Workers’ compensation, or “workers’ comp,” helps injured employees pay medical bills and recoup lost wages. Many states require employers to carry this coverage. In addition, most workers’ comp policies contain liability insurance to protect the employer from lawsuits.
The states establish the rules for workers’ comp, so coverage varies from state to state. The basic structure and operation, however, are similar across the country.
The “Grand Bargain” Between Employers and Employees
By agreeing to take workers’ compensation, employees give up their right to sue employers for negligence in exchange for guaranteed injury benefits. Moreover, employers and employees share the cost of workers’ comp insurance in many states.
The system based on the workers compensation insurance policy is like other types of insurance in that premiums are generally adjusted up or down based on the company’s experience or how bad or good it is at insuring itself against loss. In particular, insurers look at how many losses a company has in a given year and the average cost of those losses relative to its peers. That’s because “frequency breeds severity,” an insurance industry maxim that means more losses in a given year increase the likelihood that future claims will be significant, even if they are not as costly as the current ones.
While workers’ compensation insurers need help to measure risk in the real world, they have access to a lot of data from state governments and private organizations that collect information on behalf of their members. This includes the National Council on Compensation Insurance (NCCI), which gathers workers’ comp information from companies in all 50 states.
NCCI’s mission is to foster a healthy workers’ compensation system, and it has delivered on that responsibility through 17 recessions and two world wars. But the system is increasingly threatened by corporate lobbyists and pro-business legislation at the state and federal levels.
It Provides Partial Medical Care and Income Benefits
A workers’ comp insurance program is a safety net that benefits injured employees. This includes medical care for work-related injuries and illnesses and partial income replacement if an injury keeps them from working. Each state sets the maximum and minimum benefits based on the average weekly wages for workers in that area. The amount an injured worker will receive depends on the extent of their injury or illness. Injured workers can expect to receive up to 66 2/3% of their average wage, but a state’s average weekly salary caps the amount they receive.
Employees who cannot return to work may also be entitled to permanent disability benefits. The insurance system also pays death benefits to survivors of an employee who dies due to a workplace injury or illness.
Insurance companies use data collected by the state and independent sources to evaluate each year’s claims history. This information is used to adjust each employer’s premium. For example, suppose the location where an employer is located has a higher risk of a catastrophe than other locations in the same industry classification. In that case, the insurer will increase the premiums for that business. Commercial insurance brokers play a crucial role in assisting businesses in navigating these adjustments and finding the most suitable workers’ compensation coverage for their needs.
Other factors are also considered, such as the number of injuries reported and the severity of those injuries and illnesses. The insurance industry follows the principle that “frequency breeds severity.” The losses will be more significant if more accidents occur than in a less-hazardous working environment.
It Prevents Unnecessary Lawsuits
In addition to covering the costs of medical treatment and lost income, workers’ comp also protects employers from costly lawsuits resulting from workplace accidents. Unlike many health insurance policies, workers’ comp covers employees for all injuries, regardless of how they occurred. In addition, many workers’ comp insurers provide accident prevention services to employers, such as setting up safety committees, which can help prevent accidents from occurring.
State governments regulate workers’ compensation laws, and the details differ from one state to the next. However, the basic structure of workers’ compensation is very similar in all states. Most states require that businesses carry workers’ comp coverage to avoid costly lawsuits from employees who are injured on the job.
While most workers’ comp claims are legitimate, a small percentage are not. Some workers will try to take advantage of the system by falsely reporting an injury or illness, exaggerating their symptoms, or committing fraud. Workers’ compensation premiums are also subject to inflation and other cost drivers.
While a single claim can bankrupt a small business, paying a small premium for workers’ comp insurance helps to mitigate this risk. In addition, the experience rating system used by most states (and the federal government) allows for modification of class rates based on an employer’s loss history. This system rewards safe businesses with lower premiums and punishes unsafe ones with higher premiums.
It Incentives Employers to Maintain a Safe Work Environment
In addition to medical care and partially lost wages, most workers comp policies include death benefits for employees who die due to a work-related accident or illness. This can be a significant financial relief to family members, who might otherwise struggle to pay for funeral costs or other expenses.
Insurers set premiums based on an employer’s industry classification code, payroll, and workplace safety risk. For example, the rate for logging or trash-hauling companies is much higher than for accounting firms. To keep rates reasonable, insurers also often require doctors to get preauthorization for treatment before providing care. This prevents over-treatment and saves the company money by ensuring that procedures are necessary.
As a result of this insurance system, employers have strong incentives to maintain safe work environments to avoid costly injuries. They are also encouraged to implement safety programs and other controls that may help prevent accidents. For example, when UPS implemented worker safety committees in all its plants, workplace injury claims dropped by 59 percent.
Every state except Texas requires employers to carry workers’ compensation coverage. Typically, business owners must buy workers’ compensation insurance from private mutual and stock insurance companies or, in a few states, from a monopolistic state fund. However, this type of policy rarely covers contractors and freelancers, and some states limit the number of people that can be counted as employees for mandatory workers’ comp coverage laws.