Chapter 16 Workers' Compensation Insurance

Workers’ Compensation Insurance

OVERVIEW

One of the most well-known types of commercial liability insurance coverage is Workers’ Compensation, which is the exclusive remedy for workplace injuries to employees. Because benefits are paid regardless of fault, Workers’ Compensation minimizes litigation for both employees and employers by automatically providing benefits to eligible employees suffering from occupational accidents and occupational illnesses. Each state has its own Workers’ Compensation statutes, which determine mandatory coverage, employee eligibility, and the benefits provided to injured workers.

Though Workers’ Compensation coverage is ultimately dictated by state law, the policy established by the National Council on Compensation Insurance (NCCI) is the industry standard in most states. This Workers’ Compensation and Employers Liability policy provides coverage for the damages the insured business is legally obligated to pay for employees’ workplace injuries.

3 common law defenses to avoid paying claims:

• Assumption of Risk – This defense placed all the risk on the employee as being responsible for knowing the work conditions prior to employment

• Fellow Servant Rule – This defense removed the employer’s negligence if a fellow employee contributed in any way to the loss

• Contributory Negligence – This defense was used to argue that the employee was partially at fault and therefore not eligible to recover benefits from the employer

Once Workers’ Compensation laws became effective, all work-related injuries and occupational diseases became the responsibility of the employer, regardless of fault.

Workers’ Compensation insurance became the exclusive remedy for job-related injuries, meaning the employer assumes absolute liability for injuries to employees and injured employees are barred from suing the employer, even if they refuse Workers’ Compensation benefits. As long as the employer provides Workers’ Compensation insurance in compliance with state law, the employer is protected from litigation brought by employees for workplace injuries.

Compulsory vs. Elective States

Depending on its specific laws, each state may be a compulsory or elective state.

Compulsory states are jurisdictions where Workers’ Compensation benefits are mandated by state law and employers are required to provide Workers’ Compensation benefits to their employees, either with commercial insurance or by utilizing approved self-insurance. If a policy does not comply with state law, the insurer or self-insurer is required to provide all legally mandated benefits. Employers who violate state law by not providing Workers’ Compensation benefits are not protected from lawsuits.

Elective states are jurisdictions where Workers’ Compensation benefits are not mandated by state law, meaning employers have the choice to accept or reject Workers’ Compensation laws. If an employer chooses to reject the Workers’ Compensation laws and not provide benefits, an injured employee may file a claim or lawsuit against the employer for injuries. In this case, the employer is denied the use of common law defenses, including assumption of risk, the fellow servant rule, and contributory negligence defenses.

Essentially, in both compulsory and elective states, an employer that does not provide Workers’ Compensation benefits is exposing itself to unlimited liability for workplace injuries, in addition to the fines and penalties imposed by the state if laws were violated.

Monopolistic vs. Competitive States

Some states have state funds, which are state-owned and state-operated organizations that write Workers’ Compensation insurance.

In monopolistic states, Workers’ Compensation insurance is only available through the state fund. In competitive states, Workers’ Compensation insurance is available through private insurers, and any state fund that exists competes with the private insurers. Most states are competitive states.

Federal Workers’ Compensation Laws

State Workers’ Compensation programs do not apply to all employees. Some types of workers are covered by federal laws, which preclude coverage at the state level. These federal laws include:

• The Jones Act, which applies to the crews of ocean vessels

• The U.S. Longshore and Harbor Workers’ Compensation Act, which applies to non-crew workers of ocean vessels, such as workers who load, unload, build, or repair ships

• The Federal Employers Liability Act (FELA), which applies to interstate railroad workers

• The Migrant and Seasonal Agricultural Worker Protection Act, which applies to farmworkers and other agricultural workers working on a seasonal basis or traveling across state or national borders to find work

• The Federal Mine Safety and Health Act, which applies to those working in coal mines

• The Federal Employees Compensation Act, which applies to all civilian federal employees in the United States

• The Defense Base Act, which applies to workers on military bases outside of the United States

Employment Conditions

Covered Employment

Because Workers’ Compensation insurance responds to workplace injuries, it only provides coverage if an employment relationship exists between the employer and the injured person. An employer-employee relationship exists if the employer:

• Retains the right to direct the way work will be completed

• Supplies the necessary equipment and tools to complete the work

• Determines the work hours

• Determines the end results of the work to be completed

• Controls the frequency and timing of compensation for work

This definition applies generally, but each state will further clarify types of employment that are or are not covered. For example, some states may include minors and apprentices as employees covered by Workers’ Compensation.

