Workers Compensation Insurance: The Comprehensive Guide for Small Businesses

As a small business owner, your hope is that you and your team always have a safe working environment. But injuries happen, particularly in high-risk industries like manufacturing or construction. Even in a relatively safe office environment, accidents like slip and falls can occur.

This being said, when the unexpected occurs, you can protect your business by ensuring that you have adequate small business insurance coverage. For work-related injuries and illnesses, workers compensation insurance is essential. In fact, in almost every state, most businesses are legally required to have workers compensation insurance.

In this guide, therefore, we’ll break down what workers compensation insurance covers, how much it costs, and where you can go to find the best policies for your business.

Workers compensation insurance covers medical expenses and lost wages when employees sustain work-related injuries or illnesses. Additionally, workers compensation also pays death benefits to families of employees who pass away as a result of their work on the job.

In this way, workers comp protects both you and your employees. Your employees are covered in the case of injury or illness that occurs during the course of their work—and, as long as you’re compliant with state law, your business is protected too, as an employee who receives workers comp benefits cannot sue you for their injuries or lost wages.

Every U.S. state—with the exception of Texas—legally requires most employers to have workers compensation coverage.^[1] No matter what industry your business is in, you must have adequate insurance.

Coverage requirements are typically tied to the following factors:

• Number of employees: Some states require businesses to have workers comp coverage once they hire their first employee. Others require businesses to purchase workers comp only after they reach a certain number of employees. For example, Alabama requires you to purchase workers compensation insurance after hiring your fifth employee.^[2]
• Payroll costs: Some states tie coverage requirements to payroll. Kansas requires coverage for all businesses that process over $20,000 in payroll annually.^[1]
• Type of business: Sole proprietorships and general partners in a partnership don’t need to purchase workers comp in most states, unless they have employees. They can, however, choose to purchase insurance to cover themselves.

This being said, although sole proprietors don’t legally have to buy workers comp, their clients might require it. For example, a firm might require their freelancers and independent contractors to carry workers compensation insurance.

You should also be aware of locational requirements. Some states, such as California, require out-of-state companies to purchase coverage if they are employing people who work in California.^[3] Businesses with employees in multiple states have to ensure that their workers comp policy covers incidents in any of those states.

If you’re unsure of what government regulations apply to your business, you can contact your state’s insurance department or workers compensation board for more specific details.

As we mentioned above, workers compensation insurance covers an employee’s losses stemming from work-related injuries or illnesses.

Therefore, covered expenses typically include all of the following:

• Health and medical expenses
• Rehabilitation and retraining expenses
• Lost wages (disability payments)
• The employer’s legal expenses of defending a lawsuit
• Death benefits for surviving family members

Many business owners assume that only companies in hazardous industries—such as construction or manufacturing—need workers compensation insurance. But retailers and employers with office environments aren’t immune from incidents, as the examples below show.

All of the following are examples of what would be covered under a workers comp policy:

• An employee is involved in a traffic accident while driving a company vehicle.
• An office employee develops carpal tunnel syndrome from a poor desk setup.
• A retail employee develops chronic back pain from hunching over to carry books.
• Heavy items fall onto a construction employee’s leg and cause an injury.

Under some policies, post traumatic stress disorder (PTSD) and other mental conditions are also covered.^[4] For example, an employee who is diagnosed with PTSD after observing an office burglary might have a valid workers comp claim.

Injuries usually happen on business property, but this need not always be the case. An employee who is hurt while driving a company vehicle or hosting a company event, for instance, might be able to file a workers compensation claim.

Certain types of injuries and related costs are not covered under workers compensation insurance:

• Self-inflicted injury, such as a suicide attempt by an employee
• Injury incurred when the employee was not following company policy
• Injury caused by intoxication or drugs
• Injury incurred when not on the job (though injuries during a rest or lunch break might be covered)^[5]
• Injury incurred when the employee is embezzling or committing a crime
• Injury incurred by an employee after being fired or laid off
• OSHA fines
• Wages for a replacement worker

It’s important to note that workers compensation insurance only covers losses for full-time and part-time W-2 employees. Independent contractors, on the other hand, should purchase their own workers comp coverage.

Additionally, although many workers compensation insurance policies include employers liability insurance, not all do. Employers liability insurance specifically protects your business in the case an employee sues due to work-related injury or illness and covers legal costs, as well as any settlements or resolutions.

Typically, this type of policy is considered the second part of workers compensation, however, you’ll want to ensure that any company you work with offers this coverage. If employers liability insurance is not included within a workers compensation policy, you can often add a stop gap endorsement to your policy and certificate of insurance to “bridge the gap” in your coverage.

