The basics of workers compensation insurance

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Unless you’re in Texas, employers need workers compensation insurance. It’s required in every state but the Lone Star, and covers your employees’ medical expenses and lost wages if they’re hurt on the job.

Workers comp is a compromise: Benefits are paid regardless of who is to blame for the accident or injury. This “no-fault” status is key to workers comp — the employer does not admit liability for the injury or illness, and the employee recoups workers comp benefits without having to sue. There’s no room for horseplay, drunken stumbling, or illegal drugs, though — if any of those lead to an injury, workers comp insurance won’t pay. The same goes for self-inflicted injuries, and for injuries incurred while a worker is off the job, committing a crime, or violating company policy.

Your state mandates how much coverage the employer must buy, and what percentage of the employee’s salary you’ll pay if he or she misses work due to a work-related injury. In some states, large employers who meet minimum payroll or employment levels can self-insure (that is, forego an insurance company and pay workers comp claims out-of-pocket) for workers compensation. For more on self-insuring, see Self-Insuring: Is it for you? Other, smaller employers — usually with fewer than three, four, or five employees — aren’t required to carry the insurance at all.

Just to make things more confusing, not all states require all employees to be covered under workers comp insurance: Frequently excluded workers include business owners, independent contractors, domestic employees in private homes, farm workers, maritime workers, railroad employees, and unpaid volunteers.

Because requirements are clearly defined by each state, workers comp insurance packages themselves are fairly standardized, with little variation among different companies’ basic policies. Basic workers comp coverage includes medical treatment, rehabilitation costs, and lost-wage replacement, covering up to two-thirds of an employee’s regular salary while he or she is out of work. Most workers comp policies also include liability coverage, which kicks in if a worker’s family sues you for damages stemming from a workers comp claim.

Effect of Terrorism Risk Insurance Act of 2002

The Terrorism Risk Insurance Act of 2002 (TRIA), signed into law by President George W. Bush on November 26, 2002, will have a significant impact on workers compensation insurance. The TRIA requires property and casualty insurers to offer policyholders insurance for losses resulting from acts of foreign terrorism. Workers compensation insurers are additionally required to provide coverage for war-related injuries and fatalities. In both instances, insurers are backstopped by the U.S. government for a certain percentage of losses under the TRIA. The Act’s requirement that terrorism coverage be disclosed as a separate line item necessitates a change to the standard workers compensation policy.

Your insurer: Do you have a choice?

Not surprisingly, the workers comp marketplace varies by state. Unlike some of the other lines of casualty insurance, workers compensation insurance has a regulatory body overseeing each of the 51 jurisdictions. The majority (34) are managed by the National Council on Compensation Insurance (NCCI). Another 12 states have a state-specific organization charged with the oversight of workers compensation insurance in that state. The remaining 5 states deliver workers compensation insurance to employers through a monopolistic state fund that also controls rating in the jurisdiction. North Dakota, Ohio, Washington, West Virginia, and Wyoming are monopolistic markets. However, it’s worth noting that these states do not include employer liability insurance with their workers comp coverage, which must be bought separately through a commercial insurer.

In other states, some of the nation’s largest insurers control the biggest slice of the workers comp pie. Liberty Mutual leads the pack in terms of premium dollars, followed by National Union Fire Insurance Co. (owned by American International Group), Kemper, Travelers, and The Hartford.

If you’re in a non-monopoly state and looking for workers comp, you might have two options in addition to the private insurance marketplace: state insurance pools and self-insurance.

State workers’ comp insurance pools are similar to the “high-risk” health insurance pools maintained in some states. They cater to the so-called “residual market,” or companies that can’t buy workers comp insurance through normal means because they’re considered too risky — a poor safety track record or above-average number of claims could put you in this category. For that reason, buying workers comp insurance from a state pool is fairly costly.

In 47 states, businesses of a certain size have the option of self-insuring — which means taking on the risk of paying for work-related injuries themselves instead of paying an insurance company to do so.

Your agent and insurance carrier

If you use a commercial insurance company, chances are you’ll choose a policy with the advice of a commercial agent. Ideally, that person should be able to work as your company’s advocate with the insurer, says Brenda Vincent, vice president at Marsh Advantage America, a subsidiary of Marsh Inc.’s Seabury & Smith. Picking the right insurance company can do worlds of good for your workers comp claim experience.

“The agency’s experience in the industry from working in the past and matching up companies with insurers who know the industry” is key, Vincent says. “Insurers familiar with the industry can reduce the effect of claims on customers through good loss-control and claims departments. And the agency should understand that different states have rules that affect the workers comp rate, and be an advocate for the client in promoting the safety controls that warrant credit toward a lower premium,” she says.

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