses or businesses with very high safety ratings are eligible to self-insure rather than purchase a public or private workers compensation insurance policy.

Nearly all businesses are legally required to provide workers compensation insurance, though some small businesses may be exempt. For example, in some states, a small business that is owner operated may not be legally required to provide workers compensation insurance, since all of the employees are partial owners of the company. However, if an owner-operated business chooses to cover its owners with workers compensation insurance, there are policies available that are tailored to this situation.

States also have varying legal requirements about the extent to which various workers must be covered by workers compensation insurance. The amount of coverage each worker needs to have depends on the kind of work the employee does and on the overall safety rating of the company. For example, the amount of coverage legally required for an office worker will be much less than the amount of coverage required for a construction worker. However, employers in nearly all industries can reduce the amount of coverage they are legally required to provide by taking safety precautions. Even the employer whose employees work in an office could decrease the risk of injury by providing ergonomically friendly furniture, thus decreasing the amount of workers compensation coverage required.

An employee's salary also affects how much workers compensation insurance is required. Generally, the employer will pay an insurance premium based a percentage of each employee's salary. The percentage is determined by how risky the job is.

Dollar Amount of Coverage

The dollar amount of workers compensation insurance that you need will depend on the size of your business and the nature of the work that your employees do. You will be required to have a higher dollar amount of coverage for employees who perform risky tasks, such as transporting materials or performing physically taxing work, than for employees who spend most of the day sitting at a desk. Depending on the regulations in the state where your business is located, you may have some leeway in how much workers compensation insurance you have to purchase, as long as you meet the minimal state requirement.

For most workers compensation insurance policies, you will pay a percentage of each employee's wages in order to cover that employee. The percentage you pay will depend on the employee's job responsibilities and on the legal requirements of your state. Usually you will need to pay about 0.25-1 percent of wages for an employee in a position at low risk of injury or illness, and about 10-15 percent of wages for an employee in a position at high risk of injury or illness. The percentage you pay will also be determined by the dollar amount of benefits available to the employee if he or she files a claim.

When an employee files a claim to collect workers compensation insurance benefits, the employee may be eligible to have his or her medical expenses covered and to receive a percentage of his or her lost wages. Generally, the dollar amount of coverage available to each employee will be higher if you pay slightly higher premiums. For example, if you invest more in your workers compensation insurance policy, your employees may be eligible to receive a higher amount of wage reimbursement if they need to file claims.

Often, the dollar amount of coverage available is less for self-insured workers compensation policies. However, the cost of workers compensation self-insurance is also usually substantially less than the cost of public or private policies. Small businesses with a high safety rating may decide to self-insure rather than purchase a workers compensation insurance policy because they are likely to save money this way. However, they are taking the risk that if their employees file claims that they have not set aside enough money to pay for, they will suffer a financial loss in order to pay for their employees' medical care and lost wages.

Risk Classification for Your Business

The risk classification for your business is how likely your employees are to file a workers compensation insurance claim. Essentially, risk classification determines the cost of your workers compensation insurance premiums.

Risk classification for your business is determined by several factors. The riskier the industry you are in, the greater the risk classification for your business. Also, the more workers compensation insurance claims that your employees have filed in the past, the greater the risk classification for your business. Your risk classification can be increased not only by the amount of claims your employees have filed, but also by the nature of the claims your employees have filed. Claims that are more severe will give you a greater risk classification than claims that are less severe. So, a work-related injury or illness that affects your employees' ability to fully function in or outside the workplace permanently or for an extended period of time will have a greater impact on your risk classification than a claim for an injury that is only a minor inconvenience to your employees. For example, a claim for a broken leg will increase your risk classification more than a claim for a sprained thumb, even though both conditions could arise from a workplace-related injury and both can affect an employee's ability to perform his or her job duties successfully.

Risk Classification for Your Business

Working conditions in your business also affect your risk classification. Different employees in your business may have different risk classifications. For example, an administrative assistant for a construction company will likely have a lower risk classification (and cost less to insure) than the construction workers themselves.

Businesses can take steps to lower their risk classification and thus reduce the cost of their workers compensation insurance premiums. Some things, such as road conditions for a truck driver you employ, are not under your control, but other things are. You may not be able to keep the road your driver is using salted, but you can train your driver on how to handle potentially dangerous situations in order to avoid an accident. Showing your insurance provider that you have trained employees who are exposed to hazardous situations how to handle those situations safely can reduce your risk classification and lower your workers compensation insurance rates.

Ways to Reduce Workers Compensation Risk and Exposure

Reducing your business's risk classification will reduce how much you spend on workers compensation insurance premiums. Perhaps the easiest way to reduce your risk classification and save money on workers compensation insurance premiums is to promote safety in the workplace. You may have employees who are exposed to hazardous situations as part of their job duties, but you can train them in how best to handle those situations and stay safe. For example, if you employ roofers, you can educate your employees on how best to avoid a fall. Although being on a roof is still a dangerous situation, an informed employee will be able to reduce his or her risk of injury.

Training employees in safety procedures can reduce the cost of your workers compensation insurance in several ways. You can show your insurance company's auditor the steps you have taken to train employees about how to do their jobs safely when you go over the terms of your policy. Safety training can also reduce the cost of your premiums indirectly, simply by reducing the need for employees to file claims. If employees follow safety procedures, they are less likely to become injured. If employees are less likely to become injured, they are also less likely to file a workers compensation insurance claim. The fewer claims that your employees file, the less you will be required to pay for your workers compensation insurance policy.

Also be sure to reduce any workplace hazards that are under your control. Make sure your employees are equipped with any and all safety equipment that they need. Outfit your office with furniture that is ergonomically sound and less likely to cause strain on your employees' bodies every day. Post your safety regulations in prominent places around the workplace so that your employees are reminded of how to avoid injury or illness. Require your drivers to wear seat belts and other employees to wear appropriate safety equipment.

Look over a copy of the audit your insurance company did when determining your workers compensation insurance premiums. You may find ideas on how to increase safety in the workplace based on your auditor's analysis. Once you have updated your workplace to be as safe as possible, have your insurance company audit your workplace again. The new audit will take into account the updates you made and can decrease your workers compensation insurance premiums.

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