Key Takeaways

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Workers' compensation covers medical bills and lost wages for work injuries, but excludes intentional injuries and intoxication accidents.

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Coverage A is for unlimited medical benefits and wage replacement. Coverage B is for employer liability protection against employee lawsuits.

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Most businesses with employees need workers' compensation insurance, especially those in high-risk industries. However, coverage is optional in Texas and South Dakota.

What Is Workers' Compensation Insurance?

Workers' compensation insurance provides financial protection when employees get injured at work. It covers lost wages and medical costs and protects you from workplace injury lawsuits while ensuring your workers get the care they need. You'll pay premiums based on your payroll (calculated per $100 of wages), which costs far less than covering a serious workplace accident out of pocket.

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Workers’ Comp Coverage Types and Terms

A workers' compensation policy has several key components:

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    Workers’ compensation coverage A (employee benefits)

    Provides unlimited medical benefits and wage replacement according to state law. You can't adjust these amounts because your state's workers' compensation system sets them based on the employee's wages and injury severity.

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    Workers’ compensation coverage B (employers' liability)

    Protects your business from employee lawsuits with three adjustable limits: bodily injury per accident, disease policy limit and disease per employee. Workers' compensation coverage B limits vary by insurer, and you can increase them for additional lawsuit protection.

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    Deductibles

    The amount you pay out-of-pocket before insurance coverage begins. Most standard workers' compensation policies have no deductibles, but larger businesses can choose deductible policies to reduce their premium costs.

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    Experience modification rate (EMR)

    Adjusts your premium up or down based on your claims history compared to similar businesses. A score below 1.0 cuts your premium costs, while a score above 1.0 increases them. New businesses start at 1.0 until they accumulate three years of claims data for accurate scoring.

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    Classification code

    Sets your base premium rate per $100 of payroll. Construction and manufacturing pay higher rates due to injury risks, while office work pays lower rates. Your insurer assigns codes based on what your business actually does, not what you call it.

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    Premium audits

    Your insurer reviews your actual payroll annually to calculate your final premium. You'll receive a bill or refund based on the difference between estimated and actual payroll. Separate your payroll records by job type to avoid surprise charges when the auditor visits.

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    No-fault system

    Workers' comp ensures workers get benefits regardless of who caused the accident and protects you from most workplace injury lawsuits. This trade-off speeds up claims without lengthy court battles over who's to blame.

What Does Workers' Comp Cover?

Workers' compensation covers medical expenses, lost wages, disability benefits and other costs when employees are injured at work or develop job-related illnesses. While coverage varies depending on your location, most policies cover the following:

Claim Type
Is It Covered?
Business Example

Medical expenses for work injuries

Yes

During a busy dinner rush, your restaurant cook burns his hand on the grill. Workers' comp covers the emergency room visit and follow-up doctor appointments.

Intentional self-injury

No

Employees deliberately hurt themselves, hoping to get time off work. It won't be covered since it was intentional.

Lost wages during recovery

Yes

Your construction worker breaks their leg at the job site and can't work for six weeks. They'll get about two-thirds of their usual paycheck.

Injuries while intoxicated

No

A worker shows up drunk and falls off a ladder. Since alcohol caused the accident, you won't have coverage for this injury.

Permanent disability from work accident

Yes

Your factory worker loses a finger in machinery. They'll receive ongoing monthly payments based on how much the injury affects their ability to work.

How Much Workers’ Compensation Coverage Do I Need?

Most small businesses carry $1 million in employers' liability limits (coverage B), while employee benefits (coverage A) provide unlimited medical benefits as state law requires. Your coverage needs depend on state requirements, industry risk level and payroll size. Most states require coverage if you have employees, though some set minimum thresholds of three to five employees.

Who Needs Workers' Compensation Insurance?

Most businesses must carry workers' compensation insurance once they hire employees. Employers always pay the premiums and can't legally deduct these costs from employee wages.

Several factors determine whether your business needs coverage:

  1. 1

    Most businesses require it

    In most states, nearly all businesses with employees, even with just one part-time worker, need workers' compensation coverage.

  2. 2

    There are state variations

    Texas and South Dakota allow most private employers to opt out of workers' compensation, while other states mandate coverage. Check your state's requirements.

  3. 3

    Your business structure matters

    Sole proprietors without employees usually aren't required to buy coverage, but partnerships, corporations and LLCs with employees generally must.

  4. 4

    There are industry-specific requirements

    Construction contractors must often carry coverage, even without employees, while certain agricultural businesses may have different requirements or exemptions.

Workers' Compensation Exemptions

Some businesses and workers can legally skip coverage, but exemptions from workers' compensation insurance come with important financial risks.

Exemption
Explanation
Business Example

Business owners

Many states let business owners, partners and corporate officers exclude themselves from coverage even when their companies carry workers' comp for employees.

You own a small retail store with three employees and carry workers' comp for them, but you exclude yourself as the owner to save on premiums.

Independent contractors

Misclassifying employees creates problems, but your workers' comp policy doesn't cover true independent contractors.

You hire someone to design your website. They're not covered if they're truly independent, but you could face penalties if you treat them like an employee.

Employee count thresholds

Several states don't require coverage until you reach three to five employees, but requirements kick in once you cross these limits.

Your landscaping business has two full-time workers in North Carolina, which has a three-employee threshold. You're not required to have coverage yet, but will be when you hire your third worker.

Even when exemptions apply, consider the financial exposure. Without workers' comp, you're personally responsible for employee medical bills, lost wages and potential lawsuits that could cost hundreds of thousands of dollars.

