Workers’ Compensation Insurance

Workers’ compensation insurance covers medical expenses and lost wages for employees injured on the job. It protects businesses from costly lawsuits and ensures workers receive prompt care and financial support. For most employers, it’s a legal requirement and a critical part of responsible risk management.

What Does Workers’ Comp Cover?

Medical Expenses

Workers’ comp pays for necessary medical treatment related to a work injury or illness. This includes:

• Doctor visits
• Emergency room care
• Surgeries
• Hospital stays
• Prescription medications
• Diagnostic tests

Lost Wages

If an employee can’t work while they recover, workers’ comp provides partial wage replacement. This ensures the injured worker still receives income, though usually at a reduced percentage (commonly around two-thirds of regular pay, depending on state laws).

Disability Benefits

These benefits are designed to help employees who experience temporary or permanent loss of ability due to their injury:

• Temporary Disability: For short-term injuries that prevent the employee from working for a limited time.
• Permanent Disability: For serious injuries that result in lasting impairment or inability to return to work.

Death Benefits

If an employee dies due to a work-related injury or illness, workers’ comp helps support their surviving family members. This can include:

• Funeral and burial expenses
• Ongoing financial support for dependents

Ongoing Care Costs

Some injuries require long-term treatment. Workers’ comp often covers:

• Physical therapy
• Occupational therapy
• Rehabilitation services
• Assistive devices like wheelchairs or prosthetics

Covered vs. Not Covered

Injured workers may receive:

• Full medical care related to the injury
• Partial wage replacement while unable to work
• Rehabilitation and therapy if needed for recovery
• Disability benefits for temporary or permanent impairments
• Death benefits for surviving dependents, if applicable

What Does Workers’ Comp Not Cover?

While workers’ compensation insurance covers a wide range of job-related injuries and illnesses, there are important exclusions. These are situations where benefits are typically denied, either due to how the injury occurred or who was involved.

Here are some of the most common exclusions:

Injuries That Happen Outside of Work

Workers’ comp generally doesn’t apply if the injury occurs off the clock or away from the workplace—unless the employee was performing work duties at the time (like traveling for business or making a delivery).

Self-Inflicted Injuries

If an employee deliberately injures themselves, those injuries won’t be covered. This includes attempts to fake or exaggerate an injury to collect benefits.

Injuries Caused By Intoxication Or Drug Use

If drugs or alcohol are found to be the cause of the injury, the claim will likely be denied. Most states allow employers to request drug testing after a workplace accident.

Violations Of Company Policy

Workers who get hurt while breaking safety rules, ignoring training procedures, or engaging in horseplay or fighting may not qualify for coverage.

Independent Contractors

Workers’ comp typically covers employees, not independent contractors. Unless a business has specifically extended coverage to a contractor through a special agreement or policy endorsement, they’re not protected under the employer’s workers’ comp insurance

How Much Does Workers’ Compensation Insurance Cost?

The cost of workers’ compensation insurance varies widely, but on average, U.S. employers pay between $0.75 to $6.00 or more per $100 of payroll, depending on the type of work employees do and the risk associated with it.

For example, a clerical worker in an office will cost much less to insure than a roofer or construction laborer.

What Affects the Cost of Workers’ Comp Insurance?

Several key factors determine what a small business will pay:

Industry And Job Hazards

High-risk jobs, like construction, logging, or warehouse work, carry higher rates due to a greater chance of injury. Low-risk industries like accounting or consulting are generally much cheaper to insure.

Payroll Size

Because premiums are based on payroll, larger businesses typically pay more in total—even if the rate per $100 of payroll is low. However, they may benefit from volume discounts or risk management programs.

Claims History

Businesses with a history of workers’ comp claims will likely pay more. Insurers use an “experience modifier” (or “mod”) to adjust premiums based on prior losses.

State Regulations

Rates vary significantly by state due to local laws and systems. For example, California and New York tend to have higher premiums than Texas or Indiana.

Example: Workers’ Comp Cost By Industry

How Are Workers’ Comp Premiums Determined?

Workers’ compensation premiums aren’t one-size-fits-all. Insurers calculate them using a combination of risk factors that reflect the nature of your business and how likely it is that a worker will be injured on the job.

