Understanding The Workers Compensation Insurance
As the name implies, workers' compensation insurance covers your liability for injuries received by employees on the job. All businesses with employees are required to provide for some kind of workers' compensation coverage.
Usually, an injured worker covered by workers' comp can't sue your business for negligence. However, as a trade-off, he or she can collect specified benefits from your business for work-related injuries whether or not the business was negligent. All the worker has to prove is that the injury came about in the course of employment - a concept that has a very broad definition in many states. For example, an employee injured at a company picnic may have a valid workers' compensation claim.
The amount of money that the employee can recover is limited. The worker can recover for medical treatment and lost wages and, in some serious cases, for impaired future earning capacity. However, there are no awards for pain and suffering or mental anguish. A growing portion of workers' compensation claims, however, results from mental or emotional stress.
As a sole proprietor, you usually can't be personally covered by workers' compensation insurance for any work-related injuries you sustain; only your employees can be covered. Workers' comp coverage of a partner or of an officer of a small corporation usually isn't required but can be obtained if you choose.
Each state has a law setting out what an employer must do to provide for workers' compensation benefits. Sometimes, an employer can self-insure. Usually, that isn't practical for small businesses because they can't afford the type of cash reserve required by the state law. Most small businesses buy insurance through a state fund or from a private insurance carrier. Insurance rates are based on the industry and occupation, as well as the size of the payroll. Your business's safety record can also influence their rate; if you have more accidents than are usually anticipated, your rate is likely to be increased.
Although workers' compensation laws cover virtually all injury claims by an employee against an employer, in a few instances, employees can still sue an employer for pain and suffering resulting from a work-related injury. For example, in some state, an employer whose gross negligence or intentional conduct caused an injury can be sued. A second part of workers' compensation policy (sometimes called Coverage B or employer's liability) insures the employer against liability for these types of claims. Most businesses should consider policy limits of $500,000 for coverage.
Workers' compensation insurance is required only for employees - not for independent contractors. Small businesses sometimes buy services from independent contractors to save money on workers' compensation insurance, as well as taxes and other expenses normally associated with employees. But if you make a mistake, and a person improperly labeled as an independent contractor is injured while doing work for your business, you may have to pay large sums to cover the medical bills and lost wages that should have been covered by workers' compensation insurance.