What is workers' compensation and how does it work?

What is workers’ compensation?

Workers’ compensation is a business insurance policy that covers the medical bills of employees who get sick or injured while performing job-related duties. It also covers partial lost wages if the employee is unable to work for an extended period of time.

In the case of a fatal workplace accident or illness, workers’ compensation will provide a death benefit to the individual’s chosen beneficiary, such as a spouse or child.

Who needs workers’ compensation insurance?

Workers’ compensation is a legal requirement in nearly every state for small businesses that employ a certain number of people. The exact requirements, including the minimum number of employees, is different in every state.

Currently, the only state that doesn’t require workers’ compensation is Texas. Workers’ comp is optional for businesses in Texas, with the exception of construction companies that contract with government agencies.

Some U.S. businesses are exempt from carrying workers’ compensation. For example, sole proprietors and partnerships don’t usually need workers’ compensation to comply with state laws. Additionally, some states don’t require workers’ compensation for employees working on commission.

What does workers’ compensation insurance cover?

Workers’ comp covers certain expenses that result from an employee being injured or developing an illness at work. Specifically, it will cover the following costs:

• Medical treatment
• Rehabilitation
• Lost wages
• Disability benefits
• Funeral expenses 

It’s important to note that workers’ compensation is intended to cover major injuries or illnesses that impact an employee’s ability to perform their job duties. Some of examples of conditions that would be covered include:

• Injuries from repetitive movements
• Carpal tunnel syndrome
• Exposure to toxic chemicals, like asbestos
• Slips and falls
• Car accidents while driving a work vehicle

Many workers’ comp policies also cover the employer’s legal fees and court costs if a worker sues the company for their injury or illness.

What isn't covered under workers’ compensation insurance?

Workers’ compensation provides valuable protection for your employees and business, but it doesn’t cover everything. Here are some of the things that are not covered under workers’ compensation:

• Intentional acts
• Illegal activities
• Minor injuries that don’t require medical attention
• Illnesses or injuries that occur in violation of a company policy
• Accidents that occur while driving to or from work
• Injuries or illnesses that occur due to drug or alcohol use
• Terminated employees

Benefits of workers’ compensation

These are some of the main benefits of workers’ compensation insurance:

• It covers medical expenses and lost wages so employees can return to work
• It provides temporary disability benefits to injured workers
• It includes a death benefit for fatal workplace accidents

One aspect of workers’ comp employers should be aware of:  It limits employees’ right to sue after an injury or illness.

How does workers’ compensation insurance work?

If an employee needs medical attention because of an injury or illness that occurred at work, they can file a claim with their company’s workers’ compensation insurance provider. The insurance company will investigate the incident and compensate the employee for their medical bills, ongoing rehabilitation costs and lost wages. 

There is typically a statute of limitations for workers’ compensation claims. Employees must file their claim within this period in order for the claim to be covered. The statute of limitations for workers’ compensation is different in every state, but it usually ranges from six months to three years.

Here’s an example of how workers' compensation insurance works:   Construction workers are driving to a job site in a work truck when they are rear-ended. The driver complains of a headache and neck pain, and is taken to the hospital where it’s determined that the employee suffered a concussion. The doctor believes the worker will be unable to work for at least a month.

In this situation, the construction worker could file a claim with the employer’s workers’ compensation insurance company. The worker would be reimbursed for the cost of the initial medical evaluation, as well as ongoing treatment and lost wages while recovering.

Where to get workers’ compensation insurance

Small businesses can purchase workers’ compensation through licensed commercial insurance companies. Some states, like Alabama, California and Maine also have a state-administered fund where employers can get coverage. 

Here are some of the most popular commercial insurance carriers that sell workers’ compensation:

• AIG
• Allstate
• Chubb
• CNA
• The Hartford
• Liberty Mutual
• Nationwide
• Progressive
• Travelers

Keep in mind that you can’t usually purchase workers’ compensation insurance online. You will probably need to contact an agent from the insurance company that you want to work with. In order to buy a policy, you will need to provide some documentation, like your current payroll.

How much is workers’ compensation insurance?

Workers’ compensation insurance costs are different for every business. Some of the biggest factors that affect premiums include:

• Location
• Industry
• Number of employees
• Payroll size
• Coverage limits
• Past insurance claims
• The insurance company you chose 

Indeed, workers’ compensation insurance rates can vary considerably by insurer.  For example:

• The Hartford says its customers with less than $300,000 in annual payroll pay an average of $81 per month for workers’ compensation. 
• Progressive says its average workers comp insurance rate is $119 per month.
• NEXT says its customers pay an average of $85 a month

To find the most affordable workers’ compensation policy, it’s a good idea to compare workers’ compensation insurance quotes from a few companies.

Workers’ compensation insurance requirements by state

Workers’ compensation laws are different in every state. To see the exact requirements in your state, you should visit your state’s workers’ compensation bureau or department of labor website. 

In the table below, we outline the workers’ compensation laws in some of the biggest states:

How to file workers’ compensation insurance claims

Here are the general steps you should follow to report a workers’ compensation insurance claim: 

1. Employee reports the injury: The employee should report their injury or illness to their employer as soon as possible. Depending on the insurance company, the employee may need to get treatment from a doctor within the insurance company’s network. However, this doesn’t usually apply to emergency situations where immediate medical attention is required.
2. Employee completes claim paperwork: The employer should review the employee’s workers’ compensation benefits and provide the claim paperwork. The employee will need to complete the forms, provide a report of what happened and explain the extent of their injuries.
3. Employer notifies the insurance company: Once the paperwork is complete, the employer will report the incident to their insurance company and submit the claim forms. In some states, employers are also required to report the incident to the state’s workers’ compensation bureau or department.
4. Insurer reviews the claim: The workers’ compensation insurer reviews the claim forms and approves or denies the claim. If the claim is approved, the insurance company will contact the employer and employee with their proposed compensation.
5. Employee is paid: After the employee and insurance company agree on a payment amount, the employee will receive the compensation. Once the employee has recovered, they will return to work, and claims payments will end..

What our expert says

Q: What are some services workers’ comp covers?

Ethan Pease Managing attorney at Visionary Law Group, which specializes in workers' comp claims

"It covers necessary doctor visits, physical therapy, surgeries, and medications to help workers recover."