In the small business environment today, you must look out for what’s on the horizon. That vision not only means executing your business plan in hopes of increased sales and revenue but also adopting a philosophy of “anything that can happen”. With that thought in mind, insulating your business from the risk of a large financial loss must be a part of your plan.
A complete business insurance strategy involves protecting your physical assets, such as buildings, inventory and vehicles. Basically, property coverage will indemnify you if you suffer a physical loss to items you own, and liability insurance protects you from damages and legal costs associated with negligence. The comprehensive plan should also extend to employees and the financial consequences of suffering an accidental injury on the job. With regard to your duties, you might pose the question: Can an employer ask about workers' compensation claims? In short, the response would be yes.
What is Workers' Compensation Insurance and What Does it Cover?
If you have employees, workers' compensation insurance is designed to protect your business in a couple ways. Picture the following scenario: A construction worker stepping off a ladder lands awkwardly and twists an ankle. There’s some swelling and it might be a sprain or a break, so a trip to a hospital or an urgent care center necessitates an examination, some x-rays and prescription medication. Those services trigger costs, which can be significant depending on the nature of the injury. Workers' compensation insurance will cover the cost of those medical and pharmacy services.
Keep the same scenario in mind, and now picture the ladder in a state of disrepair. The owner knew the item was in bad physical condition but hoped to squeeze a few more months of use out of it. In this circumstance, it could be determined that the owner was negligent by allowing the ladder to remain on the job. The reluctance to replace the equipment could lead to legal action on the part of the injured employee, and if awarded, workers' compensation employer obligations will cover the costs of legal proceedings in addition to medical bills.
How Much can Workers' Compensation Cost vs. the Potential Risk of a Lawsuit?
The nature of your business will largely determine how much you pay annually for a policy. As you’d expect, a contractor who specializes in demolitions would incur more risk than a self-employed marketing consultant who works from home. As such, riskier businesses more prone to employee injuries would pay higher rates.
You may be an existing business paying significant workers' comp premiums. After 15 years in business, you’ve never had a claim for an injury on the job. As you renew your policy or shop for a new contract each year, your business could receive an experience modification that reduces your overall premium based on your excellent claims history.
There is a difference between employer liability insurance versus workers' comp insurance. Both policies will set you back pennies on the dollar, but the latter pays for medical bills and legal costs from physical injuries while the former protects employers from wrongful termination or discrimination in the workplace. Workers' comp premiums are tied to payroll, so if you had $100,000 in salary obligations, you could pay $5,000-$10,000 annually, for example, depending on the type of business you own. Premiums pale in comparison to medical bills and/or lawsuits that could approach as much as $500,000 or more.
How Does a Workers' Compensation Claim Affect the Employer?
You could endeavor to keep your workplace and work environment as safe as possible yet you'll need to understand how a workers' compensation claim does affect the employer. In fact, companies that form a safety committee with employee and management representatives can often receive a discount on workers’ comp premiums. Yet, despite your best efforts, accidents do happen. Thus, you’ll want to know how a claim impacts your business.
The policy is designed to protect you and the employee, so an injury suffered on the worksite may entitle a worker to remuneration for medical costs. From your perspective, you'll want to know how a workers' comp claim does affect an employer. Filing a claim that triggers payment from the insurance company can affect future policy premiums. The extent a claim’s impact on premium depends on your policy’s loss ratio. You might then wonder: Can an employer ask about workers' compensation claims? The answer is yes.
Over the years or in your first year of business with employees in the fold, you will have paid a premium pegged to total payroll amounts and subject to the risk factors mentioned above. For example, let’s say the total amount of workers' comp premium you’ve paid to one insurance carrier is $50,000. In that time frame, you’ve had that one employee stumble off a ladder and return to work quickly, incurring only $1,000 in medical bills. A small claim such as this one would probably not result in a rate increase, but a claim exceeding the $50,000 in premium paid almost certainly would.
How Does Workers' Compensation Work for Employers?
Workers' compensation laws vary from state to state, and in general, the insurance only applies to companies that have a workforce. However, you'll need to know how workers' compensation does work for employers. In some states, workers’ comp is mandatory for businesses that have employees, and in other states, a policy is optional or not required if you only have a few folks on the payroll.
Sole-proprietors or one-person shops are not required to carry workers' comp insurance on themselves. This is because the employer technically is the business and as such, owners can’t sue themselves for an injury in the course of duty. Rather, a business owner should make individual contingency plans by securing individual health, life and disability plans to insure against financial loss caused by work-related injuries.
Does Workers' Compensation Insurance Extend to Subcontractors?
Workers’ compensation employer obligations will extend to subcontractors in certain instances but it’s probably best to avoid this scenario. Before you hire subcontractors, ask them to present proof of workers’ comp and other business insurance so that the exposure for their operations is not attached to your own policies. Coverage will apply to uninsured subcontractors, but you will incur increased premium costs and greater claims liability by assuming more risk for an entirely new and unfamiliar group of people.
The Final Word
If your business is growing and hiring employees is next on your priority list, workers' compensation insurance is a must-have to prevent your organization from incurring a significant financial loss. As a business owner, you can attempt to control your own destiny but predicting the actions of employees proves to be a bit more difficult. For that reason, a workers’ compensation employer obligations must be a part of your business insurance portfolio. Contact NEXT Insurance to see how we can help secure that coverage in a few easy steps.
