Guide to Workers’ Compensation Insurance for SMBs

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In 2014, James Jarrell was training to be a truck driver in Fort Wayne, Indiana, when he sustained a severe injury on the job—but not the type of injury you’d expect. One morning, after his trainer abruptly woke him to conduct a pre-trip inspection of the truck, Jarrell stepped into a crockpot of hot water, causing severe burns to his feet, for which he was taken to the hospital by ambulance.

At first, this might not sound like a work-related injury—Jarrell wasn’t driving, logging time, or even dressed for work yet—but the court found that Jarrell qualified for workers’ compensation. The trainer had told him to sleep in the truck and he’d been woken up for the work-related inspection. 

Jarrell’s case was unique. But workers’ compensation claims are not, so all business owners with employees need to have workers’ compensation insurance. And with average claims running between $2,000 and $20,000, even small-business owners should take heed.

What is workers’ compensation insurance?

Workers’ compensation insurance is insurance coverage for work-related illnesses and workplace injuries that covers a portion of lost wages, medical bills, disability, and death benefits in the case of a workplace accident, and protects employers from any related lawsuits.

How does workers’ compensation insurance work?

Workers’ compensation is a two-way street: both the employee and the employer agree to certain conditions in case of an incident. The employer agrees to pay for medical expenses, lost wages, and potentially other benefits resulting from work-related injuries and illnesses. To obtain these benefits, however, the employee agrees to limitations for which they can sue the employer. 

To get workers’ compensation benefits, the injured or ill employee must file a workers’ comp claim about the accident or illness with their employer. The employer must then provide the employee with a workers’ compensation claim form (forms vary by state) within one working day of the incident. Both parties fill out their respective sections of the claim, which is then submitted to the insurance company for review.

Depending on the state the claim is filed in, the insurance company may or may not be required to cover expenses while determining the claim’s validity. If your business doesn’t have workers’ comp insurance, you must cover all your employees’ costs out of pocket.

What does workers’ compensation cover?

  • Medical care
  • Disability and lost wages
  • Survivor benefits
  • Rehabilitation and physical therapy

As with all forms of business insurance, the exact coverage provided by workers’ comp varies from business to business. It also depends on the severity of the workplace injury or illness. In general, a workers’ comp policy includes the following:

Medical care

Workers’ comp covers the immediate costs of medical care and any subsequent surgeries, doctors’ visits, and medical equipment if an employee suffers an injury on a job site.

Disability and lost wages

If an employee has to miss work due to being injured on the job or from a work-related illness, workers’ comp insurance covers their lost wages or disability payments. 

Survivor benefits

If an employee dies in a workplace accident or from a work-related injury, workers’ comp often pays their family some of the lost expected wages and funeral expenses.

Rehabilitation and physical therapy

If a work-related injury results in need for physical therapy or rehab, workers’ compensation insurance covers it.

What isn’t covered under workers’ comp insurance? 

On the other hand, workers’ comp generally does not cover:

  • Injuries incurred under the influence of alcohol or other drugs
  • Illness as a result of food brought from home or otherwise prepared by the employee 
  • Injuries incurred during a commute to or from work 
  • Injuries or illnesses incurred during workplace wellness or recreational programs

Do I need workers’ comp insurance?

To protect your business, it’s a good idea to have workers’ compensation insurance, and depending on what state you’re in, you’ll likely need it if you have one or more employees. However, not all business owners are required to have workers’ comp insurance. Sole proprietors, for example, don’t need it, because they don’t have employees, nor does a company that only hires contractors. 

Note that most states require some degree of workers’ comp insurance and specific requirements set in the moment a business hires its first employee. Other states don’t require it until a business has a minimum of two to five employees. Texas is the only US state that does not require most private employers to have workers’ comp.

Certain jobs are exempt from workers’ compensation insurance, depending on the state. These include: 

  • Seasonal workers
  • Farm workers
  • Insurance agents
  • Real estate agents
  • Business owners
  • Undocumented workers
  • Domestic workers
  • Loaned employees

How much does workers’ comp cost? 

Like all business insurance, workers’ comp insurance costs vary from business to business and state to state. The fee also depends on your company’s line of work. For example, businesses at a higher risk of accidents, like a delivery company, likely face higher premiums than those at a lower risk of accidents, like a content marketing agency. Other factors include the size of payroll, additional workplace activities, and claims history.

Workers’ compensation insurance FAQ

Is workers’ comp insurance required?

Workers’ compensation insurance is required to some degree in every state except Texas.

What is covered under workers’ compensation insurance?

Coverage for workers’ compensation insurance varies, but typically covers medical expenses including any medical rehabilitation and physical therapy, disability and lost wages, and survivor’s benefits in the case of a workplace-related death.

Are contractors covered under workers’ comp insurance?

No, contracted workers are not covered under workers’ compensation insurance.