Running a business means buying multiple insurance policies. If you’ve been in business for even a short while, you’ve probably purchased general liability insurance or business liability insurance, but do you have workers’ compensation? Do you know how much it will cost?
Business owners purchase workers’ compensation insurance to provide benefits to employees who experience work-related injury or illness. Medical bills can pile up quickly along with household bills when a worker is unable to return to work. If a worker dies, workers’ compensation can also provide benefits to the worker’s beneficiaries to ease the burden of expenses.
Worker’s comp protects your business from lawsuits
Although workers’ comp benefits your employees by covering medical bills and replacing lost income, it also benefits your business. Workers’ comp is a no-fault insurance system which means it doesn’t matter how a worker is injured – they are entitled to receive benefits. A worker who is injured due to employer negligence will receive benefits just the same as a negligent worker who caused their own injury.
This insurance protects your business because workers who receive benefits through the workers’ comp program can’t sue you for their injury or illness. They can sue you for additional injuries, but not the ones they’ve filed a workers’ comp claim for.
Workers’ comp is required by law
In most states, businesses are required to purchase workers’ comp insurance. A business owner who doesn’t follow the law can face fines, jail time, and might even be held liable if employees file a civil lawsuit.
While Texas doesn’t require businesses to buy workers’ comp, there are several states that exempt businesses with 3 or fewer employees. Those states include Wisconsin, West Virginia, Virginia, Arkansas, and New Jersey.
What does it cost?
The cost of premiums varies by industry and business. Your actual cost can only be calculated by a licensed insurance agent, although you can generate a fairly accurate estimate if you know what factors are used to calculate premiums. Among the factors that go into calculating a business’ premiums are payroll size, state laws, and the type of work performed by employees.
Insurance companies also consult with the National Council on Compensation Insurance to set appropriate rates. The council has spent many years classifying jobs by risk and assigning codes that help them calculate the cost of premiums by industry. The suggested costs are adjusted annually, accounting for various factors.
Each code created by the council represents a premium per $100 of payroll. For example, if your workers are classified with a code of $1.08, you’ll pay $1.08 in workers’ comp premiums for every $100 they earn.
Here’s a sample calculation that walks you through the math from start to finish.
Risky industries pay more
Workers engaging in risky professions are more likely to be seriously injured, so the premiums in those industries are higher. Risky jobs are assigned a code with a higher dollar amount per $100 in payroll. For instance, a roofing company will pay a much higher premium than a business owner running a small office of computer techs.
In construction, the risk of death and injury is far greater than most other professions. According to the Bureau of Labor Statistics, construction had the highest number of fatalities out of all U.S. industries in 2014. The 899 fatalities accounted for 19% of all U.S. work-related deaths.
Filing claims raises your rates
Like any insurance policy, having a history of claims will raise your rates. In the workers’ comp world, this is called the “experience modifier.” New businesses can avoid the experience modifier for about three years while they establish a history. In the beginning, new businesses often receive a discount.
Claims avoid costly lawsuits, but once you file a claim, your premiums will go up. However, insurance companies generally only look at a rolling three-year history of claims.
Classify workers correctly
It’s not cheap to run a business and pay for the various types of insurance required by law, but there’s no way around it. Workers’ comp insurance isn’t always cheap, but make sure you’re classifying your employees correctly. Don’t lump everyone under the same code out of convenience if their jobs are different. Yes, it’s more paperwork and more calculating, but properly classifying each employee means you won’t pay more than what you’re required.