Workers’ Compensation Insurance: What SMBs Need to Know

What is workers’ compensation insurance?

Workers’ compensation, or workers’ comp, is a type of business insurance that protects employers from liability if their employees are injured in the workplace. This system provides coverage for employees’ lost wages, medical bills and other expenses if they are injured on the job. It also limits the likelihood that employers will face a business lawsuit for workplace-related injuries or illnesses.

Enterprise businesses and large corporations know they need workers’ comp. But many small and midsize businesses don’t realize that they, too, are legally required to buy this small business insurance coverage.

Why small businesses need workers’ compensation

Businesses are legally required to have workers’ comp coverage from the moment they hire employees, explained Jeff Somers, chief operating officer at HouseCanary. “In most states … you are required by law to carry workers’ comp insurance, regardless of your industry or number of employees. You may be required to carry this coverage even if you’re a sole proprietor.”

Very small businesses, or companies whose employees primarily work desk jobs, may skip coverage because they assume that accidents are unlikely. Doing so, however, could result in legal penalties and fines. It could also mean that an accident or injury at the workplace drains your budget and involves you in a lawsuit. Carrying workers’ comp insurance protects you, your employees and your business.

Understanding your state’s workers’ compensation policies

In the United States, workers’ compensation laws are regulated at the state level. While state requirements are often similar, there may be crucial differences, such as when you are required to buy coverage.

Your state’s regulations also impact how and when you need to report accidents and the penalties for not doing so. If you run a business in Florida, for example, you are required to report claims within seven days after you are notified of an accident or injury.

“If an employer’s late reporting of a claim delays the payment of an injured worker’s benefits, the state of Florida can penalize the business,” said Karen Phillips, general counsel to the Florida United Businesses Association’s workers’ compensation program.

If your employees work in more than one state, you’ll need to purchase coverage in each state, further complicating the requirements. 

“Each state has an agency set up to manage their individual workers’ compensation programs,” said Kevin Hess, partner at management-side labor and employment law firm Fisher Phillips. “Those agencies generally have a wealth of information available to employers to assist them in ensuring they are compliant with the necessary workers’ compensation requirements.”

What workers’ compensation insurance coverage you need

Many factors impact the insurance policies your small business needs, including the number of employees you have, their risk exposure and your business’s history of workplace accidents. Businesses in high-risk industries, such as construction, typically pay higher premiums and need more coverage than businesses where employees work at an office.

Depending on your state’s requirements, business owners and sole proprietors may not need to purchase coverage for themselves. While that strategy may save you money right now, it could put you at risk in the long term.

“Small business owners need to understand the cost-benefit analysis,” Phillips said. “The owner’s health insurance policy may not cover workplace accidents, meaning the owner could have to pay out of pocket for any medical bills or lost wages they may have.”

How to report a workers’ compensation claim

Report all workplace injuries to your insurer as quickly as possible, even if they seem minor or the employee doesn’t press the matter.

“Often, what seems like a minor injury, like a bee sting, can turn into something much more extensive, like an infection, depending on the overall health of the injured worker,” Phillips said. “It’s important to [make a] timely report [of] all claims to the insurance carrier so they can get involved.”

Once you report a claim, the insurance company handles the process, which allows you to focus on running your business.

“The insurance company adjuster manages the injured worker’s care, and the insurance company hires an attorney to defend the employer should the injured worker hire an attorney,” Phillips said. 

The employer’s job during the claims process is to provide any information the claims adjuster asks for and to cooperate fully with any investigation. “Employers who don’t cooperate with the insurance company will often find their insurance being canceled,” Phillips added.

What’s involved in a workers’ compensation investigation

Cooperating with your insurance company often involves some degree of investigation. Larger businesses usually have detailed procedures or corporate policies for how these investigations happen. Small and midsize businesses should have these policies too.

“First and foremost, those policies should include documenting the injury, including any potential witnesses, and when the claim was first reported,” Hess said. “This should be done for each and every claim. The employer should also train employees on the appropriate steps to investigate and document a workplace injury.”

In some cases, you may want or need to administer a drug test following a workplace accident. States have different rules for when and how these tests can be used. In many cases, this depends on how clearly your company’s drug-testing policies are outlined and how available they are to employees.

“Employers should maintain drug-testing policies that are compliant with applicable laws, including the limitation on post-accident drug testing,” Hess said.

What workers’ compensation doesn’t cover

While workers’ compensation insurance covers your business in many scenarios, it doesn’t protect you in all of them.

“Workers’ comp doesn’t cover all lawsuits over employee work injuries; it only covers what the state requires them to cover,” Somers said. “In some states, certain types of workplace injuries and illnesses, along with accusations of negligence from employees, may not be eligible for the benefits included in workers’ comp.”

To protect against lawsuits in these instances, you may need additional types of business insurance, such as employer’s liability insurance. This type of insurance can help pay for legal fees, court costs and any settlements you are required to pay.

Workers’ compensation helps you plan for the unexpected

Business owners always face risk, and worker injuries are among the most difficult risks to predict. Planning for the unexpected with worker’s compensation coverage is not only a smart move as a business owner but also a legal requirement in most cases. 

It’s important to research different insurance carriers to find a policy that works for your business and your budget. Don’t forget that workers’ compensation requirements vary by state, so understand your responsibilities with the appropriate state agency. To find out how best to protect your business in all possible scenarios, consult a workplace insurance expert before hiring your first employee.

Erin Donaghue and Kimberlee Leonard contributed to this article. Source interviews were conducted for a previous version of this article.