Legacy Digest

What Is Workers’ Compensation / Employers’ Liability Insurance And Why Do You Need It?

As a business owner, you face potential risks every day that could impact your business. If a customer get hurt walking around your store, general liability insurance could step in to help pick up the costs of the claim. But what happens when it’s not a third-party that gets hurt, but one of your employees instead? For these situations, you need a different type of coverage, most commonly called workers’ compensation insurance, to help pay for the harm faced by your employee.

Our team at Legacy Partners is committed to helping businessowners understand their insurance so they know what risks they face and how insurance can help protect against those risks. Here’s a detailed look at workers’ compensation insurance, and how it helps protect your business.

Understanding Workers’ Compensation Insurance

A workers’ compensation policy is designed to give employees medical, wage and other benefits if they have a work-related injury or illness, and usually at the same time provide protection to the employer against lawsuits from employees for such injuries or illnesses. If you own a business, it gives you peace of mind that if your employees are injured, you have insurance coverage to get them back on their feet while keeping the business in good financial condition.

What’s Is Workers’ Compensation Insurance?

You may have heard two different terms which both come up in the context of injuries to employees: workers’ compensation and employers’ liability. These terms cover related concepts, but they are technically distinct coverages.

Workers’ compensation is designed to help employees when they are injured or suffer an illness due to their work. This coverage helps to pay for an employee’s:

• Medical Bills
• Ongoing Care and Rehabilitation
• Lost Wages
• Disability / Death Benefits

Workers’ compensation coverage automatically applies to any workplace injury, regardless of whether there was some negligence on the part of the employer. If you have an employee who gets injured in the course of their job duties, this helps cover those bills for the employee.

What is Employers’ Liability Insurance?

Employers’ liability on the other hand is more focused on the exposure faced by the employer itself. It is designed to help cover the exposures from legal costs, like:

• Attorneys’ Fees
• Settlements
• Judgments

While an employee automatically gets coverage for their medical bills and similar costs through workers’ compensation, this does not stop an employee (or his or her spouse, or other family members, or in some cases even third parties) from filing a lawsuit against the employer that you as an employer have to defend against.

For example, one common situation where this arises is in third-party contributory negligence suits. If your employee is injured by a machine, the employee might sue the machine manufacturer for some flaw in the design of the machine. The manufacturer might come back and sue your company for failing to maintain the machine, or for removing safeguards, or failing to train the employee to use it properly.

Are Workers’ Compensation and Employers’ Liability Covered By The Same Policy?

The good news is that in most cases, both workers’ compensation and employers’ liability will be covered by the same policy. There are only four states where a workers’ compensation policy would not also include employers’ liability: North Dakota, Ohio, Washington, and Wyoming.

These states are known as “monopolistic states,” because they require businesses to purchase workers’ compensation directly from a state bureau or fund, and don’t allow you to purchase it from a standard insurance carrier. If you do business in one of these states, you’ll need to purchase workers’ compensation coverage from the state.

In these monopolistic states, you’ll have the option to pick up employers’ liability coverage through a separate workers’ compensation policy (if you do business in other states) or through an endorsement to your general liability policy.

Why Do You Need Workers’ Compensation Insurance?

While we strongly suggest a number of different insurance coverages for most businesses, workers’ compensation is one coverage that you may well be required to carry by state law.

In fact, there is only one state in the country that doesn’t require most businesses to carry workers’ compensation insurance: Texas. Even then, we would recommend you carry workers’ compensation insurance because you’re still liable for the injuries suffered by your employee and face significant exposure.

What Businesses Are Required To Carry Workers’ Compensation Insurance In Michigan?

In Michigan, there are specific rules that have been adopted by the legislature to govern when businesses are obligated to carry workers’ compensation insurance. The requirements are pretty broad. For example:

• All public employers
• All private employers:
  • Regularly employing 1 or more employees 35 hours or more per week for 13 weeks or longer during the preceding 52 weeks.
  • Regularly employing 3 or more employees at one time (even if part time).
• Agricultural employers if they employ 3 or more employees 35 hours or more per week for 13 or more consecutive weeks.
• Householders employing domestic servants if they employ anyone 35 hours or more per week for 13 weeks or longer during the preceding 52 weeks.

Since the definition of “employee” in this context largely includes owners, most companies end up needing a workers’ compensation policy.

What Businesses Aren’t Required To Obtain Workers’ Compensation Coverage In Michigan?

While most businesses will be required to obtain workers’ compensation coverage in Michigan, there are a handful of exceptions.

• All Employees Excludable, and No Subcontractors: If all of your employees can be excluded from coverage AND you don’t use subcontractors, then you don’t need to obtain insurance coverage. However, you still need to fill out an exclusion form and provide it to the state certifying that all employees are excludable. This only applies to:
  • Sole Proprietorships: If all employees are the sole proprietor, and/or the spouse, child, or parent of that individual.
  • Partnership: If all employees are partners.
  • Stock Corporation: If all employees are corporate officers and own 10% or more of the available stock in the corporation.
  • Limited Liability Company: If all employees are members and are also managers and own 10% or more interest in the business.
  • Self-Insurance Approved By The State: In rare circumstances, companies can self-insure against workers’ compensation risks. To do this, you need to apply with and be approved by the Director of the Workers’ Disability Compensation Agency.

