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Workers compensation insurance is mandatory for every business with employees in all states except Texas. In most states, the moment you hire your first employees, you have an obligation to purchase workers comp insurance for them. Each state has its own rules that you should look into to ensure you’re compliant, as penalties for non-compliance can be quite severe.
This has become increasingly important with the remote workforce and companies that employ people from all around the country. Even though this employment trend has given you access to a much broader talent pool, it has also inflicted some complications for your legal team that must ensure your company’s compliance with state and local laws.
When it comes to your workers compensation coverage, you can obtain it through a state workers compensation fund or a private insurance carrier. Workers compensation pays for medical bills and a part of an employee’s wages if they get injured on the job or suffer from a work-related illness. It also covers temporary or permanent disability benefits.
In the unfortunate case of employee death from a work-related injury or illness, workers comp would pay the death benefits to their family.
It’s clear that workers compensation is crucial for employees and employers alike, not only because it’s mandatory but because it covers expensive medical bills and employee wages if need be.
However, some businesses and some workers are exempt from having to carry workers compensation coverage. For example, in Alabama, Mississippi, Missouri, or Tennessee, you are not obligated to obtain workers compensation until you’ve hired five or more employees. Make sure to check your state laws and learn more about potential exemptions from workers compensation coverage.
Whether it’s mandatory for your business to purchase workers comp, or you decide to get a policy anyway, here are things you should know when considering if you should get your coverage through a state workers compensation fund or a private insurance carrier.
Types of State Workers Compensation Funds
We mentioned state workers compensation funds as one option to obtain this insurance policy for your business. State workers compensation funds provide the same coverage as private insurance carriers and pay for valid employee claims of a workplace injury or illness. State funds are non-profit government organizations that provide coverage on their own, or by connecting companies with private insurance carriers, but with higher premiums for the insured.
State funds are also known as assigned risk pools or assigned risk plans. These funds are state-sponsored and allow companies access to mandated insurance coverage they can’t otherwise acquire. Of course, you can also choose to obtain your coverage through a state fund if you think that’s the best option for you.
If you were worried about how state funds pay for the claims, you should note that they make payouts from premiums their insureds pay and from investment income in the given state.
Even though they have the same purpose, not all state workers compensation funds are the same. We can divide them into two major groups: monopolistic and competitive state funds.
Monopolistic State Funds
Monopolistic states don’t allow companies to purchase workers compensation insurance from private carriers. As a matter of fact, private insurance carriers are not permitted to offer workers comp coverage for employees in these states, so you can’t shop around to find the best coverage for your company and employees.
Also, you can’t buy coverage for out-of-state employees, so you will have to look for another insurer for your remote employees.
The only four remaining monopolistic states are Ohio, North Dakota, Washington, and Wyoming. If you employ someone from a monopolistic state, you must purchase insurance for that employee through the state fund. Make sure to get familiar with state laws to be compliant and to purchase additional coverage to ensure you cover all your potential exposures.
Competitive State Funds
Competitive state funds are a much better option for businesses that like to compare quotes and coverages from multiple providers and find the right option for their business. You can choose whether you want to get your policy from state agencies or through a private insurance carrier.
State funds in competitive states usually serve as a backup option to ensure everyone can get their workers compensation coverage if rejected by a private insurer for being too risky to insure. States that offer competitive workers compensation funds are California, Colorado, Utah, Texas, and Arizona, to name a few.
You should check the market requirements in your state and find the best deal for your company while remaining compliant with state laws.
NCCI and Workers Compensation Rates
Some states don’t even have a designated state fund but operate through an assigned risk pool program that they administer with private insurance companies by using NCCI workers compensation class codes. A class code is a number that insurers use to identify the employee’s job and the risk category associated with it.
The National Council on Compensation Insurance (NCCI) was founded in 1923 with a mission to create a robust workers compensation insurance system that provides just insurance rates based on risk categories. NCCI analyzes claims and policy data every year and publishes its Regulatory and Legislative Trends Report with the latest trends that help insurers price the coverage they offer according to available risk factors that go with each class code.
Currently, the majority of states rely on NCCI to provide their workers compensation rating systems. Those states don’t include the monopolistic states and those that use their independent rating bureaus, such as California, New York, or Pennsylvania. These independent rating bureaus are typically a part of the state’s Department of Insurance, and the states using this system are the ones with competitive state funds.
Since monopolistic states don’t rely on NCCI class codes to determine their rates, businesses in these areas can expect to pay more to get their coverage than their counterparts in other states.
The Difference Between State Funds and Private Carriers
If you live in a monopolistic state, you simply have no choice but to buy your workers compensation policy through the state fund. As the coverage they provide doesn’t include the policy extension, employers liability insurance, you can buy the stop-gap coverage through a private insurer that will bridge the coverage gap and cover the exposures employers liability typically covers.
Employers liability insurance indemnifies companies against legal liability if an employee claims that their employer’s negligence caused their work-related injury or illness. The policy pays for legal costs and potential settlements or damages and basically continues where workers comp stops.
On the other hand, competitive and other non-monopolistic states allow you to shop around and compare quotes to find the best option for your company.
Businesses typically try to get their policy from a private insurance carrier because they offer better rates and more comprehensive coverage. But private insurers sometimes don’t want to quote a company because their business is too risky or they have filed too many claims in the past. Companies that had their policies canceled for failing to make payments are also not desired customers for private carriers.
However, there is an option for businesses that can’t get insured through a private carrier, and that option is the state workers compensation fund. The rates might be higher, but state funds exist to ensure every business gets access to workers compensation coverage. So if you can’t get your policy through a private insurer, you can turn to your state fund and get covered.
If you are looking for a workers compensation policy for your business, feel free to create a profile on Embroker’s digital platform and get online quotes for your coverage. Operating in a monopolistic state? No problem. We might have the stop-gap coverage you need to bridge the gap and obtain complete protection for your company.
*The information contained herein is subject to Embroker’s Terms, is based upon Embroker’s experience as an insurance broker, available information, current insurance information, and marketplace, or may be of a general nature. Nothing in the content provided should be construed as tax, accounting, legal or actuarial advice. While we provide comments and recommendations related to the types and terms of insurance coverage, the decision to act or not act is ultimately the insurance purchaser’s alone.
Employers liability insurance vs. workers compensation: complimentary policies that cover expenses of a workplace injury and potential employer’s liability. Read on to learn how.