Workers Compensation Insurance

Mandatory state-based social insurance program

Workers' compensation is an insurance program that provides workers with insurance protection against disability or death that occurs during work. This could include a workplace injury or occupational disease. Employees who are injured or disabled on the job receive a fixed monetary award that generally eliminates the need for litigation. Many states allow qualified businesses to self-insure for part or all of the claims. Some states allow smaller companies to form groups to self-insure, that is, pool their risk and liabilities with other companies. Federal employees and interstate commerce workers are protected under federal workers' compensation statutes.

Two-pronged coverage protects both the worker and the company

Workers' compensation provides your employees with benefits for medical expenses, lost earnings, disability, and death under the statutory liability coverage. Under the employer liability coverage, your business and your employees are protected from liabilities such as lawsuits filed by an injured employee's relatives (e.g., loss of marital consortium) or from third parties (e.g., an equipment manufacturer being sued by the injured employee).

In most states, the workers' compensation laws require businesses to accept the laws' provisions and provide the specified benefits. However, in some states, employers can opt out of the state workers' compensation system, but in so doing, they lose the benefit of certain liability limitations.

All employees generally must be covered under state workers' compensation systems. State workers' compensation acts generally classify workers as employees based on factors derived from the common law. Among the factors considered are whether the employer has the right to control the actions of the worker, and whether the work performed by the worker is part of the regular business of the employer. Independent contractors are not included in the definition of employee, and are not covered under workers' compensation statutes. In addition to independent contractors, most states exclude agricultural employees, domestic employees, and casual employees from the requirement. For more information on the different types of employees, please see the discussion on Worker Classification.

There are three funding arrangements available. The state funding arrangement determines the extent to which the state bears some or all of the risk of workers' compensation insurance. The following table shows the various funding arrangements and characteristics:

Monopolistic states (state assumes all risk)

In the monopolistic states, the state assumes the risk and pays claims from the state fund. Workers' compensation insurance is generally more stable in states with their own funding arrangements because employers need not worry about the possibility that their insurer will opt out of providing insurance in a given state in a given year. An insurer's decision not to offer insurance in a given state could result in a big headache for those companies with policies written by the withdrawing company.

Competitive fund states (state assumes some risk)

The competitive fund states may offer your business the best opportunity to shop around for coverage. You have the choice between the state fund or a private insurance carrier. While it may seem like more work to compare your choices, you could benefit in the long run.

Insurance company fund states (state assumes no risk)

The third funding arrangement occurs when the state assumes no risk for the workers' compensation insurance. In these states, the funding is handled through insurance companies.

Payroll costs

The size of your company's payroll is just one factor used by an insurance company to determine workers' compensation insurance premiums. Payroll costs are generally based on gross wages (straight-time only, not including any overtime premium for hourly workers). Some states cap the compensation amounts for executive management positions in the calculations.

Payroll classification rate

Employee payroll costs are divided into specified categories based on the type of work performed. For instance, clerical employees are grouped and assigned a rating, as are warehouse employees, machine operators, salespeople, etc. Each payroll classification is assigned a rate that is applied to the gross wages for the employee group. The various categories are added to derive a total amount.

Experience-rating modifier

The premium is adjusted by an experience-rating modifier based on your business's claims history. The experience-rating modifier is calculated by a rating bureau, generally once a year, and based on three years' claim experience and excluding the current and previous years. A modifier above 1.0 indicates higher than average claims experience, while a modifier below 1.0 indicates better than average claims experience. The experience-rating modifier serves as an incentive to promote workplace safety by lowering the premium for companies with fewer than average claims.

Don't wait until your premium notice arrives or a workplace incident occurs to assess your workers' compensation policy. There are certain measures you can take to control your company's workers' compensation costs. Some may seem to be time-consuming and a lot of work for you, the company, or your financial advisor, but could be worth it in the end when an employee is injured on the job or the premium payment comes due.

Prevention through education

The best way to prevent or reduce workplace injury and illness is through safety, health education, and training. Education and training in the areas of recognition, avoidance, and prevention of unsafe or unhealthy working conditions in the workplace can help reduce injury and illness and may even increase productivity. A workplace safety committee made up of members from management and labor can be instrumental in identifying and correcting workplace health and safety concerns.

Check your company's experience modifier rating

You or your financial advisor may be able to check your company's experience modifier at least once a year. Obtain a copy of the worksheet from the rating bureau or the insurance carrier and check for errors (which unfortunately are not uncommon).

Review insurance company claims data

You or your advisor should review the insurance company's claims data and compare the number of claims to your own records. Also check the claims information for actual claims payments and the estimated future claims reserve.

Be involved in claims settlement

You may find it worthwhile to be involved in the claims settlement process. For example, your business may be able to participate in discussions of proposed claim settlements and review loss reports with the insurance company. This can be a sensitive area because the workers' compensation contract transfers responsibility for handling and settling claims to the insurance company, but check with your agent anyway. Many insurance companies respect and appreciate the attempts of businesses to control costs.

Review employee classification codes

Verify the employee classifications and headcount within each category being used for your policy, and read the classification descriptions carefully. Classifications being used may not accurately describe the work performed by your employees or groups. In addition, you may have certain employees who perform multiple functions across different categories, so you may be able to reclassify employees or groups of employees to other less expensive classification codes.

