Workers' comp insurance questions for small-business owners
A recent survey found that only about one-third of small businesses have active workers' compensation policies.
For those looking to start a small business, purchasing workers’ compensation coverage is likely on the to-do list. While this type of insurance is required by almost all states (with a few notable exceptions), there’s no one-size-fits-all solution, leading some businesses to select ill-fitting or overly expensive policies.
This type of coverage is essential for businesses of any size, as it protects all parties in the case of workplace injury or illness. Shielding both owners and employees from overwhelming financial burdens, these policies typically cover medical expenses, loss of income, retraining, permanent injury and survivor benefits.
In a recent Google survey, Next Insurance found that only one third of respondents who were self-employed or owned a business with employees had active workers’ compensation policies, which could ultimately jeopardize their business. The right policy will support a business and its employees rather than hinder them with costly operational expenses or unnecessary stress when end-of-year audits come around.
Unsure where to start? Here are the top questions to ask when choosing the best workers’ compensation policy for your small business.
What are your state’s guidelines?
When looking into workers’ compensation policies, the business’s location should be your first consideration. While this type of insurance is legally required in most states, regulations vary for industries as do penalties for non-compliance. You’ll need to research your state’s specific laws or consult with a professional to determine what coverage is required for your individual business.
There are some notable exceptions, highlighting why research is the best first step for determining a proper policy. In Texas, workers’ compensation insurance is optional for employers. Florida only requires workers’ compensation insurance for businesses with four or more employees, excluding businesses doing construction work, while Georgia requires it for businesses with three or more employees. Although small businesses in these states may see these exceptions as a way to write off an operational expense, the out-of-pocket expenses for work-related incidents can be hefty and often outweigh the price of a policy.
Confirming businesses stay compliant with regulations, insurance companies also conduct audits at the year-end of policies, giving businesses yet another reason to make sure they have the right coverage.
Do I need coverage, even if my state doesn’t require it?
Having workers’ compensation coverage is a smart business decision, even if you’re located in a state, like Texas, where it’s not legally required. Personal health insurance alone often doesn’t cover workplace injuries, leaving employees and owners in potentially tricky financial situations. In the event of a lawsuit, employers who don’t have a policy cannot argue that a worker’s negligence led to injury and therefore may be held liable for damages.
How large is your business?
While state laws determine what type of coverage is legally required, premiums are based on a business’ payroll, or how many workers you employ and how much each is paid. Taking into account all types of compensation like sick pay and bonuses, businesses offer an estimate of its payroll for the coming year, and insurers then calculate an estimated premium. At the year-end of the policy, an insurer will conduct an audit to determine actual payroll, either charging businesses more or issuing a refund depending on how accurate the estimate was. As you get started researching policies, careful business forecasting to determine the number of employees and pay expected throughout the year will ensure an accurate premium.
If you don’t have employees, you’re often not legally obligated to have a policy. But it’s still a smart strategy as policies will cover medical expenses and wages in the event of an incident, helping you to get back on your feet as soon as possible. At the same time, most businesses require contractors to carry their own coverage to limit their own liability, meaning even sole proprietors would need coverage.
What kind of work are employees doing?
Given the nature of their work, workers’ compensation premiums will differ largely between a business employing home builders and a marketing agency with all desk workers. According to the Insurance Information Institute, laborers, including freight and material movers, had the maximum number of work-related injuries and illnesses in 2018, accounting for over 7% of all injuries with almost 68,500 incidents while construction laborers reported more than 21,000 incidents.
State laws have different requirements for certain industries, especially when it comes to contractors. As mentioned earlier, a number of states have special provisions for employees doing construction work, taking into account the added risk around heavy machinery and manual labor. Likewise, contracting businesses often need workers’ compensation to bid on contracts, and clients may require them to show proof of insurance before getting started on a project.
How safe is the workplace?
Every type of business must take into account anything that threatens the well-being of employees, from exposed wiring and misplaced props on a production set to exposure rates at a hospital.
The U.S. Occupational Safety and Health Administration reported that employers across the country pay almost $1 billion per week for direct workers’ compensation costs, and poor safety standards and plans negatively impact a company’s profitability. One study found that construction-related fatalities and injuries ultimately cost Maryland’s economy more than $700 million over a two-year span. Industries with more workplace risk will naturally need to pay higher workers’ compensation premiums, but proper safety protocol and insurance can keep costs down.
Will you need instant access to policies and claims?
If you’re hoping to launch your business quickly or just want to purchase a policy as soon as possible, consider going the digital route.
Online insurance providers can remove time-consuming and costly obstacles that many businesses face when purchasing policies or filing claims. By going with a digital carrier, owners can purchase policies instantaneously and access proof of coverage at any time, even after business hours. Likewise, digital options can accelerate the claims process, which is critical when reporting an injury or death in the workplace. Traditional insurance providers, however, may take weeks to respond to a claim.
Does workers’ compensation cover employees who contract COVID-19?
It depends. Some states include COVID-19 as a workers’ compensation “occupational disease.” Occupational diseases, which are chronic conditions that happen over time at work, are evaluated differently than a single injury. Some examples of occupational diseases include pulmonary diseases and hearing loss. With many employees now returning to their offices, COVID-19 will be a top-of-mind concern. It’s important to ask insurance providers about COVID-19 coverage within workers’ compensation and how that should be communicated to your employees.
By considering each of these questions, you’ll have a better idea of what policies make the most sense for your business. While navigating state requirements and business needs at the beginning of the process can be time-consuming, finding the best workers’ compensation is a strategic move that shouldn’t be taken lightly. It not only establishes a sense of trust and security in the workplace, it ensures your company is primed for growth.
Sofya Pogreb (support@nextinsurance.com) is chief operating officer at Next Insurance.
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