What Is Workers’ Compensation Insurance?

Workers' compensation insurance protects your employees and your business when someone is injured on the job.
Whitney VandiverSep 23, 2021

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Workers’ compensation insurance covers medical expenses for employees' and illnesses while generally shielding companies from employee lawsuits stemming from these injuries.

Most states require some form of workers’ comp for companies with employees, including small businesses, though there are exemptions. Like other types of , employers must qualify for coverage and pay premiums.

Without a workers' comp policy, your company could be sued by an injured employee. If the court finds you at fault for an employee’s injury, the business could take a large financial hit. And if a company isn't in compliance with state workers' comp requirements, it could also be fined.

Workers' comp provides coverage for injured employees by paying for medical care and rehabilitation, making up for lost wages and in some cases paying death benefits to their family.

While many benefits are standard for workers’ comp, specific coverage depends both on the policy as well as state requirements. These factors can determine which injuries are covered, how such injuries must be evaluated and how much money an employee might be entitled to receive for a claim. If a small business provides services in multiple states, the policy needs to meet the requirements for all states in which it operates. Most policies cover the following expenses:

Workers’ comp benefits cover the costs for immediate treatment of an employee’s injuries. Commonly covered expenses include hospital and doctor visits, surgeries and medication. These policies might also pay for medical equipment like wheelchairs to help with an employee’s recovery. Some states limit how much a provider can charge for an employee’s treatment of work-related injuries and how much a policy must pay.

For injuries that require an extended recovery period, workers’ comp benefits often cover physical and other therapies to help the employee return to work. If an employee is unable to return to work due to long-term effects of their injuries, some workers’ comp policies will pay for vocational rehabilitation to train the employee for a new career.

Workers’ comp also makes up for an employee’s lost wages if they are unable to work. This is considered a disability benefit and can be paid out for partial and total disability as well as temporary and permanent disability. These disability benefits are separate from Social Security disability benefits.

If an employee dies because of a work-related injury or illness, workers’ comp provides the employee’s family with financial support to compensate for their lost income. In most cases, it also pays for the deceased employee's funeral expenses.

There are standard situations in which workers’ comp will refuse to pay for an employee’s medical expenses. If an employee was negligent and disobeyed a company policy, for example, an employer’s policy is likely to deny the claim. A few examples of situations where an employee is unlikely to be covered by workers’ comp include when an employee is:

Individual states determine which businesses are required to carry workers’ comp and generally base their requirements on how many employees a business has hired. Other determining factors can include the type of services the business provides, the type of business structure and the classification of employees. If your business is a sole proprietorship, partnership or limited liability company and has no employees outside of the owners, it might qualify for an exemption.

Even if you qualify for an exemption, there are reasons why it still might be prudent to have workers’ comp. Most personal health insurance plans have exclusions when it comes to work-related injuries, and workers’ comp can help your business avoid paying out of pocket for employees' medical bills from work-related injuries and illnesses. If you're a contractor, some companies might require you to have workers’ comp so you can’t sue them if you are hurt on the job. Workers’ comp will also protect your business if you hire subcontractors and they are hurt while working for you.

Workers’ comp premiums are determined by multiple factors, including the type of work your employees do, business location, number of employees and history of claims. Small businesses in safer industries without a history of workers' comp claims could pay a few hundred per year in premiums; those in riskier industries or with a history of workers’ comp claims could pay thousands. In 2021, workers' comp premiums cost an average of $1 per $100 in payroll, according to The Hartford, an insurance provider.

Like many types of business insurance, workers’ comp is a common policy available through most major insurance providers. You will need to submit information about your business and employees to ensure you qualify for your requested coverage, and the type of coverage you will be required to have is determined by the states in which you do business.

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