What Insurance Agents Need to Know about Workers’ Compensation Insurance for Small Businesses

Have you brushed up on your workers’ comp insurance knowledge lately? In this guest blog from Pie Insurance, we’ll cover some basics every insurance agent and agency should know. 

Your role as an independent agent

As an independent insurance agent, you’re more than just a salesperson. Your clients want and need someone they can trust for advice on insurance products, risk management strategies, cost containment, and more. And you want to be that trusted partner, with strong client relationships that lead to lifelong customers. 

But insurance is nuanced and complicated, to say the least. As a licensed agent, you’ve passed an exam (or several) and kept up on your continuing education credits. Still, it’s understandable that you don’t know the ins and outs of every possible line of insurance coverage. While workers’ comp is an extremely common insurance product, you may still have questions – even around some of the basics. 

To help you brush up on your workers’ compensation insurance knowledge, here are a few of the most important facts insurance agents need to know about workers’ comp. 

Workers’ comp insurance requirements vary by state 

This should come as no surprise since insurance is primarily regulated at the state level in the U.S. And, while state insurance regulations and requirements vary widely across the 50 states, the District of Columbia, and each U.S. territory, the requirement for businesses to have workers’ comp insurance is nearly universal. 

Of the 50 U.S. states and Washington, D.C., Texas stands alone as the only state in which workers’ compensation insurance isn’t required for private businesses, regardless of business size. Texas government employers and some government contractors are required to carry workers’ comp in Texas, but it’s optional coverage for the majority of Texas employers. 

While every state except Texas requires employers to buy workers’ compensation insurance in some capacity, the actual laws governing the specifics vary state to state. For example, Alabama requires any business with five or more employees to purchase workers’ comp insurance, but not businesses with four or fewer employees. Whereas, in New York, all employers are required to purchase workers’ comp even for a single employee and even if the employee is a family member. Oklahoma has a unique setup and requires workers’ comp policies for businesses with one employee in most cases but makes an exception for businesses with five or fewer employees who are all related by blood or marriage. 

Since the requirements are so state-specific, it’s important to be well versed in the workers’ comp laws in your resident state, along with any other states where you sell insurance. 

There are some exceptions to workers’ comp insurance requirements 

In insurance, most rules have exceptions. The world of workers’ comp is no different. Also, not surprisingly, the exceptions vary by state, so you can’t assume any of these apply to your specific state without checking. 

However, in general: 

• Many states don’t require workers’ compensation coverage for businesses without any employees. This includes sole proprietorships, partnerships with no employees and single-member LLCs. 
• Many states don’t require workers’ compensation insurance for household employees like nannies and domestic caretakers. 
• Some states exempt workers comp coverage for agricultural workers.
• Contractors and freelancers are not considered employees, and usually don’t have to be covered by an employer’s workers’ compensation insurance. 

As an insurance agent or broker who sells workers’ comp to small businesses, it’s important to understand the nuances of which businesses do and don’t need workers’ compensation so you can best advise your clients. Luckily, there are some great resources out there to help. 

Workers’ comp insurance shields employers from liability 

Part of your job as an insurance agent is to help protect your small business clients’ interests and to help them protect themselves from financial losses. Aside from being legally required in most circumstances, workers’ comp insurance offers valuable financial protection to your clients. Purchasing a workers’ comp policy for all employees reduces the chances that an employer will be sued in the case of an on-the-job injury. And it’s important to emphasize “all employees” because if a business doesn’t cover an employee that should be covered, there are often steep penalties. 

Workers’ comp insurance is a valuable benefit to employees who experience a job-related accident, injury, illness, or even death. But it’s also beneficial to employers because, in settling a claim, the employee agrees not to sue the employer. This is why workers’ comp insurance is often referred to as “no-fault insurance.” Employers can settle claims and compensate employees for their injuries and financial losses without admitting legal liability for the accident. 

On the other hand, this isn’t the case if an employee is injured on the job and isn’t covered under a workers’ comp policy. In that situation, the employer would be at risk of having to pay out of pocket for medical bills, lost wages, rehabilitation bills, and large settlements in the case of severe injuries or death. Moreover, the injured employee or their family could file a lawsuit for a larger amount of money that the employer would be subject to paying if it lost the suit. 

From the perspective of an insurance agent or broker, the risk-reward analysis is unequivocally in the favor of purchasing a workers’ comp policy instead of risking full liability for an injury. 

There are three ways to purchase workers’ compensation insurance coverage

Employers typically have options when it comes to how to provide workers’ comp coverage to their employees. Depending on the state, small businesses may be able to purchase coverage from an insurance carrier (along with other common small business insurance policies) or choose to participate in a state-administered workers’ comp fund.

Workers’ comp from an insurance carrier 

This is the most common method for small businesses to purchase workers’ comp policies for their employees. Just like with other types of insurance, you can help your small business clients obtain quotes from different insurance carriers. After comparing the rates and the coverage, you may present the top options to your client. Unlike other types of insurance, workers’ comp is highly standardized and benefits don’t vary from carrier to carrier. Other factors like the level of customer service and your agency’s relationship with the insurance carrier may influence which policies you prefer to sell. 

Workers’ comp through a state fund 

Many states offer state-administered workers’ compensation insurance funds. These are an alternative to coverage through an insurance carrier. While most states offer state funds as an option, four states limit businesses to them and don’t allow insurance carriers to offer workers’ comp at all. 

Ohio, North Dakota, Washington, and Wyoming are “monopolistic” states because they don’t allow commercial insurance carriers to offer workers’ comp policies. Of these four states, only Washington offers businesses the option to self-insure, and even then, only if the state approves their request. For small businesses in Ohio, North Dakota and Wyoming, participating in the state fund is the only option. 

Self-insured workers’ compensation insurance

Some states offer businesses the option to self-insure, however this usually isn’t an option for small businesses since it depends on an application process and businesses must prove their financially able to self-insure. Small businesses usually don’t meet the criteria, and states will reject their application for self-insured workers’ comp status. Self-insurance is a good option for large businesses that have enough cash reserves to adequately cover their own risk. As an independent insurance agent serving small businesses, you wouldn’t be likely to work on self-insured workers’ comp policies. 

It’s important for clients to file workers’ comp insurance claims as soon as possible 

While you hope your clients’ employees stay safe and healthy, workplace injuries are an unavoidable part of business. It’s important that you know what to do so you can educate your small business clients before they’re in a situation where they need to act quickly. 

There are a number of reasons it’s very important for employees to report any accidents immediately and for employers to file a claim with their workers’ comp insurance carrier as soon as possible. These include: 

• Receiving medical attention for injuries as soon as possible 
• Directing injured employees to in-network facilities, or specifically-contracted clinics and hospitals to contain costs
• Accuracy of reporting and the ability to get witness statements
• Keeping employee trust and morale when accidents occur 

It’s important to emphasize to your small business clients that they should be timely in reporting any accidents to their workers’ comp insurance carrier. It’s equally important that they understand their role in conveying to their employees how seriously they take workplace safety and the importance of reporting any accidents to a supervisor immediately. 

This is hardly a comprehensive list of everything insurance agents should know about workers’ comp insurance. We do hope it’s been a good summary that’s got you thinking about where you may need to brush up on your knowledge of your own state’s workers’ comp laws and requirements. For additional topics relating specifically to workers’ compensation and other types of small business insurance, we hope you’ll visit our independent agent resource center.