It can also prevent employees from suing employers over work-related accidents in most cases. And in the majority of states, it covers the employer’s legal fees in the event of an accident that’s eligible for a lawsuit.

Most businesses are required by law to carry workers’ compensation coverage—but you may be exempt, depending on your industry, where you operate, and how many people you employ. But even if your enrollment is optional, it can be wise to invest in workers’ compensation insurance to prevent substantial out-of-pocket costs in the worst-case scenario.

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What is workers’ compensation insurance?

Workers’ compensation insurance is a commercial insurance policy that can step in to help an employee who contracts an illness or gets injured while working or as a result of their job. Covered workers’ comp benefits may include medical treatments, partial income replacement, job training programs, and more. In the event of a covered incident, workers’ comp coverage applies even if the employer isn’t at fault.

This insurance product also protects business owners from lawsuits, as employees generally can’t sue over workplace accidents and must instead turn to workers’ compensation as their “exclusive remedy.” That said, workman’s comp insurance usually covers the employer’s legal costs in instances where the employee is still allowed to sue, such as the following situations:

• The employer intentionally harms the employee or recklessly puts them in danger
• The employee is sexually harassed by one of their colleagues
• The employer breaks the law by firing, intimidating, or otherwise punishing the employee because of their workers’ compensation claim
• The employer violates federal regulations concerning the transportation or housing of migrant workers
• The employee experiences an injury that isn’t otherwise covered by the workers’ compensation policy (e.g., psychological trauma unrelated to a physical injury)

How does workers’ compensation insurance work?

State laws often regulate the specific details of how workers’ compensation insurance programs work—such as the minimum amount of benefits guaranteed to disabled workers and the maximum amount they can possibly receive on a weekly basis. For example, eligible workers in California can receive no less than $160 per week and no more than $290 per week in workers’ compensation disability payments.

Your state’s laws may also establish coverage limits for employees who are permanently disabled following a workplace accident. The limit may be set at either a total dollar amount or a maximum duration of time during which the employee can claim benefits. For example, the following time limits apply in New York:

Employees don’t have to pay a deductible for covered workers’ compensation claims, but the employer might, and it can often lower its premiums by raising its deductible.

Depending on your state and the characteristics of your business, you may be allowed to self-insure rather than buying private workers’ compensation insurance. Conversely, companies in the following “monopolistic states” can only obtain coverage through a state fund:

• North Dakota
• Ohio
• Washington
• Wyoming

Employees typically report an injury to their employer, seek approved medical treatment if required by state law, and file a workers’ compensation claim within the applicable reporting deadlines. Missing these deadlines may reduce or eliminate eligibility for benefits. 

Who needs workers’ compensation insurance?

Most businesses with employees are required by law to carry workers’ compensation—Texas, South Dakota, and Wyoming are the only states that don’t enforce broad, industry-neutral requirements. However, there may be some exceptions, like if you employ fewer than three to five people. Additionally, certain industries may be exempt from workers’ compensation requirements, such as the nonprofit, domestic service, and agricultural industries.

Below are some examples of industries that have a high exposure to workplace accidents and are more likely to need to file workers’ compensation claims as a result:

• Construction
• Education
• Fishing
• Forestry
• Health care
• Hospitality
• Manufacturing
• Mining
• Retail
• Transportation and logistics
• Wholesale

What does workers’ compensation insurance cover?

Let’s examine the different kinds of expenses a typical workers’ compensation insurance policy may cover after a workplace accident.

Medical expenses

One of the main functions of workers’ compensation insurance is to cover medical bills and continuing care expenses for employees who have experienced a work-related sickness or injury. Examples of health care services that may be covered include the following:

• Physician services
• Hospitalization
• Physical restoration
• Physical therapy
• Chiropractic treatment
• Dental care
• Prescriptions
• X-rays
• Laboratory services
• Any other care considered necessary and reasonable by the treating physician, subject to applicable treatment guidelines
• Ambulance rides

Lost wages

Workers’ compensation insurance can help make up for lost wages if an employee must miss work while they recover. Depending on your coverage details, there may be a waiting period lasting three to seven days before lost income coverage takes effect. As a result, your employee may not be reimbursed after a minor injury that puts them out of work for less than a week.

Temporary disability

If your employee is temporarily unable to return to work because of a job-related disability, they may be eligible for disability benefits set at a percentage of their weekly income. An employee may receive up to two-thirds of their normal wages for a total disability—though the benefit amount may be lower if they only experience a partial disability and can still work in some capacity.

Permanent disability

Your employee may qualify for permanent disability benefits if it’s determined that they’ve reached their maximum medical improvement (MMI) after a workplace accident and yet are still disabled. As with temporary benefits, permanent benefits may be split into either total or partial disability payments, depending on whether the employee can’t work at all or must simply move into a different position at your company.

Vocational rehabilitation

In the event that an employee is unable to return to their previous role due to a work-related disability, workers’ compensation insurance may cover costs associated with training them for a different job. This is important because, despite the “permanent” title, permanent partial disability benefits are often subject to a coverage limit and may eventually expire.

Death benefits

Similar to life insurance, workers’ compensation coverage can pay out a death benefit to help cover final expenses—such as funeral, burial, or cremation costs—for an employee who dies on the job or because of an illness or injury stemming from their work. The payout amount may be calculated based on the worker’s earnings and how many dependents they left behind.

