Workers Comp 101
So what exactly is workers' compensation, and why do you need insurance to cover it? Let’s review some of the basic questions you may already be asking yourself.
What is workers' compensation?
- Workers’ compensation provides wages and medical benefits to employees who have been injured as a result of a workplace incident, and financial benefits to a deceased worker’s family.
- It is required by law in most states for most employers and highly recommended for all employers
- The federal government has a separate workers’ compensation program, mostly for federal employees.
- Some states are “monopolistic,” meaning workers’ compensation coverage must be purchased through one designated carrier or state fund.
- Employers pay an insurance carrier for this coverage or are self-insured. In states in which workers’ compensation is not mandatory, there may be other options for employers to compensate injured workers.
- States develop the guidelines for what is covered and the benefits that are due. These guidelines can significantly vary on aspects like:
- Which employers are required to provide coverage
- Who employers can purchase coverage from
- Class codes and rates
- Amount of benefits injured workers receive
- Treatment guidelines and fee schedules
Why is workers’ compensation insurance valuable to me?
- For workers: If you are injured or become ill as a result of your job, it provides compensation for your medical treatment and loss of wages. Additionally, if you are killed in a work-related accident or illness, your dependents might receive death benefits.
- For employers, this coverage helps you to protect your workers and may protect you from costly lawsuits. Some states limit the amount that injured workers can receive. Also, some states protect coworkers from liability in most accidents.
What does workers’ compensation insurance cover?
- Every injury or illness, and every state in which it occurs, is different. How much, for how long, and under what circumstances, may differ in each state.
- There are many types of injuries that may be covered by workers’ compensation, such as:
- Illnesses due to occupational exposure
- Injuries caused by repetitive motion
- Injuries sustained while attending a required business-related function
- Work injuries due to natural disasters or terrorist attacks
- Depending on the state, some injuries/illnesses may not be covered, such as those that:
- Were sustained intentionally or in an altercation that the injured worker started
What benefits does workers’ compensation insurance provide?
Benefit details vary by state and injury, but can include:
- Medical expenses – medical provider visits, prescriptions, hospitalizations, surgeries, etc.
- Replacement of wages lost – the amount and duration of wage replacement varies by state.
- Vocational rehabilitation and physical therapy
- Medical equipment and supplies
- Compensation for permanent disability
- Death benefits
Is workers’ compensation insurance required? Why?
- Most states require most employers to carry workers’ compensation insurance for their workers. There are exceptions:
- If you have only a few employees, you may be exempt from purchasing coverage in your state. Other states do not permit any exceptions, even if you employ only one part-time worker.
- Certain industries, employees, and types of work (such as volunteer) may be exempted from mandatory coverage, depending on their state.
- Whether or not your state requires your business to purchase workers’ compensation insurance, this coverage is smart:
- Your employees will know that they are covered if they become injured or ill as a result of their job.
- In many states, workers’ compensation coverage is mandatory – there may be fines or penalties for non-compliance.
- Workers’ compensation coverage is considered an exclusive remedy, and it is a no-fault system. In exchange for this protection, injured workers generally cannot sue their employer for negligence. There may be exceptions if the employer recklessly or intentionally caused injury, harm or illness. Also, third parties may face liability through a process known as subrogation.
How is workers’ compensation premium calculated?
- The type of business, claim history, payroll, and location(s) all impact premium.
- The basis for workers’ compensation premium is this formula: Class Code Rate x Experience Modification Factor x (Employer’s Payroll/$100)
- Businesses are categorized by class codes specific to the type of work their employees do. Insurance carriers charge different rates for each class code, because some types of work are riskier than others. Rates and class codes vary by state.
- Experience modification factors are related to a business’s history of workers’ compensation claims. If a business has a claims history that is better (safer) than average for its type of business, then its modification factor will likely be below 1.00. If a business has a worse claims history than average, its modification factor will likely be above 1.00.
- State workers’ compensation bureaus calculate this experience modification factor. In some states, smaller employers may alternatively have a merit rating which can also impact their premiums based on their claims history.
- Insurance carriers use a payroll amount based on an estimate of the employer’s annual payroll.
- Credits or debits may be applied to the premium, depending on a variety of factors. Charges and state assessments may be added to the premium.
- After the policy has concluded, a premium audit will likely be performed. The purpose of this audit is to compare the estimated annual payroll used to calculate the premium with the employer’s actual annual payroll. If there is a difference, an adjustment will be made – either the carrier will owe the employer money (because the actual payrolls are less than the estimated payroll), or the employer may owe the carrier additional premiums (because the actual payrolls were higher than the estimated payroll).
What can be done to lower premium costs?
- One of the best things that an employer can do to protect their workers and to ultimately lower their workers’ compensation premium, is to prevent accidents before they occur. Employers can do this through a focus on workplace safety. Many states permit a type of discount or rate credit for certain workplace safety programs. By improving their claims history over time, employers will also benefit from a lower experience modification factor.
- Some employers may find that loss sensitive products like dividends, deductibles, retrospective rating plans, or alternative insurance options, provide them with greater control over their insurance costs.
- Directing care, depending on jurisdiction. Some states permit employers to direct medical care through various means – medical provider panels, managed care organizations, etc. The goal of these programs is to help injured workers obtain prompt, appropriate care from providers who use evidence-based, cost-effective treatment.
- Help injured workers recover faster by using work as a therapeutic tool. Appropriate use of modified duty helps can help injured workers return to work faster, lower claim costs and restore productivity.
What happens when a claim occurs?
- The goal of the workers’ compensation system is to help injured workers receive the appropriate medical care and return to gainful employment.
- While the state specifies how many hours or days an employer has to report an accident, the insurance carrier should be notified immediately whenever there is a workplace injury. The faster the carrier receives notice of an injury, the faster the injured worker can access the most effective medical care.
- OSHA and/or the state workers’ compensation board may need to be notified as well.
- Many employers are required to keep injury and illness records.
- When a fatality occurs in the workplace, within eight hours after the employer learns about the event, OSHA must be notified, regardless of the size of the employer or its industry.
- All employers are required to report any work-related inpatient hospitalization, amputation or loss of an eye, within 24 hours after the employer learns about the event.
- The carrier generally helps file a First Notice of Injury with the appropriate state agency.
- There are two components to claim costs: medical costs (compensation for medical care) and indemnity costs (compensation for income lost while the injured worker was unable to work). When a claim involves indemnity costs, it is sometimes referred to as a “lost-time claim.” When the claim occurs, the insurance carrier will set aside reserves for the accident, based on its prediction of the money that will be needed until the claim is settled.
- States vary in their regulations regarding treatment guidelines, ability to direct care, impairment categorization and compensation, duration of benefits, and so forth.
- When an injury results in permanent partial or total disability, continuing benefits may be paid depending on state regulations.
- Some states permit full and final settlements; some require “lifetime medical” benefits. Workers may be permitted to re-open a claim if they aggravate the injury or experience a worsening of the condition.
- When an accident results in a fatality, most state regulations provide death benefits for certain family members to compensate for the loss of financial support.