At this point, you might be wondering: How much is workers compensation? When it comes down to it, the cost of workers compensation insurance can vary based on a number of factors, including:

• The state or states where your employees work
• Your industry
• The size of your business
• Your annual payroll
• The type of work your employees do
• Your claims history
• The insurance provider you work with
• The amount of coverage you need

As you might imagine, if you need workers compensation coverage in multiple states, especially in a higher-risk industry, your costs are going to be higher than those for one state or a lower-risk industry.

This being said, however, according to a 2019 report from the Oregon Department of Consumer and Business Services, the average annual workers compensation insurance cost is $1.11 per $100 in payroll.^[6] In other words, if your annual payroll is $50,000, you’ll be paying about $555 per year, or $46.25 per month for workers comp insurance.

As this example shows, unlike other types of business insurance, workers compensation insurance costs are typically quoted for every $100 of payroll. Prices vary widely based on industry, from as little as $0.12 per $100 of payroll for clerical employees, all the way up to $9 or more per $100 of payroll for construction workers, painters, and machinists. This base rate is called the classification rate.^[7]

In addition to industry, a company’s track record of claims also impacts cost. This factor is called the experience modifier. Newer companies receive a higher experience modifier and have higher premium costs because the insurer has no claims record to assess.

If your company has been around for a while and established a track record of minimal claims, then your business insurance company will decrease your experience modifier, thereby decreasing your premium. The average experience modifier is 1.^[8]

Therefore, if you’re looking to calculate the cost of a workers comp insurance policy, you can use this formula:

Workers Compensation Premium = Total Payroll (X) Classification Rate (X) Experience Modifier

Let’s walk through some examples for different types of small businesses:

These examples should give you an idea of the interplay between your company’s industry and track record of claims. Between the two factors, your industry has the biggest impact.

Moreover, it’s important to remember that insurers might charge additional administrative fees or require a minimum annual premium, which you should also take into account when calculating your final premium costs.

1. Hiscox: Best for purchasing a policy online
2. The Hartford: Best for comprehensive coverage with free online quote
3. Travelers: Best for customizable, in-person service
4. Insureon: Best for comparing quotes from multiple providers
5. State insurance funds: Best for businesses in certain states and high-risk industries

All of this being said, because workers compensation insurance is required for most businesses with employees, you’ll want to compare options from different providers to find the right policy for your small business.

You might start by looking into the policies from your current business insurance provider, if you have one, or you might explore large insurance companies, small boutique agencies, or even your payroll company.

Additionally, if you work with a professional employer organization (PEO), you can ask them if they over workers compensation coverage. Many businesses choose to work with their PEO or payroll provider to make their search easier, manage multiple processes in one place, and hopefully, save on costs by bundling services.

On the other hand, you might choose to self-insure. This is only an option, however, for companies that have sufficient money in their bank accounts. Instead of paying a monthly premium, companies that self-insure assume the financial risk of fully paying for claims as they arise.

All states except North Dakota, Ohio, and Wyoming allow approved businesses to self-insure. To self-insure, employers must meet state requirements and receive approval from the state. Companies that self-insure can manage their own claims or outsource claims handling to a third-party firm.

Ultimately, there are a number of routes you can take to find the right workers compensation insurance, so if you’re unsure of where to start, you can look into these four top companies:

If you want to get workers compensation insurance online, quickly and easily, you might turn to Hiscox for your policy. With Hiscox’s partnership with CoverHound, you can answer a few questions about your business and receive a free quote online. You also have the option to call and speak with a licensed agent who can discuss your options and help you choose the right coverage.

Overall, the typical workers comp policy from Hiscox will include coverage for:

• Medical costs due to work-related injury or sickness
• Lost wages due to work-related injury or sickness
• Costs to retrain injured or sick employees returning to work
• Related legal fees
• Wages for a temporary worker (which you don’t find with every policy)

Hiscox also gives you the option to pair your workers compensation policy with other types of coverage, including general liability insurance, a business owner’s policy, as well as professional liability insurance.

As we discussed above, your workers compensation insurance cost will depend on a variety of factors, so you’ll want to complete the steps to receive a free quote to get an accurate sense of the price of working with Hiscox.

Generally, Hiscox is highly-rated and known for their online-experience, particularly working with professional service-based businesses. It is worth noting, however, that insurance from Hiscox may not be available for every state nor every industry.

On the other hand, for a full-service workers compensation insurance policy that includes a range of additional services for your business and employees, you might consider The Hartford.

