Workers' compensation insurance covers medical expenses and loss of income for employees who are injured on the job. It is required in almost every state to protect employees and prevent lawsuits for workplace injuries.
A workers' compensation policy ("workers' comp" for short) is designed to provide comprehensive coverage for any instance when an employee is injured performing their job duties, whether on or off site. Learn more about how it works, what it covers, and when it doesn't apply.
What Is Workers' Compensation Insurance?
Workplace injuries can be costly. On top of any medical expenses, an employee may be unable to work for a period or even permanently. In the event that an employee is killed on the job, their dependents are permanently deprived of that employee's income and other contributions to the family.
For this reason, nearly every state requires employers to maintain workers' compensation insurance. A workers' comp policy covers any expenses related to medical attention or loss of income sustained from a work-related injury.
- Alternate name: Workmen's compensation insurance
Workers' compensation insurance is mandatory for employers with more than a few employees in all states except Texas.
How Does Workers' Compensation Coverage Work?
Workers' compensation benefits are provided regardless of fault, so injured workers need not sue their employer to obtain compensation. Workers are generally eligible for benefits even if their own carelessness contributed to their injury. For example, a restaurant worker could collect benefits for a finger injury they sustained on a meat slicer even though the injury occurred because they failed to use the machine guard and refused to wear cut-resistant gloves.
There are some exceptions to what a policy will cover, however. Depending on these state and situation, these may include:
- Some injuries that are self-inflicted
- Injuries a worker sustains while committing a serious crime
- Injuries a worker sustains when violating a company policy
The specific benefits workers receive are determined by laws of the states in which they're employed. Workers' compensation laws typically provide the following types of benefits:
- Medical coverage: This includes doctor visits, hospital care, prescription medications, physical therapy, and other medical treatments.
- Disability: Policies provide a partial replacement of income lost when workers are unable to work due to an on-the-job injury. The amount and duration of benefits depend on whether the disability is temporary or permanent, and partial or total. Percentage of salary and length of payment varies by state.
- Vocational rehabilitation: This enables workers who cannot return to their prior occupation to learn a new skill based on their current capabilities.
- Death benefits: Benefits are afforded to the spouse and minor children of a worker killed on the job.
Workers' compensation insurance covers bodily injury by accident that occurs during the policy period. It also covers bodily injuries by disease (occupational diseases such as asbestosis) that are caused or aggravated by the conditions of employment. State laws determine which diseases qualify for coverage under workers' compensation insurance.
In some cases where transmission can be tied to the workplace, employees who become ill may be eligible for workers' compensation.
How Are Workers' Comp Premiums Calculated?
The premium a business will pay is typically determined based on three key factors:
- Employee job classification: Each state his its own coding system to classify different types of jobs based on their risk of injury. For instance, a warehouse worker would be higher risk than an office employee. A higher number of employees at a higher risk level will lead to a higher premium.
- Employee wages: The higher your employees' salaries, the more expensive your policy will be.
- Employer experience rating: This is basically an assessment of your risk level as an employer. The total loss from workers' compensation claims made by your workers will be compared to the state average for your industry, resulting in a rating that can raise or lower your premium.
All states have a regulatory bureau that oversees workers' compensation rates, policy forms, and other issues related to workers' compensation insurance. Many states delegate functions such as statistical analysis, classification, experience rating, and form development to the National Council on Compensation Insurance (NCCI), a nonprofit organization owned by insurers. In these states, called "NCCI states," insurers issue workers' compensation policies on a standard form published by the NCCI.
Employer Liability Beyond Workers' Compensation
Employers who violate employment or workplace safety laws may be fined by a regulatory agency or forced to pay extra benefits to injured workers. Such fines and extra benefits aren't generally covered by the policy. In most cases, standard policies exclude any payments the employer must make (over and above the normal workers' comp benefits) for any of the acts listed below:
- Serious and willful misconduct: For example, an employer has not replaced a missing guard on a cutting machine even though three workers have sustained cuts. When another worker is badly injured by the machine, the state regulatory agency orders the employer to pay the worker supplemental benefits on the basis that it has engaged in serious and willful misconduct.
- Knowingly employing a worker in violation of the law: For instance, a meat shop hires a 14-year-old to work as a butcher, violating a state law requiring employees of meat shops to be at least 16.
- Failure to comply with a health or safety law or regulation: In the cutting machine example cited above, the absence of a guard would likely constitute an OSHA Violation.
- Discrimination by coercion, discharge, or other action against any employee in violation of the workers' compensation law: For example, an employer fires an injured worker in retaliation for filing a workers' compensation claim.
Employers who fail to procure required worker's compensation insurance may be subject to fines from state agencies and lawsuits from employees.
Claims Outside the State
Workers' compensation insurance is state-specific. Coverage applies only to the employer's workplaces in the states listed in the information page under Item 3.A. This isn't a problem if a business never has any activities outside its home state. Yet, employers can develop interstate exposures they didn't anticipate when the coverage was written. For instance, an employer may acquire a new client or send workers to a training class in an adjacent state. Alternatively, the business may hire workers who live in one state to work in another.
Fortunately, businesses can protect themselves against potential interstate exposures by purchasing an "Other States Insurance" rider for the policy. This pays benefits injured workers are entitled to receive because of injuries sustained in any of the states listed in Item 3.C of the information page. The employer should try to list as many states as possible in Item 3.C (other than its existing workplaces, which should be listed in Item 3.A). Some, but not all, insurers will include broad language such as "all states other than monopolistic states and states listed in Item 3.A."
What Is the Subrogation Clause?
Like most insurance policies, the standard workers' comp form contains a subrogation clause. This clause states that an insurer has the right to recover its payments from anyone liable for an injury. That is, if a third party negligently injures your employee on the job, your insurer may sue that party to recoup the cost of the benefits it pays to the worker.
- Workers' compensation insurance is a type of employer coverage that pays employees' medical costs and loss of wages in the event that they are injured or become ill due to their job.
- It is legally required for employers with more than a few employees in every state except Texas.
- Workers' comp will usually pay workers for job-related injuries regardless of who is at fault.
- Specific coverage and benefits for workers' comp vary by state.