Here’s a breakdown of the main elements that go into determining your premium:

Total Payroll

Your payroll is the starting point for calculating premiums. The rate is usually expressed as a cost per $100 of payroll. The more employees you have, or the higher their wages, the more you’ll pay. For example, a business with $500,000 in payroll and a $2.00 rate would owe $10,000 in premiums annually.

Job Classification Codes

Each employee is assigned a classification code based on the type of work they do. These codes are set by the National Council on Compensation Insurance (NCCI) or state-specific systems. Riskier jobs, like construction or roofing, get higher rates than lower-risk roles like clerical or sales work.

Example:

• Clerical worker: lower rate
• Carpenter: higher rate due to injury risk

Experience Modification Rate (EMR)

The EMR is a score that reflects your claims history. A business with fewer or less severe claims than the industry average will have an EMR below 1.0, which reduces premiums. A business with a poor safety record may have an EMR above 1.0, increasing costs.

• EMR of 0.80 = 20% discount
• EMR of 1.20 = 20% surcharge

Location (State Base Rates)

Workers’ comp is regulated at the state level, so base rates differ from state to state. A roofing contractor in Texas may pay far less than a similar business in California or New York due to regulatory differences, benefit requirements, and local risk factors.

Is Workers’ Comp Insurance Required By Law?

In most U.S. states, yes, but the details vary. Every state sets its own rules for when workers’ compensation insurance becomes mandatory and who must be covered. While nearly all states require coverage as soon as a business hires one or more employees, there are exceptions and nuances.

For example, some states allow business owners to exclude immediate family members, like a spouse, parent, or child, from the employee count used to determine if coverage is required. Other states treat family members the same as any other employee and require coverage from the first hire.

State-by-State Requirements

Not having legally required workers’ comp coverage can lead to steep penalties, which vary by state but commonly include:

• Fines: Ranging from a few hundred to tens of thousands of dollars
• Stop-work orders: Halting business operations until coverage is obtained
• Lawsuits: Injured workers may sue the employer directly, often resulting in higher settlements than a comp claim
• Criminal charges: In some states, repeated or willful failure to comply is a misdemeanor or felony offense

Because the rules can vary significantly, it’s important you understand the specific requirements in your state, including how family members and corporate officers are classified. When in doubt, consult your state’s workers’ compensation board or a licensed insurance advisor.

Who Needs Workers’ Comp Insurance?

Workers’ compensation insurance isn’t just for large corporations—it’s a key protection for businesses of all sizes, including solo operators who occasionally bring in help. Whether you’re required to carry it depends on a mix of your business structure, location, and who you work with.

Small Businesses With Employees

If you have one or more employees, most states require you to carry workers’ comp insurance. This includes full-time, part-time, seasonal, and even temporary workers in many cases.

Some states allow small businesses to delay coverage until they have a certain number of employees (often three to five), but others, like California and New York, require it as soon as the first person is hired.

Even family-run businesses are often not exempt. Many states include spouses, children, and other relatives in the employee count unless you file specific exemptions.

Independent Contractors And Subcontractors

In most cases, independent contractors aren’t automatically covered under your workers’ comp policy. However, if you hire subcontractors or 1099 workers and they don’t carry their own coverage, some states may treat them as your employees, making you responsible for their injuries on the job.

Construction businesses in particular should be cautious here. States like Florida and Massachusetts closely regulate subcontractor relationships, and failing to carry coverage could result in fines or stop-work orders.

Sole Proprietors And Self-Employed Individuals

If you’re a one-person operation with no employees, you’re usually not required to carry workers’ comp insurance. You may be legally required to get coverage if you:

• Bring on a part-time helper.
• Hire a temp worker for a job.
• Use a laborer or assistant even briefly.

Even when it’s not required, many sole proprietors choose to buy workers’ comp voluntarily. It helps cover their medical bills and lost wages if they’re injured on the job—something health insurance doesn’t always do, especially if the injury is considered “work-related.”

Who Doesn’t Need Workers’ Comp Insurance?

Not every business or individual is required to carry workers’ compensation insurance. Most states allow certain exemptions based on business structure, number of employees, and the nature of work relationships.

That said, exemptions vary widely by state, so it’s important to check your local laws before assuming you’re off the hook.