With workers compensation from The Hartford, you can receive:

• Medical care and lost wages coverage for sick or injured employees
• Disability benefits
• Funeral coverage for employees who pass away
• Training for employees to take new roles if they can’t return to their old roles
• Coverage for legal costs in defending a lawsuit
• Preferred medical provider network
• Prescription drug features
• Needle stick reimbursement program
• Nurse back to health program
• Pay-as-you-go billing solutions

As you can see, The Hartford goes beyond standard coverage to offer thorough and customizable workers comp policies for your business.

Similar to Hiscox, The Hartford allows you to receive a free quote online by entering information about your business. Once you receive a quote, you can work with an insurance specialist to purchase your policy. Unlike Hiscox, however, you cannot purchase your policy online, you’ll have to work with a specialist over the phone.

This being said, though, you can also bundle other types of business insurance with your workers comp—including commercial property insurance, business income insurance, and more.

For comprehensive workers compensation insurance that includes risk management assistance as well as local claim departments, you might look into Travelers.

Travelers is one of the biggest writers of workers comp and offers customizable policies that can include:

• Medical expense benefits
• Lost wages benefits
• Limited liability if sued by an injured employee
• Safety resources and expertise available to reduce workplace accidents
• Investigative team for claims
• Over 2,000 workers compensation claim professionals to assist with the claims process
• 500+ in-house nurses and medical professionals to help employees transition back to work
• Proprietory risk control services
• Flexible payment options

Overall, Travelers not only provides policies that protect you and your employees, but they also help you prevent accidents from occurring—and when they do occur, Travelers makes the claim process as easy as possible.

Unlike some of the other workers compensation insurance companies we’ve discussed thus far, however, you’ll have to find a local Travelers agent in your area to receive a quote and discuss your policy options.

Although this may not be the fastest and simplest way of getting business insurance, it will ensure that you have personalized attention and receive the opportunity to talk to a professional about your options and business needs at length.

If you want to compare multiple quotes online without having to go through the process of working with each individual insurance provider, you might utilize an insurance marketplace, like Insureon. Insureon works with top insurance companies—Liberty Mutual, Travelers, Hiscox, Chubb, The Hartford, etc.—and allows you to compare quotes from these companies by inputting basic information about your business.

Although the actual policy you purchase will come from one of these providers, and not from Insureon, using the marketplace model can be one of the simplest and most efficient ways to shop for insurance.

Plus, Insureon doesn’t just offer quotes for workers compensation, but the full range of business insurance products as well—general liability, business owner’s policy, errors and omissions, etc.

This being said, even though the workers compensation insurance cost you pay will vary based on the factors we discussed above, as well as the provider you choose, Insureon reports that their customers pay a medium premium of $47 per month, or $560 annually for workers comp. In addition, 30% of their customers pay less than $400 per year.

Finally, although our last option isn’t your typical business insurance company, it’s worth discussing state-run insurance funds and how these work with regard to workers comp.

In short, many states run government funds where businesses can purchase workers compensation insurance. In four states—Wyoming, Ohio, Washington, and North Dakota—state-run funds are the only way to purchase workers comp insurance. Private insurers in these four states aren’t permitted to sell workers comp.

This being said, about 20 other states allow private insurers to compete with a state-run fund. A state-run fund might be your only option in some cases if you’re in a high-risk industry, like machinery or carpentry.

According to Andy Gastley of A.G. Roth, “The more hazardous type work you do, the more likely a company will have to obtain coverage in the state-run funds as a startup. The state funds have the most expensive rates and should be avoided if possible.”

States usually contract with private insurers to review and process claims.

Unless you have no other choice, it’s probably best to go with a private insurer. However, many states do publish insurance rates on their state-fund websites, which can give you an initial idea of cost.

When a business owner or employee gets injured, it can be a stressful time for everyone involved. As an employer, you obviously want to balance your team’s safety against your own costs.

Prioritizing safety at work and being smart when shopping around for coverage are the best ways to save money on business insurance. To this point, you can follow these best practices:

• Have written safety rules, and ensure that your staff understand and follow them. Inform insurance underwriters of your safety policies.
• Give insurers accurate payroll numbers when shopping around for a quote.
• Keep written documentation of any safety incidents that occur on-site and off-site.
• Enroll in state-sponsored programs (such as drug-free workplace workshops) that can earn you discounts on premiums.
• Ensure that your business is properly classified. A wrong classification rating can cost your business hundreds or thousands of dollars.

Ultimately, the cost of your workers compensation insurance will depend on your actual claims history. By prioritizing safety with your team, you can have a happier, healthier workforce and reduce your insurance costs.