Legal protection for employers

Again, workers’ compensation insurance can also benefit employers by lowering their exposure to costly legal fees related to workplace incidents. Just remember that state-sponsored workers’ comp insurance doesn’t cover legal costs for employers in the four monopolistic states, so businesses in these (relatively few) states may need to buy separate employer’s liability coverage.

What isn’t covered by workers’ compensation insurance?

The following types of injuries typically aren’t covered by workers’ compensation insurance:[9][10]

• Injuries from a fight the injured employee started
• Injuries involving an intoxicated employee
• Self-harm
• Mental health conditions (unless accompanied by a physical injury related to a workplace accident)
• Injuries that occur away from your business premises and aren’t related to your employees’ work
• Injuries that aren’t reported within your state’s mandatory time limit
• Scrapes, bruises, or other minor injuries that don’t require serious medical attention
• Car accident injuries that occur on the way to work
• Injuries that occur at optional office parties or recreational events

Also, certain employees may not be eligible for coverage under a standard workers’ comp insurance policy—though you may be allowed to add coverage for some of these types of workers, depending on your state. Examples of jobs that may not automatically qualify for workers’ comp insurance coverage include the following:

• Business owners, partners, and sole proprietors
• Self-employed people
• Independent contractors
• Volunteers
• Cab drivers
• Part-time domestic workers, gardeners, or maintenance workers hired by an individual homeowner
• Federal employees, railroad workers, and dockworkers (covered under separate federal workers’ compensation programs instead)

How much does workers’ compensation insurance cost?

Average businesses pay between $1,000 and $2,500 per year for workers’ compensation insurance coverage. A number of factors can influence your premiums, including:

• Coverage limits
• Industry
• Payroll
• Number of employees
• Claims history
• Risk level associated with the specific type of work your employees do

How workers’ compensation premiums are calculated

One common formula for calculating workers’ compensation insurance rates leans heavily on the following three factors:

1. Class code: Every type of job has a classification code assigned by the National Council on Compensation Insurance, which roughly measures the risk of bodily injury associated with each job. Insurance companies typically assign a standard starting rate for each workers’ compensation class code.
2. Experience modification rate: Your insurer may then multiply your basic class code rate by your experience modification rate, which evaluates your claims history to determine whether you file claims more or less often than other businesses with the same class code. Experience modification rates are generally set between 0.75 and 1.25, with higher rates corresponding to higher premiums.
3. Payroll: Finally, the product of your class code rate and experience modification rate may be multiplied by the amount you spend on paying your employees divided by 100—that is, the combined rate applies for every $100 of your payroll. This accounts for the fact that you have a higher risk of filing workers’ compensation insurance claims if you have more employees.

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Workers’ compensation insurance vs. general liability insurance

While workers’ compensation insurance covers your employees’ expenses if they’re injured on the job, general liability insurance covers medical and repair costs for people unaffiliated with your business—such as customers—if you’re held liable for injuring them or damaging their property. Even though it isn’t required by law, general liability insurance is recommended for virtually every business.

Workers’ compensation insurance at a glance

1. Definition: Workers’ compensation insurance is a business insurance coverage type that takes care of an employee’s medical and rehabilitation expenses if they experience an injury or illness during the course of performing their work duties.
2. Coverage for employees: If an employee experiences a covered condition, workers’ compensation insurance may cover their medical treatments, lost income while they recover, temporary or permanent disability payments, training for a new job, or death benefits for their beneficiaries.
3. Protection for employers: In exchange for receiving workers’ compensation, employees generally waive the right to sue their employer over a work-related injury. In limited cases where an employee can sue, workers’ compensation insurance usually covers the employer’s legal expenses.
4. Limits: Disability benefits paid out by a workers’ compensation insurance provider may be restricted by total dollar or time-based coverage limits. In addition, these payouts generally aren’t enough to replace an employee’s entire income.
5. Requirements: For the most part, workers’ compensation insurance is required by law for businesses with employees. However, certain exemptions may apply, depending on your state, industry, and employee headcount.
6. Exclusions: Workers’ compensation policies may exclude coverage for certain types of injuries, such as injuries stemming from fights, excessive drinking, car accidents on the way to work, or other events unrelated to work.
7. Cost: The average business pays around $80 to $200 per month for workers’ compensation coverage, depending on factors like the company’s location, industry, payroll, and claims history.

How to save on workers’ compensation insurance

Taking the following actions may help you lower your workers’ compensation insurance premiums:

• Implementing risk management protocols
• Asking your insurer if you qualify for any discounts
• Checking your insurer’s premium calculation to ensure you’re being charged the correct amount
• Selecting a higher deductible
• Limiting the number of claims you file to avoid being placed in an assigned risk pool
• Bundling workers’ compensation with other types of coverage, such as disability insurance or employer-sponsored group health insurance

The takeaway

Worker’s compensation insurance is typically required by law for businesses with at least one employee (though specific thresholds vary by your state). It serves not just to help employees with workplace-related injuries get the help they need, but also to keep employers from most lawsuits and potentially significant legal costs. If your business has employees, it’s worth at least investigating workers’ compensation insurance.

Frequently asked questions