Workers’ compensation is the one business policy that is often not optional. It pays for medical treatment and lost wages when an employee is hurt on the job, and in exchange it generally limits the employee’s ability to sue you over that injury. That trade — benefits without proving fault, in place of litigation — is the whole design.
Ryan Hearn is a licensed insurance producer in California. This article is educational and is not a recommendation to buy any specific policy. Insightful Coverage is an independent publisher, not an agency, broker or carrier.
Who is required to carry it
Requirements are set state by state rather than nationally, and they differ more than most people assume. The threshold in one state may be a single employee; in another it may be three or five. Some states exclude certain kinds of work, and construction is frequently treated more strictly than other industries.
Check your own state’s rule with its workers’ compensation agency or insurance department rather than relying on a general summary, including this one. The penalties for getting it wrong are among the harshest in business insurance and can include personal liability.
If you have no employees
In most states a sole proprietor with no employees is not required to carry it. Two complications are worth knowing.
- Clients and general contractors often require it anyway. A certificate of insurance can be a condition of winning work, which makes it a commercial requirement rather than a legal one.
- Who counts as an employee is not always obvious. Misclassifying someone as a contractor does not settle the question — states apply their own tests, and an uninsured injury is when that gets tested.
- You are not covered by your own policy by default. Owners are commonly excluded unless they specifically elect to be included, so if you are doing the physical work yourself, ask.
What it pays for
- Medical treatment for the work-related injury or illness.
- A portion of lost wages while the employee cannot work, usually a set share of their normal earnings rather than all of it.
- Disability benefits where the injury has lasting effects, and rehabilitation where it applies.
- Death benefits to dependants.
It does not cover injuries outside the scope of employment, and it is not health insurance. It also does not respond to injuries suffered by customers or visitors — that is general liability.
What drives the premium
Workers’ compensation is priced differently from most business cover. It is generally based on your payroll and on classification codes describing the work each employee actually does, then adjusted by your own claims history through an experience modifier.
Two practical consequences follow. Misclassified job codes are a common and expensive error, in both directions, and worth auditing. And because premium follows payroll, it is usually estimated up front and reconciled later, so a year of growth can produce a bill you did not plan for.
Related reading
- General liability insurance — which covers injuries to customers, not employees.
- 12 types of business insurance coverage explained
- Employment practices liability insurance — the other employee-related cover, for claims rather than injuries.
- Best business insurance providers