Sole Proprietors With No Employees

If you’re a sole proprietor and you don’t have any employees, most states don’t require you to carry workers’ comp. You’re considered self-employed and not subject to the same coverage mandates as businesses with hired help. However, if you later bring on a helper, even temporarily, you may need coverage to stay compliant.

Corporate Officers Or LLC Members

Many states allow certain business owners, like corporate officers or members of an LLC, to opt out of workers’ comp coverage. This often requires a formal waiver or exclusion filing. For example:

• In Florida, up to three corporate officers can exempt themselves from coverage.
• In California, some officers and directors may opt out if they own at least 15% of the company.
• In New York, executive officers of corporations may be exempt if they don’t perform manual labor and meet ownership criteria.

These rules are designed to give business owners flexibility, especially if they’re not involved in day-to-day operations.

Independent Contractors

True independent contractors, those who work on their own terms, provide their own tools, and control how and when they do the job, are generally not required to carry workers’ comp or be covered under someone else’s policy. However, this gets tricky:

• If the contractor’s work is supervised or directed by the business hiring them, states may reclassify them as an employee.
• In industries like construction, some states treat independent contractors and subcontractors as de facto employees unless they carry their own comp coverage.

Misclassifying workers as independent contractors to avoid insurance costs is a common compliance issue—and one that can result in serious penalties.

How Workers’ Comp Claims Work

When an employee gets injured on the job, a workers’ compensation claim sets the process in motion to cover their medical expenses and lost wages—while protecting the employer from a potential lawsuit.

Here’s a simple breakdown of how the claims process typically unfolds:

Employee Injury Report

The process starts when an employee is injured or becomes ill due to work conditions. They must report the injury to their supervisor or employer as soon as possible, usually within a few days, depending on state law. Delayed reporting can lead to denied claims.

Employer Files A Claim With The Insurer

After being notified, the employer must submit a claim to their workers’ comp insurance carrier. This usually involves:

• A report detailing how and when the injury occurred
• The employee’s contact and job information
• Any initial medical treatment received

Most states have deadlines for employers to file the claim, often within 7 to 10 days of being notified.

Medical Evaluation And Treatment Authorization

The injured worker may need to see an approved medical provider (as specified by the employer or state). The doctor evaluates the injury, provides treatment, and submits documentation to the insurer. Ongoing care, like surgery, rehab, or therapy, must often be pre-approved by the insurance company.

Payments For Medical Bills And Wage Replacement

Once the claim is accepted:

• The insurer pays for all necessary medical treatment.
• The employee receives wage replacement benefits if they’re unable to work. This usually amounts to about two-thirds of their average weekly wage, subject to state limits.
• If the claim is disputed or denied, the worker may appeal through the state’s workers’ comp board.

Return-To-Work And Ongoing Monitoring

When the employee is medically cleared to return to work—either full duty or light duty—they resume employment. If they can’t return to their previous role, vocational rehabilitation services may be provided. Some cases involve ongoing medical checkups or disability assessments to determine long-term benefits.

The entire process is designed to be “no-fault,” meaning the employee doesn’t have to prove the employer was negligent, just need to show the injury was work-related. At the same time, workers’ comp usually prevents employees from suing their employer directly for damages.

Real Workers’ Compensation Claims Examples

Here are a few real-world examples that show how workers’ compensation works in action, highlighting the types of injuries covered, typical costs, and outcomes for employees and employers alike.

A 38-year-old construction worker fell 10 feet from scaffolding while installing roofing panels on a residential build. He suffered a broken leg, a concussion, and a spinal strain. His recovery included surgery, physical therapy, and nearly 14 weeks off the job. Workers’ compensation covered all related expenses, including over $60,000 in medical costs and approximately $25,000 in wage replacement benefits.

The worker eventually returned on light duty with modified tasks, and the total claim cost came to around $85,000.

A grocery store cashier began experiencing numbness and wrist pain after years of repetitive scanning at the register. She was diagnosed with early-stage carpal tunnel syndrome, a common repetitive strain injury. Workers’ comp covered the cost of physical therapy sessions, ergonomic workplace adjustments, and follow-up visits.

Since she didn’t miss work, there were no wage replacement payments. The total claim cost was modest—about $3,200—but still crucial in helping her recover without financial strain.

A delivery driver was rear-ended while stopped at a red light in a company vehicle. He suffered whiplash and a herniated disc, which required physical therapy and diagnostic imaging. He was unable to work for six weeks. Workers’ compensation paid for all medical treatment and partial wage replacement during his recovery period.

