Your guide to workers’ compensation insurance

U.S. employers spent $73.9 billion on workers’ compensation insurance in 2009 to cover about 125 million workers, according to the National Academy of Social Insurance. To give you an idea of how much money that is, Bill Gates' net worth for 2011 was estimated at $59 billion.

While the amount of money that employers spend on workers’ compensation is high, the investment protects business owners from legal messes that could be much costlier.

“If an employer fails to obtain workers’ compensation coverage, he or she can be personally liable for any workplace injuries,” says Thomas Simeone, an attorney who is a part-time professor at the George Washington University Law School.

Workers’ compensation provides medical care and rehabilitation as well as reimbursement for lost wages for employees who are injured on the job or develop an illness because of their work. It also pays benefits to families of workers who die from work-related causes.

workers compensation insurance guide Whether your business has had workers’ compensation insurance for years or is just taking out a policy, having a thorough understanding of how it works can benefit both you and your employees.

Here are seven things to remember when it comes to workers’ compensation insurance.

1. Each state has different requirements.

Every state regulates its own workers’ compensation program, and the insurance requirements vary depending on where an employer is. In most cases, employers must have workers’ compensation insurance; however, state laws may allow exceptions for small companies, such as those with five or fewer employees, along with sole proprietors and independent contractors.

Depending on where you live, you may be required to buy workers’ compensation insurance through a state program, a state-run agency or a private insurance company. State laws also lay out how claims will be handled, how disputes are to be resolved and other guidelines, such as limits on chiropractic care aimed at controlling costs.

If your company expands into another state, you may need to comply with different workers' compensation rules for that area.

2. Rates can change from year to year.

States set rates for workers’ compensation insurance, which are listed as a percentage of the amount due for every $100 of payroll. In recent years, several states have increased workers’ compensation rates for employers. Factors such as a sluggish economy, high unemployment rates and rising medical costs are behind these rate hikes.

Some of these rate increases may have substantial effects, especially for small business owners. Effective January 2012, employers in Florida saw a rate increase of up to 8.9 percent. Employers in New Jersey are experiencing an average hike of 6.9 percent for workers’ compensation rates, following a 3.9 percent rate increase in 2011. And the Colorado Division of Insurance ordered an average premium rate increase of 3.4 percent beginning in January 2012.

Yet not all states are greatly increasing rates.

For instance, business owners in Texas will see little change. According to the Texas Division of Workers’ Compensation, the rate for the first quarter of 2012 is 3.61 percent, up from 3.59 percent during the last quarter of 2011. The Washington State Department of Labor & Industries imposed no general rate increase, on average, in workers’ compensation rates for 2012. And employers in Maine can expect a 7 percent decrease in workers’ comp rates in 2012.

While the state-established rate is a starting point for determining how much you’ll pay for workers’ compensation insurance, other factors are taken into account, such as your company's claims history.

3. Coverage extends beyond the work site.

Employees injured at work, or anyplace that's in the “course and scope” of employment, are covered through workers’ compensation. In fact, the leading generator of workers’ compensation death claims is traffic crashes involving employees who are driving for work, such as someone delivering packages, according to the Insurance Information Institute. Crashes that occur when a worker is driving to and from work are not covered.

Workers’ compensation also covers chronic conditions, such as back pain and carpal tunnel syndrome, that can develop through repetitive motions made by a worker.

4. Costs depend on the risks.

Employers' costs for workers’ compensation insurance include insurance premiums, payments made under deductibles, and the administrative costs of handling claims and making reports to state regulators and insurers.

What you’ll pay in premiums for workers’ comp will depend on several factors, including the number of employees you have and the type of work they do. For a small workplace, such as one with 10 employees or fewer, costs can be as low as $2,000 a year, Simeone says.

When setting up a policy, insurance carriers will take on-the-job risks into account. If you have a delivery worker spending a lot of time on the road, the chances of that person getting injured are greater than those of a secretary who sits at a desk most of the day. Among the types of jobs with the highest risks – and generally, highest insurance costs – are construction workers, factory employees using heavy equipment, emergency response teams and some lab workers.

5. Safety measures can lead to monetary savings.

“The best way to save costs is to have a strong safety program,” says Rebecca Shafer, president of Amaxx Risk Solutions, a risk management company that offers tools to help employers reduce workers’ comp costs.

In some states, if your company has strong safety and workers’ compensation programs, your premiums may be calculated at a lower rate than the state average. Depending on where your company operates, you may be able to get a 15 percent discount on premiums for safety measures.

Encouraging safety among workers can be a key component to a successful program, says Linda Webb, president of Contego Services Group, which specializes in fraud investigations and other insurance services. Consider giving awards for safety efforts, such as handing out movie tickets to workers for every 90 days that pass without a workplace accident.

6. If an accident happens, take action.

If an employee gets injured, report it promptly to your insurance carrier, Simeone says. Some states allow the insurance company to choose a doctor to treat your worker; others let a business make that decision.

During the time away from work, an injured employee is entitled to a percentage of wages lost. If the injury is permanent, a lump sum payment may be made to cover pain, suffering and disability.

Whenever a claim is filed, take time to evaluate your safety program, and look into strategies to get injured employees back to work, Shafer says.

7. Make note of pre-existing conditions.

Workers sometimes get hurt on the job by tweaking a pre-existing injury, says Joey Price, CEO of Jumpstart HR, a human resources consulting firm in Washington, D.C. A construction worker who injured a knee while playing sports several years ago, for instance, may be more likely to suffer knee problems while working at the project site.

For pre-existing conditions, you may be able to prove that your work site did not contribute to the injury, Price says. Doing so can free you from any liability charges that may arise from an incident. Screen employees during the hiring process, and document any pre-existing conditions. If an injury does occur, you’ll have notes ready to help assess the situation.

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