Everything Contractors Must Know About Workers’ Comp Insurance Before Buying

Workers compensation insurance protects business owners and employees if they get injured or fall ill due to work-related activity

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By Hannah Sullivan

Workers’ compensation insurance is a form of coverage that protects business owners and their employees should they get injured or fall ill due to work-related activity.

Getting injured on the job could include hurting your back from lifting heavy machinery, getting wounded by a sharp tool, or suffering from a shoulder injury due to repetitive motion. Job-related illnesses could include sickness from inhaling harmful chemicals.

What does workers’ comp cover?

With a workers’ compensation policy, you will not have to pay for medical costs resulting from a work-related injury out of pocket. Your policy will cover the medical bills, as well as funeral expenses in the unfortunate event you or an employee die. If you or an employee requires time off work to recover, lost wages will be supplemented.

Employers’ liability, a component of workers’ compensation insurance, protects your business financially from claims regarding negligence or an unsafe work environment. Should an employee file a lawsuit, attorney’s fees, settlements and other court costs will be covered by your workers’ comp policy.

Who is eligible for workers’ comp insurance?

All businesses are eligible for workers’ comp. Whether you are a one-person operation with no employees or a large company with dozens of employees, we recommend this coverage to keep you and your business safe.

Business entities eligible for workers’ compensation:

  • Sole proprietors
  • LLCs
  • Partnerships
  • S-Corps
  • C-Corps

Why do I need workers’ comp?

If you want to protect yourself, your employees and your business physically and financially, you need workers’ comp coverage. Without this policy, if an accident occurs, you will be held responsible. You will have to take money from your business or you personal pocket to pay for your or an employee’s injury.

Paying for workplace accidents can be very costly. Having to pay for damages out of your personal or your business account can potentially put you out of business. With workers’ compensation insurance, you (and your business) will be financially protected.

What are workers’ comp requirements?

You may be required to have workers’ compensation insurance by the state, or by the party that is hiring you.

Whether the party hiring you is a general contractor or a homeowner, they may require you to have a Certificate of Insurance in order to work for them. Many hiring parties mandate proof of insurance to take the liability off of themselves.

How do workers’ comp requirements vary by state?

If you have employees, many states will require that you have workers’ compensation insurance. However, sometimes there are minimum requirements. For example, if you work in Alabama and have fewer than five employees, you are not required to have workers’ compensation insurance.

Just because you are required to have coverage because you have employees doesn’t necessarily mean you are required to have coverage for yourself. Some entities have the option to exclude themselves from coverage, which would lower their insurance premium.

But, keep in mind, just because you are not required to provide workers’ compensation insurance for your employees doesn’t mean you will not be responsible in the event of an employee injury. Employers are almost always held liable for their employees. If you have employees and do not have coverage, be prepared to foot the bill if someone gets hurt.

How is workers’ comp different than health insurance?

When you think about getting hurt, two insurance coverages often come to mind: Workers’ compensation insurance and health insurance. But having one, and not the other, can be tricky.

If you have workers’ comp, but end up tripping on the sidewalk and fracturing your ankle outside of work, your workers’ comp policy would not pay the damages. You would need health insurance to cover a personal medical expense. The reverse is also true: If you get hurt on the job, your health insurance may not pay the medical bills. In order to be compensated for work-related injuries, you would need a workers’ comp policy.                                               

How is workers’ comp different than accident insurance?

While workers’ comp coverage is limited to accidents that occur while working, accident insurance provides you 24/7 protection on or off the job. Regardless of whether or not your have health insurance or workers’ comp insurance, this policy helps pay medical and non-medical expenses that result from an accident. Accident insurance stays with you — so even if you change jobs, your policy remains the same.

What type of workers’ compensation insurance do I need?

It depends on what you do, where you live and how many employees you have. If you are a one-person operation with no employees, you may only need a minimum premium workers’ comp policy, commonly referred to as a ghost policy.

Ghost policies are essentially the most affordable form of workers’ compensation on the market. They provide the owner a Certificate of Insurance, while excluding them from coverage. This makes it easy to get hired, and helps you save money.

If you are a larger operation, a traditional workers’ comp plan may be the right fit for you. And, you would likely opt to be included in coverage. Regardless of whether or not you include yourself in coverage, your employees will be covered either way. Workers’ compensation is all about managing risk.

Not sure what type of workers’ compensation insurance is best for your business? Speak with an expert to learn about what level of coverage is right for you.

How much does workers’ comp cost?

Workers’ compensation insurance rates depend on many factors. However, the minimum premium (which is the lowest price available) for many states is $750 for an independent contractor.

What determines the cost of my workers’ comp policy?

Workers’ comp rates also depend on what you do, where you live and how many employees you have. Because this form of insurance is based on payroll, the more employees you have, the greater the cost of your insurance policy.

If you have had workers’ compensation insurance previously, your experience modifier (MOD) will also play a factor in determining workers’ comp cost. Your MOD is based on your loss history and is higher or lower depending on if you’ve had any claims in the past. A MOD compares your losses with everyone else in your industry within your operating states. If you perform better than your peers you get a lower MOD.

An additional factor is the expense constant, which covers administrative fees. Usually, this fee is around $200.

Check out this workers’ comp cost analysis to learn more about workers’ compensation insurance rates.

How can I save money on my existing workers’ compensation rates?

Policyholders should update their policy every year based on payroll. If payroll is not reported, you may face unexpected (and often hefty) charges when your audit rolls around.

Even if you are happy with your current provider, it never hurts to shop around every two to three years. Speak with your agent about getting your policy requoted with other carriers to ensure you’re getting the coverage necessary at a fair price.

Five months before your renewal date your MOD will be released from the National Counclin on Compensation Insurance (NCCI). This is basically your “insurance report card”. It measures how well you are doing compared to others in your industry, and specifically takes into account your loss history. If you MOD is above where it should be, you will be paying more unnecessarily. Control your costs by making sure your MOD is correct.

Another way to ensure your workers’ comp premium is correct is by having your agent review all open claims. If there are claims that have not been paid or have not been closed, it impacts your MOD. The higher the MOD, the higher your workers’ comp rate.

Additionally, if you have a transitional duty and back to work program your employees will return to work faster. This is good for you, because your comp policy will not have to pay lost wages for an extended period of time, which means the impact of the claim on your MOD is lesser.

Finally, it’s recommended to have a written safety program and drug testing program.

Need additional forms of insurance for contractors?

Take a look at these recommended insurance coverages for contractors.

Hannah Sullivan is the co-founder of Pogo, a business insurance platform for contractors. Pogo compares rates from over 30 insurance carriers to provide contractors the best coverage at the right price.