4-2 Workers Compensation Coverage Overview
Background
In the late 1800’s, as the American economy began a rapid transformation from agrarian to industrial
based jobs, more and more work-related injuries began to incur. Most workers did not have health
insurance, and as a result, the growing numbers of injuries became a significant burden on society. The
solution, beginning in 1911, was the passage of Workers Compensation laws which provided for the
employer to bear the cost of work-related injuries and illnesses without regard to negligence. Workers
would be covered, regardless of fault, and employers could not be sued by employees. Therefore,
Workers Compensation became the sole remedy for occupational injuries.
Coverages Provided
Workers compensation policies actually provide two different coverages—Workers Compensation and
Employers Liability.
Workers Compensation
Provides no-fault coverage to employees for work related injuries and illnesses. The employee
does not need to prove negligence on the part of the employer.
When Workers Compensation coverage is purchased, it is the sole remedy for injured workers,
with the exception of gross negligence.
Payments to workers are partial and periodic, with an emphasis on returning the employee to
work. However, there is no limit to reasonable and necessary medical coverage, as well as no
time limit. Payments may be made for life if warranted.
Employers Liability
Provides coverage to the employer for injury-related claims made by employees for things not
covered by workers compensation statutes:
Legal Liability to Employees Not Covered by WC:
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Gross negligence- (wanton disregard for the safety of others)
Intentional Injury
Dual Capacity Claims- Consider the example above where employer is also the maker of
the saw. The employee, even though his injuries are covered by workers compensation,
can sue his employer as the manufacturer of the saw. The products exposure would not
be picked up by workers compensation
Legal Liability to Others:
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Loss of Services by Family Members-Where family members sue the employer for
negligence for their loss (loss of consortium).
Third-Party (action-over) claims- Where an injured worker sues a third party and they
counter-sue against the employer. Example-A worker is injured by a defective bench
saw. Workers compensation pays his injury loss. He sues the saw maker for the
defective product and the saw maker then counter-sues the employer, claiming that the
employer failed to properly maintain the saw.
Consequential Bodily Injury Claims- Pain and suffering, mental anguish, nervous
breakdown etc. suffered by family members as a result of the workers injuries.
Coverage by State
Workers compensation is mandatory in all states except Texas and New Jersey, where it is elective.
A sole proprietor with no employees is not eligible for workers compensation
4 states have Monopolistic State Funds, meaning there are no private insurers: ND, OH, WA and WY.
Premium Basis
In almost all cases, payroll is the basis for WC premium. Various manuals and online sites provide
assistance in choosing the correct class code for each occupation.
If the payroll of an employer reached the minimum premium threshold, usually $3500, the risk qualifies
for experience rating. This is mandatory, and the experience rating worksheet is developed by the DOI.
This worksheet calculates and experience modifier, or emod, which applies a debit or credit percentage
to the overall rating process. Carriers have the option of applying Schedule Rating on top of the emod.
Schedule rating is based on peculiarities of a specific risk, and the applied debits or credits must be
documented. An example would be applying a 5% schedule credit because the insured has a formal
safety program which includes weekly safety meetings.
Schedule Rating is not isolated to Workers Comp. Most carriers have filed plans that allow them to apply
Schedule Rating to Property, Inland marine, Auto and other lines.
The same concept of Experience Rating applies to Commercial Auto, where large fleets meeting certain
qualifications receive an emod developed by the DOI. In some states, experience rating can also be
applied to General Liability.
Stop Gap Coverage: A form of “stand-alone” Employers Liability coverage used in Monopolistic Fund
states (ND,OH,WA, WY), which do not combine EL with the Workers Compensation policy. Stop Gap
Coverages is usually added to the insured’s CGL policy.
Underwriting Workers Compensation
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Management Attitude Toward WC
o Is the employer actively involved in minimizing hazards and reducing losses?
o Are safety programs mandatory and enforced?
o Are accidents investigated and the results incorporated into an ongoing program of loss
improvement?
o Does the employer provide “light duty” or other back-to-work programs?
o Are employees actively involved in the Safety process?
o Is there evidence of good housekeeping and regular maintenance of the building and all
work-related machinery and processes?
Independent Contractors: Contracting risks in particular are significantly impacted by how an
Independent Contractor is defined. In many states, if a sub-contractor cannot meet the definition of
Independent Contractor, then the sub-contractor’s payroll must be included in the hiring contractor’s
Workers Compensation exposures. Definitions vary by state, but most include some reference regarding
who controls the work, and the relationship between the contractor and the sub.
Take for example a cabinet manufacturer who sub-contracts the installation. In this example, the subcontractor works exclusively for the cabinet manufacturer and must follow the maker’s instructions
regarding installation. The sub-contractor consists of 5 employees, and they do not carry Workers
Compensation. One could argue that the sub-contractor is functioning in more of an employee role than
that of a sub-contractor role.
Description of Coverages: Items 3A, 3B, and 3C:
The information page (dec page) for the typical WC and EL policy has three important fields listed as 3A,
3B, and 3C. It is imperative that you understand the implication of what appears in these fields.
Item 3A: States with Active Operations
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List here all states where the insured has known or expected operations. In other words, if the
inured operates in MD and they know that they are going to expand operations into PA during
the policy period, both MD and PA should be listed in item 3A.
This activates Workers Compensation laws for those states
Cannot list Monopolistic States. You must separately purchase the Monopolistic Fund polices in
those states (and Stop Gap Coverage is recommended)
Note that there are no occurrence or aggregate limits for Workers Compensation.
Item 3B: Employers Liability Limits
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This is the Employers Liability limits, which apply to all states listed under 3A.
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Should consider limits carefully, especially if an Umbrella will be purchased. $1M/$1M/$1M is
recommended.
Note that there is no policy aggregate for BI by accident, only a per accident limit.
BI by disease has both a per employee and policy limit.
Item 3C: Other States Coverage
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This is Other States Coverage, activating WC laws for listed states in which work begins in those
states after the effective date of the policy
The insured MUST notify the insurance company immediately when work begins in any state
listed in 3C. The activated states must be moved to Item 3A upon renewal.
To avoid possible gaps (where the insured begins work in a state not listed in 3C) the suggested
wording for 3C is:
o “All states and US Territories except North Dakota, Ohio, Washington, Wyoming, Puerto
Rico, the US Virgin Islands and states designated in Item 3A of the Information Page.”
What determines which States WC laws apply? (Any may apply)
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State in which the employee was hired
State of the employee’s residency
State where the Primary Employer is located
State in which the employee is paid
State where the injury occurred.