The notion of being sued by a worker hurt on the job is enough to keep any small business owner up at night with litigation trepidation and bankruptcy nightmares.
Fortunately, business owners can take comfort in a security blanket called workers’ compensation insurance (or workers’ comp), which safeguards the company and the employee from costs related to medical bills, income replacement, disability and other consequences of an injury or illness sustained while at work.
Not only does having this coverage in place make good business sense, it’s also required by law in all states except Texas. In fact, more than 94% of workers are protected by workers’ compensation insurance, according to Employers Insurance Company of Nevada.
The confusing rules behind workers' compensation
Yet, even with that high percentage of protected workers, over one in four business owners polled recently by Insureon and Manta said they actually lacked workers’ comp insurance, and 30% weren’t sure if they are required to provide such coverage.
Part of the problem is that workers’ comp laws are complex, can be difficult to understand, and vary by state. In Missouri, for instance, employers with less than five employees are not obligated to have coverage. But, in California (and most other states), all employers—even those with a single employee—must have workers’ comp insurance in place.
Furthermore, some states provide exemptions for different types of employees and businesses—like real estate agents, sole proprietors, and owners’ family members. And other states mandate having insurance coverage intact for yourself as a business owner as well as for subcontractors or independent contractors you hire.
Nevertheless, ignorance of the law is not an excuse. Going without coverage can make your company vulnerable to a costly lawsuit, state/OSHA fines and could even land you in jail. That’s why it’s important to learn the facts, weigh your coverage options, shop around carefully for the right insurance provider, and reevaluate your coverage as your needs and employees change.
What workers’ compensation covers
Workers’ compensation is simply an insurance policy, provided by an insurance carrier, that covers costs involved with medical treatment, disability, and lost wages associated with an employee who becomes injured or sick while on the job.
Expenses covered can include hospital visits and required operations, prescription drugs, physical therapy, and an ergonomic retrofitting of the employee’s work environment. The insurance is paid for by the employer and, if the worker dies, the benefits can continue to his or her family or beneficiaries.
Small business should offer this insurance to their employees because the risks associated with not doing so can be prohibitively expensive.
David Bakke, finance expert at Money Crashers
It’s important to note that workers’ comp policies cover only work-related injuries and accidents, not self-inflicted ones. It also excludes stress or psychological problems, alcohol- or drug-induced occurrences, or injuries sustained while commuting to or from the job.
“Small business owners should also be aware that workers’ comp insurance doesn’t necessarily cover all lawsuits over employee work injuries; it only covers what the state requires them to cover,” said Jeff Somers, president of Insureon. “This means that, in some states, certain types of workplace injuries and illnesses—along with accusations of negligence from employees—may not be eligible for the benefits included in workers’ comp coverage.”
To protect against lawsuits not covered, Somers suggests purchasing optional employer’s liability insurance if your workers’ comp policy doesn’t already include it.
“Employer’s liability insurance can help pay for legal defense fees, court costs, and settlements or judgements if the case makes it to court,” Somers said.
Why workers' compensation is worth it
David Bakke, finance expert at Money Crashers, believes workers’ comp coverage is worth every penny.
“Small business should offer this insurance to their employees because the risks associated with not doing so can be prohibitively expensive. You may end up paying more in the long run compared to the overall costs of the insurance itself,” said Bakke. “What’s nice is that it includes the caveat that your injured worker, once [he or she agrees] to and receives workers’ comp benefits, waives the right to sue your company for negligence.”
Plus, Bakke said, “It can be a good tool to use in the hiring process. Without it, you may have a hard time finding employees willing to work for your company.”
What’s more, without coverage, “the business owners’ personal assets, if unsecured, may be vulnerable,” said Kevin Richey, attorney with George Sink, P.A. Injury Lawyers. “The workers’ compensation commission in your state may assert a lien against those assets to satisfy any award or judgement.”
Also, consider that, minus the necessary coverage, “your employees could suffer potential delays in receiving adequate medical treatment following a worksite injury or illness,” said Ray Wise, chief sales officer for Employers, a workers’ compensation insurance provider for small businesses.
Choosing the right workers' compensation coverage
You can shop around for a policy either on the private market or through your existing commercial or business insurance provider. However, in some states, you are required to purchase coverage only through that state’s workers’ compensation fund.
“Search the internet and get quotes from at least three different providers. Be sure to speak with a real person from each provider so you can discuss your specific needs,” Bakke said.
Richey agreed. “Find a reputable agent who understands workers’ compensation well. I have seen small business owners get bad advice and not purchase the right compensation coverage,” said Richey. He recommends coverage limits of at least several million dollars for each employee, if you can afford it.
Workers’ comp insurance costs can range widely based on different factors, including the number of employees, how risky the job duties are, employment laws in your state, and your payroll size.
A report published by the National Academy of Social Insurance revealed that workers’ comp insurance costs varied from $0.75 to $2.75 per $100 in employee wages, with the average typical cost per worker at $450 annually.
“Be aware, however, that workers’ comp claims are expected to rise over the next few years,” said Bakke. That means premium costs will likely rise, too.
While price is important, it shouldn’t be the only factor in your decision.
“Look at the whole package of services a carrier offers. Ask about the carrier’s network of care facilities, return-to-work program guidance, loss control support, anti-fraud programs, claim handling efficiency, and flexible payment programs,” Richey said. “These integrated services can help you maintain a safe workplace and get more value out of your policy.”
Insurance premiums can be paid at various frequencies, such as annually, monthly, or quarterly.
When an on-the-job injury occurs
Additionally, it’s smart to know what to do and expect if and when an employee gets hurt while on the clock.
“As the employer, you should report the injury immediately to your insurance provider and document all the details,” Richey said.
Indeed, reporting the claim quickly—within 24 hours of the incident—is crucial. A 2015 study found that delayed reporting can raise claims costs up to 51%.
Phil La Duke, author of “I Know My Shoes Are Untied. Mind Your Own Business! An Iconoclast’s View of Worker Safety,” said it’s smart to conduct an internal investigation promptly.
“Not all injuries that happen in the workplace are the employer’s responsibility, such as if the worker was injured while violating company policy or committing a crime. So, gather as many facts as possible after the worker gets proper medical treatment,” said La Duke.
Eventually, your company and the injured worker will need to complete a workers’ comp claim form that is sent to your carrier’s claims administrator.
“This person reviews the facts of the case and typically issues a response within three months,” said Bakke. “The claim is either accepted or denied. If accepted, payments begin immediately, but if denied, the worker has the right to dispute the decision.”
Note that the average compensation in a claim settlement is $21,800, with 73% of workers receiving a payout on their claims, based on Martindale-Nolo Research data.
Lastly, remember that patience is required. Richey said a workers’ comp case can sometimes take two years or longer to resolve.
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