Exempt Workers

Workers’ Compensation statutes require employers to provide benefits to all employees unless an employee is exempt. The exemptions vary by state. For example, some states may exempt workers if the employer has fewer than 1–3 employees.

Other workers may be exempt based on their job duties, such as:

• Casual laborers whose work is non-recurring or irregular

• Independent contractors, such as plumbers, electricians, and landscapers who work under contract for more than one employer. These workers often work beyond the employer’s control and outside the scope of the employer’s business, meaning they do not have an employer-employee relationship with the insured employer. The exact definition and exempt status of independent contractors varies by state.

• Agricultural workers, such as farm and ranch laborers. These workers are typically covered by federal laws.

• Domestic employees

• Sole proprietors

• Executive officers and directors

Covered Injuries

Covered injuries are those that arise out of, and in the course of, employment. This means that:

• The injury mu

• st occur while the employee is at work or working

• The employee is working the hours they are designated or expected to work

• The employee is performing the duties that they were employed to do

• The injury must arise from a risk that is reasonably related to employment

The employer can deny benefits to employees who intentionally injure themselves or if the injury results from intoxication. The injuries are not considered occupational if they occurred at the workplace while the employee was present as a member of the general public, or while the employee was doing personal tasks, unrelated to employment, outside of their assigned work hours.

• Covered injuries include occupational accidents and occupational disease or illness.

Occupational Accidents

Occupational accidents are unexpected and unplanned events that occur in the course of employment and cause injury to one or more employees.

Occupational Diseases and Illnesses

An occupational disease must arise out of the course of employment and be caused by conditions that are particular to that employment.

Benefits Provided

Each state determines benefit levels, benefit types, and definitions of disability. However, there are some common definitions. Typical benefits include medical benefits, disability income benefits, rehabilitation benefits, death benefits, and survivor benefits.

Medical Benefits

Medical benefits typically provide unlimited coverage for all necessary medical expenses—including hospital expenses—related to the covered injury that occurred during the policy period.

Disability Income Benefits

Disability income benefits are payments for lost wages that are generally limited to the period of disability. There are four types of disability:

Temporary Total Disability (TTD)

A temporary total disability is an injury from which an employee is expected to recover and return to work, but they are unable to do any work while recovering. For example, an employee is stocking a retail store, and falling merchandise causes a broken arm. The stocker is not allowed to work while recovering, but they are able to go back to the same job after recovering.

Benefits begin after a waiting period of several days, and benefits may be paid retroactively for that waiting period if the disability lasts beyond a certain period. The benefit amount is a percentage, typically 66 2/3% of the employee’s average weekly wage, subject to minimum and maximum limits set by the state.

Permanent Total Disability (PTD)

A permanent total disability is an injury that prevents an employee from being able to do any work for the rest of their life. For example, a delivery driver is involved in an accident and suffers a spinal cord injury. They are not expected to recover from it, and the injury keeps them from doing any work.

Benefits are subject to the same weekly benefit percentage and the same minimum and maximum limits as temporary total disabilities. In most states, benefits are paid for life.

Temporary Partial Disability (TPD)

A temporary partial disability is an injury after which an employee is able to do some work, but they are not able to earn their usual wage until full recovery. For example, a construction worker sprains an ankle while working on a project. They are offered light duty work, but with a pay cut.

Benefits are usually calculated as a percentage of the difference in wages.

Permanent Partial Disability (PPD)

A permanent partial disability is an injury after which an employee is able to do some work, but they will never fully recover. The employee can still earn a wage, but not as much as they would have earned if the injury had not occurred. For example, a court stenographer is diagnosed with carpal tunnel syndrome, deemed to originate from the stenographer’s job. Though they are able to do some work, they are not able to work as many hours as they worked before the disease’s onset, leading to a loss of income.

Benefits may be limited by a schedule of benefits, which specify a specific dollar amount for specific permanent partial injuries (such as loss of an eye or hand), payable for a fixed number of weeks.

Rehabilitation Benefits

Rehabilitation benefits may include physical therapy and vocational training, which are utilized to return the injured employee to work as soon as possible. These benefits are usually paid by the insurer, but some states have established special state funds to pay for rehabilitation costs. These state funds are funded by taxes levied against insurers and self-insureds.

Death and Survivor Benefits

If an employee dies, death benefits may be paid to the employee’s family to provide financial support for final expenses, such as final medical bills, and to cover funeral and burial expenses. The amount of this burial allowance, also known as the Funeral Expense Benefit, is set by state law.