Workers’ Comp Requirements by State

Workers' comp requirements differ by state, with most requiring coverage from your first employee, while others wait until you have three to five workers. Texas and South Dakota are unique in that they make coverage optional for most businesses. You'll also see differences in whether states cover part-time workers or exclude certain industries.

State
Employee Threshold
Coverage Notes

Alabama

5+ employees

Excludes agricultural and domestic workers

Alaska

1+ employees

Includes part-time workers

Arizona

1+ employees

Excludes sole proprietors and partners

Arkansas

3+ employees

Different rules for agriculture and construction

California

1+ employees

Includes part-time and seasonal workers

Colorado

1+ employees

Excludes domestic workers in private homes

Connecticut

1+ employees

Includes corporate officers

Delaware

1+ employees

Mandatory for all employee types

Florida

1-4+ employees

Different rules by industry

Georgia

3+ employees

Excludes agricultural workers

Hawaii

1+ employees

Includes temporary and part-time workers

Idaho

1+ employees

Excludes domestic workers

Illinois

1+ employees

Strict penalties for non-compliance

Indiana

1+ employees

Includes corporate officers

Iowa

1+ employees

Excludes agricultural employees

Kansas

1+ employees

Coverage required

Kentucky

1+ employees

Includes all worker classifications

Louisiana

1+ employees

Excludes agricultural and domestic workers

Maine

1+ employees

Includes part-time and seasonal workers

Maryland

1+ employees

Mandatory for all businesses

Massachusetts

1+ employees

Includes corporate officers

Michigan

Complex System

1+ employee working 35+ hours/week for 13+ weeks, OR 3+ employees at one time

Minnesota

1+ employees

Includes temporary workers

Mississippi

5+ employees

Excludes agricultural and domestic workers

Missouri

5+ employees

Lower threshold for construction

Montana

1+ employees

State fund available (not mandatory)

Nebraska

1+ employees

Includes all employee types

Nevada

1+ employees

Mandatory coverage required

New Hampshire

1+ employees

Includes corporate officers and partners

New Jersey

1+ employees

Mandatory for all businesses

New Mexico

3+ employees

Different rules for construction

New York

1+ employees

Includes domestic and farm workers

North Carolina

3+ employees

Excludes agricultural workers

North Dakota

1+ employees

Monopolistic state fund

Ohio

1+ employees

State fund participation required

Oklahoma

1+ employees

Includes all worker types

Oregon

1+ employees

Mandatory coverage required

Pennsylvania

1+ employees

Must cover all employee types

Rhode Island

1+ employees

Includes domestic workers

South Carolina

4+ employees

Excludes agricultural and domestic workers

South Dakota

Optional

No legal requirement

Tennessee

5+ employees

Excludes agricultural workers

Texas

Optional

Businesses with government contracts need coverage

Utah

1+ employees

Mandatory coverage required

Vermont

1+ employees

Includes part-time workers

Virginia

3+ employees

Different rules by industry

Washington

1+ employees

State fund participation required

West Virginia

1+ employees

Private insurance system (privatized in 2005)

Wisconsin

3+ employees

Excludes agricultural workers

Wyoming

1+ employees

State fund participation available

*Workers' compensation requirements change frequently. Check with your state's insurance department for current requirements and verify coverage obligations before making business decisions.

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MONOPOLISTIC VS. COMPETITIVE STATES

North Dakota, Ohio, Washington and Wyoming are monopolistic states that require workers' compensation insurance to be purchased only through state-run programs. Other states are competitive, letting you choose between private insurers and state funds. You can shop for rates and services in competitive states, while monopolistic states offer streamlined coverage through state programs.

Penalties for Not Having Workers’ Comp Insurance

Nobody wants to deal with penalties, but skipping workers' comp when your state requires it can create serious problems for your business. You're risking:

    Daily fines

    States hit you with steep daily penalties when you operate without coverage. Illinois charges $500 per day with a $10,000 minimum, while New York tacks on $2,000 for every 10 days you go without coverage. California penalties can reach $100,000.

    Criminal charges

    Some states treat intentional noncompliance as a serious crime. Pennsylvania makes it a felony, and you can get up to seven years in prison and $15,000 in fines. California can jail you for up to one year.

    Stop-work orders

    Many states will shut down your business immediately until you get coverage. No insurance means no operations.

    Personal liability

    Without workers' comp, you pay all injury costs yourself. That includes medical bills, lost wages and legal fees. One serious accident can cost hundreds of thousands of dollars.

    Lawsuits

    Employees can sue you directly when you don't have coverage, exposing you to unlimited liability instead of the protection workers' comp normally provides.

Check your state's workers' compensation board for current penalties and requirements.

Workers’ Compensation Insurance: Bottom Line

Workers' compensation benefits everyone. Your employees get medical care and wage replacement when they get hurt at work, but it won't cover intentional injuries or accidents involving intoxication. It also protects you from workplace injury lawsuits. Most businesses with employees need this coverage, especially in high-risk industries, though Texas and South Dakota make it optional.

Workers’ Comp Insurance: FAQ

MoneyGeek answered these frequently asked questions about workers' compensation insurance:

What is workers' compensation insurance?

Who needs workers' compensation insurance?

What are the penalties for not having workers' compensation insurance?

Who pays for workers' compensation insurance?

What are workers' compensation insurance benefits for employees?

How do you buy a workers' compensation insurance policy?

How does workers' compensation insurance work step-by-step?

What workers' compensation technology trends should I expect in 2025?

How does telemedicine work for workers' compensation claims?

Does workers' compensation cover mental health conditions like PTSD?

About Mark Fitzpatrick


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Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.

Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!

Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.


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