Workers’ Compensation Insurance: What Is It And How Does It Work? (2024)

Workers’ compensation insurance pays vital benefits to employees when they are injured or sick because of their job. These benefits include medical treatment and ongoing care, payments to cover lost wages and even death benefits.

In most states, businesses are required to buy workers’ compensation insurance for their employees—possibly even if they only have one employee.

What Is Workers’ Compensation?

Workers’ compensation insurance provides compensation to employees for lost wages and medical care for people who are hurt due to their jobs. Employers pay for workers’ comp coverage. Employees don’t contribute to the funds.

In addition to paying for injuries and rehabilitation, workers’ compensation may compensate a family after a work-related death.

A workers’ compensation claim is paid if the employer or insurance company confirms that the injury, illness or death was work-related. If the insurer or employer rejects the workers’ comp claim, a workers’ compensation judge decides on the case.

Who Needs Workers’ Comp Insurance?

Most states require businesses to have workers’ comp insurance, even as part of small business insurance for operations with just one employee. Other states (such as Alabama and West Virginia) do not require workers’ comp if you have fewer than five employees.

Some states have exemptions for workers’ comp requirements based on the type of work. For example, in California, you aren’t required to have workers’ comp for domestic workers employed by parents or for volunteers who work for a non-profit recreational camp or ski patrol.

Check our guide to workers’ compensation laws by state to find out what’s required where you operate.

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What Does Workers’ Comp Insurance Cover?

Here’s a closer look at the benefits covered by workers’ comp insurance.

• Medical expenses resulting from injuries or illness caused by employment, including hospital visits, medications and emergency surgeries.
• Mental health, in some states, such as depression or anxiety due to repeat trauma.
• PTSD in some states, for first responders.
• Lost wages are partially covered (usually up to two-thirds of wages) when the employee needs time away from work to recover from a work-related illness or injury.
• Disability benefits if the injury caused a partial or permanent disability.
• Ongoing care costs, such as physical therapy.
• Death benefits for funeral costs and survivor benefits for the worker’s family if death is caused by employment.

Workers’ comp benefits are paid no matter who was at fault. And workers’ compensation laws typically prevent employees from suing their employers for a work-related injury or illness.

What Does Workers’ Compensation Insurance Not Cover?

Employees are covered for workers’ compensation regardless of the number of hours they work. However, there are exclusions, which could result in a denied workers’ comp claim, including:

• Commuting: Traveling to and from work is typically excluded from workers’ comp coverage. A person may be covered if they’re in a company vehicle or don’t have a physical office, such as a traveling salesperson.
• Intoxication or substance abuse: Many states exclude workers’ compensation coverage if the injured person was intoxicated and that contributed to the injury.
• Workplace fight: If an injury happens during a fight with a colleague, workers’ compensation may not cover the injuries. One exception is if the fight was about work.

What Are the Benefits of Workers’ Comp?

Workers’ comp benefits both your small business and your employees. Here are a few examples of the benefits of workers’ comp coverage.

• It reduces your out-of-pocket expenses. If a worker gets sick or ill while on the job, workers’ comp pays for their lost wages, medical expenses and other expenses, such as funeral costs. Without workers’ comp, you might have to pay out of pocket for these expenses.
• It covers your employees for extended absences. An accident or illness that results in an extended absence could be financially devastating for your employees. Workers’ comp covers partial lost wages and ongoing care costs such as physical therapy.
• Workers’ comp covers your employees no matter who is at fault. Mistakes happen in the workplace. Workers’ comp will cover your employees even if they’re at fault for the accident.

Types of Workers Compensation

There are two coverages, or parts, of workers’ compensation.

• Coverage A (part one)
• Coverage B (part two)

Coverage A

Coverage A, or part one, is determined by state laws and specifies what an employer’s insurance is required to pay an injured or ill employee.

Coverage B

Coverage B is your liability coverage as the employer. In other words, coverage B is applicable if you are sued by an employee for work-related injury or illness. This coverage kicks in if the employee is owed coverage beyond what is provided under coverage A.

How Much Does Workers’ Compensation Cost?

Workers’ compensation insurance costs $542 per year, according to Insureon. That’s about $45 per month. But your costs for workers’ compensation will vary, depending on several factors.

Factors That Affect the Cost of Workers’ Compensation

The payroll of the business and any past workers’ comp claims also impact workers’ compensation insurance cost.

The cost of workers’ compensation is affected by employee job classifications, riskiness of the jobs, payroll and past workers’ comp claims.

“If there is confusion about workers’ comp, it’s usually around how the premium is determined in part by the number of employees on the payroll,” says Andrew Dalton, assistant vice president for The Hartford’s small commercial workers’ compensation line of business. “Each year, state law typically requires every workers’ comp insurance company to perform an audit of the premium paid.”

“It’s important to keep in mind that this audit is required and it’s important to be certain that the business owner is accounting for their employees throughout the year,” Dalton says.

Where to Buy Workers’ Compensation Insurance

Need to buy workers’ compensation insurance for your employees? You’ve got different options depending on your state: You might buy from private workers’ comp insurance companies or purchase it from a state-run agency—or you might have both options.

• Private workers’ compensation insurance companies set their own prices and approve or reject customers. You may get a better price from a private insurer than from a state fund.
• State-funded programs may be available if you are not able to purchase workers’ comp from a private insurer. In a competitive, state-funded workers’ comp program, private insurers and state-funded programs compete for customers. If your business is in a monolithic state like Ohio, North Dakota, Washington and Wyoming, you must get coverage through the state-funded program.

How To File a Claim for Workers’ Compensation

Here are the steps in a typical workers’ compensation claim process.

1. Employee reports their work-related illness or injury to the employer
2. The employer notifies the insurance provider.
3. The employer notifies the state workers’ compensation board if required.
4. If the employer does not dispute the claim, the insurance company will pay the employee workers comp benefits.
5. If the employer disputes the claim, the employee may need to appear before the workers’ compensation board to make their case.

Risk Control for Workers’ Comp Claims

By working to control your business’s risk of workers’ comp claims, you can keep control of future premiums.

“There’s a lot that can help a business owner control their risk associated with employee injuries,” says Dalton. “You don’t want to leave these things to chance and you want to be certain you have safety protocols and procedures and that your business has taken steps to reduce the kinds of things that can cause injury.”

Training employees on workplace safety is a key approach to minimizing worker injuries and accidents. Many states offer workers’ compensation insurance discounts if the business implements a workplace safety program. This safety program could include:

• Written safety policies and safety rules
• Safety inspections
• Preventative maintenance
• Safety training
• First aid

Workers' Compensation Insurance Frequently Asked Questions (FAQs)