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What Is Workers' Compensation Insurance?

Updated 10:46 AM EST, Tue July 31, 2018

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What Is Workers' Comp?

Workers' Compensation is an insurance coverage that helps protect businesses and their employees from the resulting financial losses when a worker is injured or contracts an illness on the job. It helps cover the costs of the sick or injured employee’s lost wages and medical expenses. In addition to wage replacement and medical costs, workers’ comp can also help cover the costs of vocational rehab. In the event of an employee’s death, workers’ comp even provides death benefits to help cover funeral expenses and support payments to dependents.
 
In the United States, the first workers’ compensation system started in the early 1900s as a result of the “muckrakers” literary movement. The muckrakers’ stories exposed the appalling and dangerous conditions many factory employees were working under which eventually spearheaded social change.
 
Today, workers’ comp insurance helps protect workers from the potentially devastating costs of work related injuries and illnesses and can help protect employers from the potentially crippling costs of employee claims.
 

Workers' Compensation Insurance by State

Workers’ Comp requirements vary by state. And, the state is the body that regulates the requirements. States also determine the premium amounts and whether Workers’ Comp is handled by state run agencies, private sector insurance companies or by the state itself.
 
One of the reasons that states determine their own Workers’ Comp benefits and premiums is because of the differences in state economies and risk profiles. For example, Alaska has one of the highest average premiums in the country. This is because Alaska has a large lumberjack economy. Lumberjacking is a high risk occupation and because of this, employers are required to pay higher premiums.
 
Some states maintain secondary injury funds. A secondary injury fund helps cover the cost if a disabled employee finds a new job and is once again injured due to their disability. For example, an employee who worked in nursing might injure his back and file a Workers’ Comp claim. Several years later he may get a job working at a shipping yard. Although he has returned to work, his back may be at increased risk for injury. If he reinjures his back at the shipping yard, the secondary injury fund can help pay the costs. This fund is set up to encourage employers to hire previously disabled workers. Without it, employers may shy away from hiring workers with prior histories of injuries.
 
So What Do Workers’ Compensation Insurance Laws Look Like for Different States?
 
  • California – Every person working for an employer, including apprentices must be covered by Workers’ Compensation insurance. This includes employees with oral and written agreements. It also includes lawfully or unlawfully employed workers. California does not require children and spouses to be covered. Nor does it require coverage for deputy sheriffs, volunteers, amateur sports officials and people working in exchange for aid or food.
  • Florida – Every person working for another person, group of people, firm, or corporation must be covered by Workers’ Comp insurance. This includes people working under any type of contract whether it is expressed or implied. This coverage requirement extends to aliens and minors who are lawfully and unlawfully employed. Licensed real estate brokers, musical theater performers, and temporary workers are exempt. Most independent contractors are exempt as well, with the exception of construction workers. There is a bit of a gray area with volunteers, chauffeurs and other drivers and sports officials. For more information on these gray areas, you can visit Florida’s Workers’ Compensation page.
  • Illinois – Every person working for someone else or under a contract must be covered by Workers’ Comp. Certain businesses in Illinois are deemed “extra hazardous.” Employees in these businesses are covered automatically by law. Real estate brokers and sales people working on commission as well as farmers and jurors are exempt from Workers’ Compensation insurance coverage.
  • New York – All employees working at for-profit companies must be covered by Workers’ Compensation insurance. This includes part-time, borrowed and leased employees, family members and people who are volunteering for a for-profit business. Most employees for nonprofit businesses are also required to have Workers’ Comp insurance. Additionally, most state workers, domestic workers, public school teachers and farmers who make more than $1,200 a year are covered. Volunteers and most religious employees are not covered. Certain real estate, media sales and insurance agents who work as independent contractors are not covered.
  • Texas – Private employers are not required to provide Workers’ Compensation insurance. If an employer doesn’t have this coverage they must report their coverage status, work-related injuries and diseases to the Division of Workers’ Compensation. Employers that do have Workers’ Comp must report job-related injuries and illnesses that result in more than one day of employee absence. Failure to do this can result in administrative penalties.

What Doesn't Workers' Compensation Insurance Cover?

There are certain situations that Workers’ Comp won’t cover. These differ by state and are determined by state law. Generally speaking, most Workers’ Comp insurance plans do not cover the following types of injuries or illnesses:
 
  • Injuries sustained in an altercation that the injured employee started
  • Injuries an employee sustained intentionally
  • Injuries sustained while the employee was intoxicated
  • Emotional injuries that are not accompanied by physical trauma
There are many reasons an employee may sue an employer. Issues such as gross negligence or malicious intent that leads to injury as well as discrimination, failure to promote, or termination because of an injury are all grounds for an employee to sue in most states. For cases such as these, Employment Practices Liability Insurance can help cover the costs related to the business’s legal defense.
 