Because the employee’s survivors experience a loss of income being brought into the household, survivor benefits provide ongoing cash benefits to make up for this income loss, provided as a percentage of the deceased worker’s wages. Survivor benefits are paid to the surviving spouse, in which case they usually end if the spouse remarries, and to dependents, typically until age 18 or longer under certain circumstances.

Second Injury Fund

There may be instances in which an employee who has already suffered a prior disabling injury later sustains a subsequent injury, and the combination of the two injuries creates a greater disability than what would have been created if the employee had only suffered the second injury. In these instances, a Second Injury Fund helps pay compensation on behalf of an employer to an employee who sustained this kind of injury.

The purpose of the fund is to encourage employers to hire people with disabilities by limiting the employer’s liability for subsequent injuries. The employer is responsible only for the compensation that would have been paid had the second injury occurred alone, without the existence of the prior injury. The Second Injury Fund pays the remaining compensation owed to the employee.

The Second Injury Fund is usually funded by assessments against insurers and self-insurers, but it may also be financed through general state revenues.

Workers’ Compensation and Employers Liability Insurance Policy

Workers’ Compensation and Employers Liability policies provide liability coverage for amounts owed to injured workers. Like other policies, the policy contains various parts that address coverages and conditions. Most states utilize the standard policy developed by the National Council on Compensation Insurance (NCCI). The NCCI policy is only 6 pages because the details regarding the payment of benefits are contained in each state’s Workers’ Compensation statutes. The standard policy contains the following parts:

General Section

Part One – Workers’ Compensation Insurance

Part Two – Employers Liability Insurance

Part Three – Other States Insurance

Part Four – Your Duties If Injury Occurs

Part Five – Premium

Part Six – Conditions

General Section

The General Section outlines the following provisions.

The Policy

The policy is a contract between the employer and the insurer. The terms of the policy may not be changed or waived, except by endorsement.

Who Is Insured

The employer is the insured of a Workers’ Compensation and Employers Liability policy.

Workers’ Compensation Law

The Workers’ Compensation laws that apply to the policy are those of each state or territory named on the Information page, which is the Declarations page for Workers’ Compensation policies. An injured employee is entitled to benefits provided by the state where the injury occurs.

State

As used in the policy, state refers to any state in the United States, including the District of Columbia.

Locations

The policy will cover all workplaces, locations, and states listed on the Information page.

Part One – Workers’ Compensation Insurance

The following sections appear in Part One of the standard policy.

How This Insurance Applies

The policy applies to bodily injury by accident, bodily injury by disease, or bodily injury resulting in death. The accident must occur during the policy period. Bodily injury by disease must be caused or aggravated by employment conditions, and the last exposure must occur during the policy period.

We Will Pay

The insurer will promptly pay the benefits due, in accordance with state law.

We Will Defend

The insurer has the duty to defend any claim for benefits payable by the policy, at the insurer’s expense. The insurer has the right to investigate and settle claims.

We Will Also Pay

In addition to other amounts payable under the policy, the insurer will also pay certain supplementary payments, including:

• Expenses incurred by the insurer

• Expenses incurred by the insured at the insurer’s request, except for loss of earnings

• Premiums for bonds to release attachments and appeal bonds

• Litigation costs taxed against the insured

• Interest on judgments against the insured

Other Insurance

If other insurance or self-insurance applies to the loss, the insurer pays their share of the loss on a contribution by equal shares basis.

Payments You Must Make

This section of Part One is essentially the Exclusion section. The insured is responsible for paying benefits in excess of those provided by Workers’ Compensation law, including those required because:

• Of the insured’s serious or willful misconduct

• The insured knowingly employed an employee in violation of law

• The insured fails to comply with health or safety laws

• The insured fires, coerces, or otherwise discriminates against any employee in violation of law

If the insurer makes any excess payments, the insured must promptly reimburse the insurer.

Part Two – Employers Liability Insurance

Employers Liability insurance provides insurance for bodily injury and other damages for which the insured becomes legally liable, but that fall outside of Workers’ Compensation or occupational disease laws. These injuries are related to workplace injuries, and damages result from lawsuits against the insured for negligence and other tort damages. Employers Liability insurance often covers damages the insured must pay because of:

• Third-party-over action, where an injured employee sues a third party for contributing to an injury, but the third party then sues the employer to recover the damages paid to the employee

• The Doctrine of Dual Capacity, which applies when an employee is injured in the course of employment by a product the employer manufactures, and the employee brings legal action against the employer as a manufacturer (rather than as an employer)

• Loss of consortium, where an employee’s spouse brings action against the employer for punitive damages for the loss of companionship, household services, care, or support

• Consequential injuries to dependents of an injured worker

How This Insurance Applies

Employers Liability insurance applies to bodily injury by accident or disease, including resulting death. The bodily injury must arise out of and in the course of the injured employee’s employment by the insured. Occupational accidents must occur during the policy period, and occupational diseases must be caused or aggravated by employment conditions, with the employee’s last exposure occurring during the policy period.