Monitor claims frequency

Watch the number of claims being filed, not just the amounts. The experience rating factor is based largely on the frequency of claims, so a lot of smaller claims could increase the experience rating even if the total dollar amount of the claims is relatively small. Check with your insurance company; some insurers allow businesses to self-insure for minor claims. While such an arrangement could affect cash flow in the short term, the long-term benefit of reduced future premiums could be achieved.

Check the risk of different business lines (if a multi-line operation)

Generally, the rate modifiers are based on the riskiest line of business. Corporations with subsidiaries may consider moving a high-risk subsidiary to another state (especially if it represents a small percentage of overall operations) or carving out the riskier business line. State law may not require the modifier of a minority interest subsidiary or venture to be applied to the consolidated operations. Your financial or legal advisor can help you here.

Not all employees are covered by workers' compensation

Some states have compulsory workers' compensation laws, while others have elective laws. In compulsory states, companies who employ only a few people (less than a set minimum) may not have to comply with the law, although all other employers do. In elective states, both employer and employee have the right to reject the law. However, if the employer rejects the law, the employer gives up any protection from liability offered under the law as well. Some states require that certain occupations (such as dangerous ones) be covered under workers' compensation, while other occupations are exempted. In addition, many states exclude farm workers and domestic employees from compulsory coverage.

Benefits are paid only for work-related illnesses or injuries

You can't receive workers' compensation benefits unless your illness or injury was work-related. An accidental injury is a compensable injury only if employment was the source of the injury, and the injury occurred during the course of employment. An illness is considered work-related only if it qualifies as an occupational disease. To qualify as occupational, the illness must result from employment and be caused by conditions specific to that employment or occupation. Two examples will illustrate how injuries or illnesses must be work-related:

Disability benefits

If you are injured on the job, you may receive either permanent or temporary disability benefits from workers' compensation. In addition, your disability may be classified as either total or partial. How your benefit is paid, and in what amount, is determined by the law in your state, and depends as well on how severe and permanent your injury is. These benefits can be paid to you weekly, in a lump sum, or both. Permanent disability benefits are often paid in a lump sum according to a schedule determined by the state. Temporary benefits are usually paid weekly, and the amount of benefit you receive is based on your wages at the time you were injured. In most states, you will receive 66 2/3 percent of your wages, although this percentage may be higher for permanent total disabilities. However, your benefit is also subject to a weekly maximum that varies widely from state to state.

Medical benefits

Medical care is provided under all state workers' compensation laws. In most cases, the full cost of the injured worker's medical treatment will be paid. A few states, however, limit payments for medical care and restrict the length of time during which medical care can be supplied.

Survivor benefits

If you die as a result of a job-related injury or illness, your survivors may be entitled to receive survivor's benefits based on your wages (minimums and maximums do apply) and the number of surviving dependents. Your survivors may also receive money for burial expenses. Benefits are usually paid to the surviving spouse, as long as he or she does not remarry, and to the dependent children until they reach a certain age.

Rehabilitation benefits

Rehabilitation benefits are not included in each state's workers' compensation laws, but all states do provide rehabilitation under the Federal Vocational Rehabilitation Act. If you become disabled, you may receive physical, mental, or vocational rehabilitation; pay for expenses incurred during rehabilitation; and aids (such as a wheelchair) that you require. Some states, however, impose maximum limits on rehabilitation benefits.

Social Security disability benefits

If you receive Social Security disability benefits, any disability benefit you receive from workers' compensation may offset (reduce) your Social Security disability benefit. This applies if you are under normal retirement age.

Individual disability insurance policy benefits

Workers' compensation may reduce the amount of benefit you receive from an individual disability insurance policy in two ways. First, some insurance companies require that you make more than $25,000 to purchase a disability insurance policy, because in many states, workers' compensation may pay you up to this amount (or more) if you are injured or sickened on the job. Second, other companies will issue you disability policies, but they will ask you to purchase a social insurance offset rider that will reduce benefits paid to you if you become disabled and begin receiving some type of social insurance (such as workers' compensation or Social Security). If you purchase such a rider, you will pay less overall for disability insurance coverage than you would if you did not purchase the rider.

Workers' compensation benefits are not taxable as long as they are paid under a workers' compensation act or statute. Any benefits paid to your survivors are also tax exempt. However, if you return to work and continue to receive payments, your workers' compensation benefits will then be taxable. If part of your workers' compensation benefit offsets (reduces) your Social Security benefits, that part is considered to be a Social Security benefit and may be taxable according to the rules governing Social Security.

How long do you have to work for an employer before you are covered by workers' compensation?

Assuming that your employer and your occupation fall under your state's workers' compensation laws, you are covered as soon as you begin working. Your employer must provide benefits to all employees regardless of how long they've worked for the company or how much they earn.

If you receive workers' compensation benefits and later suffer another disabling illness or injury, will you be able to receive workers' compensation benefits again?

Yes, as long as your injury is determined to be work-related. Workers' compensation is not a onetime benefit. In fact, most states maintain a Second Injury Fund to cover situations such as yours. Because a second injury sustained combined with a first injury often leads to permanent total disability, second injuries often cost the employer more. The Second Injury Fund is set up to protect employers from the increased costs of providing disability benefits to an employee who could be permanently disabled by a second injury.