Workers Compensation Insurance: A Complete Guide for Employers

Workers compensation insurance pays the statutory benefits your state's law requires when an employee suffers a work-related injury or occupational disease, medical care, disability payments, rehabilitation expenses, and death or survivorship benefits, regardless of who was at fault. The same policy also includes employers liability insurance, which defends and pays claims for work-related injuries that fall outside the workers compensation law itself.

Here's how the standard NCCI Workers Compensation And Employers Liability Insurance Policy actually works, and what employers need to know before buying it.

Workers Compensation Insurance

Workers compensation insurance pays the medical, disability, rehabilitation, and death benefits a state's law requires when an employee suffers a work-related injury or occupational disease, regardless of fault. The same policy includes employers liability coverage for work-related injury claims that fall outside the workers compensation law.

What is workers compensation insurance?

Before workers compensation laws existed, an injured worker's only recourse was to sue the employer and prove negligence under common law, while the employer raised defenses like assumption of risk, contributory negligence, and the fellow-servant rule. Workers and their families were often left with nothing. The modern system replaced that with a statutory bargain built on five purposes:

• No-fault: the employer is responsible for work-related injuries regardless of how they occur, which largely eliminates litigation costs.
• Prompt and reasonable payment: benefits are prescribed by statute and usually must be paid within a stated number of days. Benefits are partial and final: a percentage of wages, no payment for pain and suffering.
• Exclusive (sole) remedy: in exchange for guaranteed benefits, the employee gives up the right to sue the employer. The level of protection varies by state.
• Predictable costs: premium is based on job classification and payroll, adjusted by your loss history.
• Loss prevention: because your claims history feeds your experience mod, safety directly lowers your premium.

To be compensable, an injury or disease must both arise out of employment (be caused by it) and arise in the course of employment (be linked to it in time, place, and circumstances).

How is the policy structured?

The policy has three components: the Information Page (the workers comp version of a declarations page), the six-part policy form WC 00 00 00 C, and any endorsements. The policy form breaks down as:

What benefits does Part One actually pay?

Part One incorporates your state's workers compensation law by reference, which is why it carries no standard limit of liability. It pays four categories of statutory benefits:

• Medical benefits: necessary care to treat a compensable injury or disease: surgery, hospital care, physical therapy, prescriptions. Statutes, not policy limits, determine what's paid, subject to "reasonable and necessary" standards.
• Disability benefits: wage replacement in four flavors: temporary partial, permanent partial, temporary total, and permanent total. Most states pay two-thirds (66.67 percent) of the employee's average weekly wage, subject to state maximums, after a waiting period that ranges from 3 to 21 days depending on the state.
• Rehabilitation benefits: costs to restore the employee's physical capacity, and some states add vocational rehabilitation.
• Death or survivorship benefits: burial expenses plus ongoing support to qualifying dependents, defined by statute.

The insurer also has the right and duty to defend any claim or proceeding for benefits, and pays defense-related costs in addition to the benefits themselves.

What is employers liability insurance (Part Two)?

If workers comp is the exclusive remedy, why does the policy need a liability section? Because the statute doesn't reach every employment-related claim. Part Two covers lawsuits for work-related bodily injury that fall outside the workers compensation law, claims that are infrequent but tend to be expensive when they hit. The four most common types (the policy says "include," so this isn't an exhaustive list):

• Third-party action over: an injured employee sues a third party, who then sues your business back. If a contract with an indemnification agreement drives the suit back to you, the CGL responds instead, the rule of thumb is: insured contract, look to the general liability policy, no contract, look to Part Two.
• Care and loss of services: the injured employee's spouse or children sue for loss of the employee's services and companionship.
• Consequential bodily injury: a family member suffers their own injury or illness as a consequence of the employee's (a spouse's breakdown after weeks at the hospital, for example).
• Dual capacity: the employee sues you in a capacity other than employer, such as the manufacturer of the very product that injured them. Many states don't allow these suits.

One related exposure lives outside this policy entirely: employees driving on company business. That's a commercial auto question, the covered auto symbols on your business auto policy decide whether those vehicles are insured.

Unlike Part One, Part Two is subject to limits, shown in Item 3.B of the Information Page, commonly written at $1,000,000 each accident for bodily injury by accident, $1,000,000 policy limit and $1,000,000 each employee for bodily injury by disease. Part Two also carries 12 exclusions, several of which can be bought back by endorsement. Among them:

• Contractual liability
• Punitive damages
• Employment-related practices, demotion, harassment, discrimination, termination
• Work subject to federal acts like the Longshore And Harbor Workers Compensation Act or FELA

How is workers comp premium calculated?

Premium starts with your classification codes and remuneration (payroll), a rate per $100 of payroll for each class, and is then adjusted by your experience modification factor:

• Losses lower than the average for your class → mod less than 1.00 → credit
• Losses higher than average → mod higher than 1.00 → debit

Your workers comp premium is provisional. Because it's based on estimated payroll, the final premium is subject to verification and change by audit after the policy period, and your claims history feeds the experience mod that adjusts every future year's rate, which makes safety a direct financial lever. To keep your premium and coverage accurate, work through these checks:

• Verify your classifications: misclassified payroll is the most common source of audit surprises. Confirm each class code actually matches the work performed.
• Check the states in Item 3.A: part One only applies to the state laws listed there. Item 3.C (Other States Insurance) catches new or incidental exposures, but known operations belong in 3.A, and the four monopolistic states are excluded from both.
• Match endorsements to your contracts: construction and service contracts routinely require a waiver of subrogation. Unlike the CGL, the workers comp policy does not allow a pre-loss waiver without the WC 00 03 13 endorsement, and the entity generally must be scheduled.
• Mind the gaps around leased and contracted labor: if you use a PEO or hire uninsured subcontractors, you can end up the statutory employer of someone else's injured worker. Keep your own policy in force even when a PEO provides coverage.

If an uninsured subcontractor's worker is injured on your job, you as the hiring contractor may become the statutory (de jure) employer responsible for their workers comp benefits. Collecting certificates of insurance from every subcontractor, and verifying the coverage behind them, is basic protection. See our guide to certificates of insurance.

This guide is for educational purposes and summarizes standard NCCI policy language. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.