Any suits for damages for bodily injury must be brought in the United States, its territories or possessions, or Canada.

We Will Pay

The insurer will pay all sums the insured is obligated to pay as damages, up to the policy limit. Payable damages include those resulting from third-party-over action or the Doctrine of Dual Capacity, and damages for care, loss of services, and consequential injury to a spouse, child, parent, or sibling of the injured employee. Loss of services refers to the services the injured worker contributed to the household, like chores or childcare.

Exclusions

The policy will not provide coverage for:

• Liability assumed under a contract

• Punitive or exemplary damages awarded because an employee was employed in violation of law

• Bodily injury to an employee while employed in violation of law

• Any obligation imposed by any Workers’ Compensation, occupational disease, unemployment compensation, or disability benefits law

• Bodily injury intentionally caused by the insured

• Bodily injury caused outside of the United States, its territories and possessions, or Canada. However, injury to a United States or Canadian resident temporarily outside of these areas would be covered.

• Damages arising out of coercion, criticism, defamation, evaluation, reassignment, discipline, harassment, humiliation, termination of, or discrimination against any employee

• Bodily injury arising from work that falls under federal jurisdiction

• Fines or penalties imposed for a violation of federal or state law

• Damages payable under the Migrant and Seasonal Agricultural Worker Protection Act

Part Two – Employers Liability Insurance continued

We Will Defend

The insurer has the duty to defend any claim for benefits payable by this Part, at their expense, with the right to investigate or settle those claims.

We Will Also Pay

The insurer will also pay the same types of supplementary payments payable under Part One.

Other Insurance

The insurer pays its share of the damages when other insurance also applies to a loss, on a contribution by equal shares basis.

Limits of Liability

The limits of liability shown in the Information page are the most the policy will pay for all damages. The Bodily Injury by Accident limit applies to each accident, with the standard limit being $100,000. The Bodily Injury by Disease – Policy Limit applies for all occupational illness and disease damages, with the standard limit being $500,000. The Bodily Injury by Disease – Each Employee limit is the most paid to any one employee, with the standard limit being $100,000.

Recovery From Others ( Subrogation)

The insurer reserves the right to recover its payments from anyone liable for causing injury.

Actions Against Us

The insured must comply with all policy terms before bringing action against the insurer. Prior to action against the insurer, the amount owed by the insured must be determined with the insurer’s consent or by trial and final judgment.

Bankruptcy of the insured does not relieve the insurer of its obligations.

Part Three – Other States Insurance

Many employers have operations in multiple states, or anticipate having operations in other states. The policy is designed to provide coverage for as many states as the law permits. Employers with operations in the monopolistic states must purchase coverage directly from the state entity that sells this coverage. Otherwise, agents can adapt this policy for their customers to include very broad national coverage as long as the Information page shows the states in which they have active operations and may have potential exposures.

How This Insurance Applies

The Information page may list one or more states to which Other States coverage will apply. If, after the policy’s effective date, the insured begins work and is not insured or self-insured in a listed state, the policy extends coverage to apply to that state. The insured must tell the insurer immediately if work begins in one of the listed states. If the insured begins work in a state that is not listed, the insurer must be notified within 30 days for coverage to be afforded.

If the other state requires certain benefits but the insurer is not allowed to pay those benefits directly to the person who is entitled to them, the insurer will reimburse the insured.

Part Four – The Insured’s Duties if Injury Occurs

If injury occurs, the insured must:

• Provide for immediate medical services required by law

• Give the insurer the names and addresses of the injured persons and any witnesses

• Promptly forward all notices, demands, and legal papers related to the injury to the insurer

• Cooperate with the insurer’s investigation, settlement, or defense

• Not interfere with the insurer’s subrogation rights

• Not voluntarily make any payments, assume obligations, or incur expenses, except at the insured’s own cost

Part Five – Premium

Our Manuals

All premiums for the policy are determined by the insurer’s manuals of rules, rates, rating plans, and classifications. Manuals may be changed, and those changes may be applied to the policy, as authorized by state law.

Classifications

The Information page will show the rate and premium basis for certain work classifications, assigned based on an estimate of the exposures the insured may have during the policy period. If insured’s actual exposures are not properly described by the estimated classifications, the insurer will assign the proper classification, rates, and premium basis by endorsement.

