Small Business Mythbusters: Workers’ Compensation Insurance
Myth: Small businesses don’t need workers’ compensation insurance.
No matter how small your business, it’s not just in your best interest to obtain workers’ compensation insurance—it’s also required in most states. All small business owners should familiarize themselves with their state’s laws, as they vary widely across the country. If mandated by your state, you must have coverage in place when your first employee is hired.
The penalties for not having this insurance can be substantial. Business owners must renew coverage annually and ensure they pay premiums in a timely manner so coverage doesn’t lapse. Even if your business operates in a state where workers’ compensation requirements are less stringent (Texas, for one, allows it to be elective), the benefits of purchasing this coverage should be fully understood.
What Is Workers’ Compensation?
Workers’ compensation insurance protects employers and employees when workplace accidents or illnesses occur. Coverage generally encompasses medical treatment and rehabilitation, partial replacement of lost wages, retraining costs and death/burial benefits paid to the spouse and minor children for fatal incidents.
A company typically must honor a claim even if the employee is at fault for an injury. There are exceptions, however. For example, a business can require employees to submit to drug or alcohol testing. Claims may be denied if it’s found an employee was under the influence at the time of the injury.
Who Is Covered?
Different state rules apply regarding covered employees, but W-2 workers are always eligible. Subcontractors paid through a 1099 are often covered, unless they provide written evidence of a Certificate of Insurance. Business owners may believe they and their officers are not eligible for coverage, but this also varies by state.
Therefore, owners or officers should check their health insurance policy before electing to forgo coverage.
How to Buy Coverage
In most jurisdictions, a business can buy a policy from a private insurance company. Some locations, however, require a company to purchase through a state-operated fund. In certain states, coverage may be elective if an employer has fewer than a specified amount of employees. Some business owners may choose a self-insured plan, which means they pay claim costs out of pocket. This is generally reserved for larger businesses that maintain a certain level of funds to pay claims.
High-risk businesses such as construction, trucking and manufacturing often have a tougher time obtaining coverage. Their premiums can also be much higher. The assigned-risk market, which is state-operated, can help these businesses get insured when traditional companies refuse to provide coverage.
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