What If I Can’t Get Coverage From An Insurance Carrier?

There are some businesses which really struggle to obtain the coverage required by law. This can be due to a high risk occupation that private insurance carriers don’t want to take on, or due to bad claims history where your business has had such bad experiences in the past that the carriers do not want to insure your company.

If this is the case for your business, you can likely still obtain coverage because most states have set up state insurance funds for workers compensation. For example, in Michigan, you can obtain workers’ compensation and employers’ liability coverages from the Michigan Workers’ Compensation Placement Facility.

What Happens If You Don’t Carry Workers’ Compensation Insurance When It’s Required?

There are severe penalties in Michigan for failing to provide workers’ compensation coverage where required.

• You can be fined up to $1,000 per day without insurance.
• You as an employer can be jailed for between 30 days and 6 months, with each day without insurance being a separate offense.
• You can still be sued by employees who are injured in a civil court system, which can result in significant losses.
• The Workers’ Disability Compensation Agency that actively enforces these laws can ask a court to prohibit your company from employing any persons in your business until you comply with the law, effectively shutting your business down.

How Much Does Workers’ Compensation Insurance Cost?

Since most companies are required to buy workers’ compensation insurance, it’s important to try to understand how much you get charged for this coverage. The costs are different for every company, based on the specific exposures and details of how your company operates.

How Are Prices Determined?

Initially, prices are determined by looking at two important components. First, each employee is classified based on their job duties. If an employee works in an office setting, they could be classified as a Clerical Office Employee (8810).

If their job is to replace shingles on roofs, they might be classified as a Roofing Employee (5551). Each job is associated with a different risk profile, and a different rate, expressed as $XX / $100 of payroll. A Roofing Employee may be more likely to suffer a serious injury than a Clerical Office Employee, so the rate assigned to that class code is likely going to be higher.

Once each job is classified, the question becomes how much payroll is associated with that position at your company. If you have a rate of $0.10 per $100 of payroll, and you have $200,000 of payroll for that classification, your base cost is $200.00.

After that, the policy can take into account a number of factors including discounts applied by the carrier, and your experience as a business. The latter concept, the experience modification factor, is set by the state and based on your individualized claims history. If you have a lot of claims, you will end up paying a lot more for workers’ compensation coverage.

Does Owner Payroll Count?

Unless you file an exclusion form with the state, some amount of payroll will be attributed to each of the owner’s of a business, and they will be included in coverage. There is a set minimum and maximum amount of payroll they will count for owners, which can vary by state.

Does Subcontractor Payroll Count?

While laws can vary by state, in Michigan, subcontractor payroll is automatically included and counted against a general contractor’s insurance costs unless the subcontractor is able to provide a certificate of insurance showing coverage in place for the time period they acted as a subcontractor or that subcontractor is exempted/excluded from needing coverage.

As a business owner, if your subcontractors don’t have their own coverage, you’ll end up paying for it on their behalf. For this reason, it’s very important to collect certificates of insurance from every subcontractor you use in your business. By ensuring you keep this documentation on file, you’ll be able to lower your own insurance costs.

What Is A Workers’ Compensation Audit And How Does It Affect Your Costs?

At the beginning of each policy term, you’ll have an estimated payroll for each classification code, and you’ll have a set rate for that code for that term. After each policy term, insurance carriers will typically audit your workers’ compensation insurance policy.

They will go back and ask for documentation showing how much you actually paid and compare that to whatever amount was initially estimated. If you had more payroll than you estimated, you’ll end up owing more money for the insurance; if you had less payroll than you estimated, you’ll end up with a credit.

It’s important to estimate as best you can up front, because if your audit results are too far off you can end up with a big bill after the term is over for the prior term. And at the same time, the carrier might turn around and require you to update the estimated payrolls for the current term, which could result in two big bills at the same time.

Conclusion

Workers’ compensation and employers’ liability insurance laws can be vary complicated due to the state-by-state regulation of this particular line of insurance. Businesses operating in one state can have a difficult enough time understanding their obligations, but businesses operating in multiple states can have real nightmares dealing with this type of insurance.

In Michigan, most employers are required to have coverage, so your business likely needs to carry this coverage or provide proof that you are eligible for an exclusion. Either way, we highly recommend consulting with an experienced agent who understands workers’ compensation coverage to make sure you’re satisfying your obligations.

For personalized advice and comprehensive coverage options, contact Legacy Partners Insurance. As an independent agency serving our customers in Michigan and all over the United States, our licensed professionals are ready to assist you with all your insurance needs. Call us today to ensure your business is properly protected.