Workers’ Compensation Insurance provides medical and wage benefits to people who are injured or become ill at work. The coverage is mandated by every state and the wage and medical benefits vary from state to state. Workers’ compensation is considered a social insurance because it relies on a social contract between owners, management and labor, where in exchange for purchasing workers’ compensation insurance, business owners are protected from civil suits from their workers who become injured on the job. Each party benefits yet there are limitations. Workers’ compensation insurance is purchased by businesses, and is underwritten by insurance companies and, in some states, underwritten by publicly supported state funds.
Workers’ compensation provides medical expenses, lost wages, and rehabilitation costs to an employee who is injured or becomes ill “in the course and scope” of their job. It also pays death benefits to families of employees who whose death happens on the job.
Similar businesses in each state, that have comparable workplace injury patterns and costs, are grouped into “classes.” Rates are determined for each class based on the prior five years of loss costs for all businesses within that class. This provides system where rates are charged commensurate with the actual loss experience of each class of business. Economic factors for each state are then related to this data to determine the rate for each class in a given state.
A system called “experience rating” (sometimes referred to as an X-Mmod) allows for modification of the class rates based on the loss history of an individual business. This system provides business owners a significant amount of control over the cost of their workers’ compensation premium – safe businesses receive lower premiums and unsafe businesses, in which a lot of accidents/claims are reported, are penalized with higher premiums.
All states, with a small number of exceptions, require businesses with employees who are not owners, to purchased workers’ compensation coverage for those employees.
Businesses that fail to provide workers’ compensation coverage can face severe penalties, including payment of claims out of pocket, fines and possible imprisonment, as well as possibly losing the right to conduct business in the state.
For more information about workers’ compensation insurance, including risk management and workplace safety, please contact us.