What Is Workers’ Compensation Insurance?

Most states require small businesses to have coverage. Being caught without it can be an expensive risk.
Whitney VandiverAug 4, 2021

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Workers’ compensation insurance covers medical expenses for employees' work-related injuries 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 business insurance, 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 it 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.

How much does workers' comp cost?

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.

To be considered work-related, an injury, illness or aggravation of a pre-existing condition must occur while the employee is performing tasks related specifically to their duties as an employee. Illnesses and pre-existing conditions that are aggravated by a work event or exposure can also be considered work-related. Certain criteria must be met for workers’ comp to kick in, and there are exceptions for what qualifies.

If an employee is performing a personal task, such as exercising in the parking lot at lunch, the injury is not considered work-related, even though it occurred on work premises.

Workers’ comp also covers work-related illnesses and occupational diseases, which are caused by workplace environmental factors and considered preventable. Such conditions can be caused by exposure to chemicals, allergens and contagious diseases, and are more common in certain industries.

Workers' comp coverage for contagious diseases varies by state. To get workers' compensation after contracting COVID-19 in some states, for instance, an employee needs to prove they contracted it in the workplace; in other states, it's easier to get workers' comp without the employee providing such proof. Diseases that can be contracted in everyday life, such as the common cold and influenza, are generally not covered by workers’ comp even when they are contracted in the workplace.

Nerdy tip: Workers’ comp can also cover work-related injuries relating to less common incidents like workplace violence and natural disasters.

Workers’ comp has also adapted to unconventional scenarios where employees might be injured beyond the traditional office. Employees who are injured while working at home or traveling for work can qualify for coverage in certain circumstances as well.

What does it pay for?

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:

Immediate medical care

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.

Disability and lost wages

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.

Survivor 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.

What does it exclude?

There are standard situations in which workers’ comp will refuse to pay for an employee’s 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:

  • Under the influence of alcohol or illegal drugs at the time of the injury.

  • On the premises while voluntarily participating in a wellness program or recreational activity.

  • Eating food that they have prepared for their personal meal.

  • Commuting to or from the work site to their personal residence or for personal reasons.

Who needs it?

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.

How do I get it?

Like many types of business insurance, workers’ comp is a common policy available through most major insurance providers and can often be added outside of your business owners policy. 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.

Frequently asked questions

Most states require workers' comp for businesses, but each state has its own requirements and exceptions for who must have coverage.

Workers' comp covers injuries or illnesses that qualify as "work-related," which is determined by the Occupational Safety and Health Administration. Each policy will specify what it does and does not cover.

No, they are two different types of coverage. Workers' comp applies when one of your employees is injured on the job, while business liability insurance kicks in when a third party, like a customer, is injured on your premises.

If you don't have workers' comp coverage when an employee is injured while performing their job, you might be liable if a lawsuit finds that you were at fault for the injury and be required to pay for the employee's medical treatment and recovery along with legal expenses.