Remuneration

The premium for each work classification is determined by multiplying a rate by a premium basis. The most common premium basis is remuneration, which includes payroll, and all other amounts paid or payable during the policy period to all workers eligible for Workers’ Compensation benefits.

Example

The insurer may multiply a manual rate for a job classification by each $100 of remuneration for that job classification.

Premium Payments

The named insured must pay the entire premium when it is due.

Final Premium

The premium shown on the policy is an estimate, also called a deposit premium, that is based on estimated payroll. The final premium must be determined after the policy ends. The final premium will use the actual (not estimated) premium basis and the proper classifications and rates that apply to the covered business. The insurer will refund premiums or require additional premium payment as necessary to fit the final premium.

Experience Modification Factor

The premium calculation depends, in part, on the insured’s experience modification factor, which represents the insured’s claims history. The factor is the ratio of the costs of the insured’s actual claims compared to the expected costs for companies of similar size and in the same industry.

Example

An experience modification factor of 1.0 represents the industry standard. If the employer’s experience modification factor is 0.90, the premium charged will be 10% lower than the manual rate. If the experience modification factor is 1.25, a surcharge of 25% over the manual rate will apply.

Typically, the NCCI collects the employer’s payroll and loss information to develop the experience rating and distribute it to the insurer.

Premium Discount

Some states may use a premium discount rating method to help calculate final premiums. This method takes into account the fact that some expenses included in the premium rate are fixed and do not increase as the size of the risk increases—for example, administration costs. Because of these fixed expenses, larger risks receive a discount of sorts, which is really a credit for those expenses that do not increase proportionately with the risk.

Premium Refunds for Policy Cancellation

If the insurer cancels the policy, the final premium will be calculated pro rata for the time the policy was in force. A minimum premium may apply to the policy, in which case the final premium may not be less than the pro rata share of the minimum premium.

If the insured cancels the policy, the final premium will be based on insurer’s short-rate cancellation table. The final premium may not be less than the minimum premium.

Records

The insured must keep records necessary for premium calculations. These records must be provided to the insurer upon request.

Audit

The insurer may audit records related to the policy at any time and for up to 3 years after the policy period ends. The audit is used to determine the final premium.

Records include ledgers, journals, registers, vouchers, contracts, tax reports, payrolls, and programs for storing data.

Part Six – Conditions

Inspection

The insurer has the right, but not the obligation, to inspect the insured’s workplaces. Inspections are for underwriting and premium determination purposes, and they are not health or safety inspections.

Transfer of the Insured’s Rights and Duties (Assignment)

The insured may not transfer their rights and duties under the policy to any other person without the insurer’s written consent.

Cancellation

The insured may cancel the policy at any time by mailing or delivering advance written notice, stating when cancellation goes into effect.

The insurer may cancel the policy by mailing or delivering advance written notice at least 10 days in advance.

The policy period will end on the day and hour stated in the cancellation notice. These provisions are automatically changed to comply with state laws, when necessary.

Sole Representative

The first named insured will act on behalf of all insureds to change the policy, receive any return premium, and give or receive any cancellation notice.

Selected Endorsements

Voluntary Compensation Endorsement

This endorsement allows the insured employer to extend Workers’ Compensation benefits to employees who may not be entitled to benefits under the terms of the state’s statutes. This endorsement is used to extend benefits to agricultural workers or domestic employees.

The class of the employees to be covered and the state of employment must be included in the endorsement. The employees must also waive their right to sue the employer in relation to workplace injuries, and they must accept coverage under the endorsement.

Other Sources of Coverage

Assigned Risk Plan (Residual Market Plan)

Many states offer employers unable to purchase coverage in the voluntary market the opportunity to obtain coverage in the residual market through a Workers’ Compensation Assigned Risk Plan. Typically, insurers who write Workers’ Compensation insurance in the voluntary market in the state are required to participate in the state’s assigned risk plan.

In lieu of established assigned risk plans, some states establish state funds. Employers may purchase coverage directly from the fund, and licensed brokers may place business with the fund.

Self-Insurance Plans and Employer Groups

Except for North Dakota and Wyoming, all states allow employers to self-insure if they satisfy certain statutory requirements that guarantee their ability to meet Workers’ Compensation obligations. Large employers are sometimes attracted to self-insurance plans because losses can be predictable and benefits are capped by statute.

Employers must obtain a self-insurance certificate. They may also purchase excess insurance or reinsurance. Some states require the employer to also purchase a surety bond.