The total claim amounted to roughly $18,500, covering both healthcare costs and lost wages. He returned to work with temporary lifting restrictions before resuming full duties.

Are Your Employees Covered If They Are Out Of State?

It depends—but only if you’ve set up your workers’ comp policy correctly.

A standard workers’ compensation policy covers employee injuries that occur in the states specifically listed in the Declarations section of the policy. If your employee is injured in one of those listed states, they’re covered under your policy—simple as that.

But what if an employee travels or temporarily works in a different state?

That’s where the “Other States” section of your policy comes into play. This section allows you to extend coverage to states not listed in the declarations, so long as:

• You’ve named those other states in that section (either individually or as a general catch-all), and
• The injury occurs during a temporary work assignment, business travel, or short-term project.

If a state isn’t listed in either the declarations or the “Other States” section, your policy might not provide coverage, leaving both you and your employee exposed. In some cases, you may need to add that state to your policy mid-year or even buy a separate policy if the state has special rules (like monopolistic states: Ohio, North Dakota, Washington, and Wyoming).

Can An Employee Who Suffered An Accident Sue Me?

There are a few exceptions where legal action outside of workers’ comp may still be allowed:

• Intentional Harm: If an employer intentionally causes injury (e.g., physical assault, knowingly removing safety guards from machinery), the employee may be able to sue directly.
• Gross Negligence (in some states): While workers’ comp usually covers standard negligence, a few states allow lawsuits if the employer acted with extreme recklessness or willful disregard for safety.
• Third-Party Claims: An injured employee may sue a third party (not the employer) whose actions contributed to the injury, like a subcontractor, property owner, or equipment manufacturer. If that happens, the employer is usually not directly involved, but might be asked to provide documentation.

So while workers’ comp coverage generally protects you from lawsuits, it’s not an absolute shield. Maintaining a safe work environment and following all safety regulations reduces both injuries and your legal risk.

What Other Business Insurance Policies Do You Need?

Workers’ compensation insurance is just one piece of a smart risk management strategy. Most businesses—especially those with employees, physical locations, or client-facing operations—need additional policies to stay fully protected.

Here’s a breakdown of the most common types of business insurance and what each one covers:

General Liability Insurance

General liability insurance is the foundational policy for most businesses. It covers third-party claims of:

• Bodily injury (e.g., a customer slips and falls)
• Property damage (e.g., damaging a client’s home during a job)
• Personal and advertising injury (e.g., libel, slander)

If you interact with the public in any way, general liability is a must-have.

Professional Liability Insurance

Also known as errors and omissions (E&O) insurance, this protects service-based businesses against claims of:

• Negligence
• Missed deadlines
• Professional mistakes or bad advice

It’s critical for consultants, accountants, architects, IT providers, and other professionals who offer expertise or services.

Business Owner’s Policy (BOP)

A BOP bundles general liability and commercial property insurance into one cost-effective package. It’s designed for small to midsize businesses and often includes:

• Protection for your building and contents
• Liability coverage
• Business interruption insurance (lost income due to covered events)

It simplifies coverage while saving money.

Cyber Insurance

If you collect or store any personal, financial, or customer data, cyber insurance protects you against:

• Data breaches
• Ransomware attacks
• Regulatory fines and legal fees
• Notification and credit monitoring costs

Even small businesses can be targets—and this coverage is becoming increasingly necessary.

Business Equipment Protection

Sometimes included in commercial property or inland marine policies, this coverage protects:

• Tools
• Machinery
• Mobile equipment
• Electronics used for business operations

It’s especially valuable for contractors, repair services, or creatives who rely on expensive gear.

Commercial Property Insurance

This covers the physical location of your business and its contents, including:

• Buildings
• Inventory
• Furniture
• Fixtures

It protects against fire, theft, vandalism, and certain weather events. Landlords may require tenants to carry this policy.

Commercial Umbrella Insurance

Think of this as extra coverage that kicks in when your other liability limits are maxed out. Umbrella insurance extends the limits of:

• General liability
• Auto liability
• Employer’s liability (part of workers’ comp)

It’s an affordable way to add a layer of high-limit protection, especially if your business faces lawsuits or high-dollar risks.