How Does Workers' Compensation Protect My Business?

There are three ways that Workers’ Comp can help protect your business. First and foremost, Workers’ Comp insurance helps cover employees for work related injuries and illnesses. It also mitigates the possibility of employees bringing suits against your business for work related injuries and illnesses. The third way it helps protect your business is by keeping it compliant with state Workers’ Comp regulations.
 
If an employee is injured or becomes ill on the job, Workers’ Comp helps cover the related costs. If an employee is unable to work, Workers’ Comp can help provide lost wages. It can also help cover medical expenses for treatments the employee needs. This can include physical therapy, surgery, medicine and more. Workers’ Comp can also provide help in getting the employee back to work. This can be at the employee’s former position or at a new one that suits the employee’s health status. In the unfortunate event an employee dies, Workers’ Comp can provide financial benefits to the employee’s family.
 
In most states, Workers’ Compensation coverage is required by law. Specific coverage requirements differ by state. Coverage features such as the amount of benefits, injuries covered and how benefits and care are provided are determined by the state. You may need coverage for every state your employees work in. Some Workers’ Comp policies do allow exceptions for multiple states or workers that travel to different states. In any case you will need to be covered for every state your employees work in.
 

Will Workers' Comp Cover Me If An Employee Sues Me for Getting Hurt on the Job?

Generally the answer is yes, Workers’ Comp will cover you if an employee sues you for getting hurt on the job, with some exceptions. Workers’ Compensation insurance is a no-fault system. Typically with Workers’ Comp, if covered employees become ill or injured from their job, they receive compensation for their losses in exchange for giving up their right to sue their employer. However, there are important exceptions.
 
Workers’ Compensation insurance does not provide coverage in cases where employers intentionally cause physical or non-physical harm to employees. Examples include, if an employer commits assault, battery, defamation, fraud, emotional distress, or other such tort injuries against an employee.
 

Do I Have to Buy Workers' Compensation Insurance?

Most states require businesses to hold Workers’ Compensation insurance, with the exception of Texas and New Jersey, where Workers’ Comp is elective. Also, depending on the type of work performed and the workers’ status, certain businesses may be exempt from their state Workers Comp requirements.
 
In New Jersey, employers who opt out of holding Workers’ Compensation insurance are required to purchase employers liability insurance.
 
For example, some businesses that have employees who work on commission are not required to provide Workers’ Comp. This can sometimes be the case for real estate salespeople and insurance sales representatives. Some states do not require businesses to provide workers’ comp for family members who are employees. Part-time work, volunteer work and work that is done in exchange for food is often exempt as well. Some states also have a rule that businesses with fewer than five employees are not required to provide Workers’ Compensation insurance.
 
It’s a common misconception that Workers’ Compensation requirements are based on business risk. Whether or not a business poses a physical danger to its employees is not a factor in determining whether Workers’ Compensation insurance is required. Even the safest job in the country may require Workers’ Comp coverage. However, risk does affect the premium cost of the Workers’ Compensation insurance. The more physical danger posed to employees the higher the premium will likely be. Don’t be mistaken in believing that your business is exempt from Workers’ Comp because it’s a “safe” business. Regardless, your state likely requires you have a Workers’ Compensation policy.
 

What Types of Injuries Are Covered by Workers' Comp?

Workers’ Comp helps cover injuries that happen to employees who are on work premises or acting on behalf of their employer. For example, Workers’ Comp helps cover injuries an employee sustains in a car accident if he was driving for work purposes. Workers’ Comp also helps cover injuries that happen at work as a result of workplace violence, terrorism and natural disasters.
 
It’s not just injuries that Workers’ Comp covers. It also helps cover illnesses. For example, Workers’ Comp helps cover an employee’s illness if it was caused by exposure to chemicals while working.
 
Workers’ Comp will not cover injuries that the employee intentionally sustained. Nor will it cover injuries that occur while the employee is commuting to or from work.
 
Muscle sprains and strains are among the most prevalent causes of workers’ comp claims making up more than 30 percent of cases. These injuries are typically due to overexertion when lifting. Typically, these injuries require a median of 12 days to recover before the employee can return to work. Work activities that see the most sprain and strain injuries involve labor, freight, stock and material moving. Nursing assistants also see a high number of cases for these types of injuries.
 
Falls, slips and trips account for the second largest percentage (27 percent) of Workers’ Comp claims. Most of these accidents happen “on the same level.” This means that employees tripped over objects like extension cords, loose carpeting or their own feet.