If you are a business owner you are probably familiar with workers comp insurance. From my experience as a commercial insurance professional there are lots of opinions about workers comp ranging from “It’s a fraud that costs me lots of money for nothing” to “I am so thankful that I had a quality workers comp policy in place, it saved my business.” Many of the negative opinions actually come from common misconceptions about this coverage and how it applies to you as a business owner.
I want to lower my Workers Comp premium.
Through better understanding it will help you be able to see how important having workers comp insurance is. Here are two of the most common workers comp insurance misconceptions:
Misconception #1: “If I am not required by the state to buy workers comp I don’t need it.”
This is probably the biggest false belief of small business owners. Many states do not legally require you to purchase workers comp if you have less than a certain number of employees. For example in Georgia the number is three; if you have only one or two employees you are not required to buy workers comp insurance by the state. So this means you don’t need it and are exempt right? Wrong! The fact is that even if you only have one employee you and your business can still be held liable in the event that employee gets hurt on the job. Just because you are not required to buy it legally by the state does not mean that you are exempt from workers comp liability; it only means you are exempt from any penalty by the state for not buying the coverage.
Look at this way: Unless you have a loan on your car you are not required to have comp and collision coverage but if you run into a tree your car is still going to be wrecked and you are still going to have to pay for it. Just because you didn’t have to buy comp and collision doesn’t meant that your car isn’t totaled. The same principle applies for work comp. Even if you are not legally required to buy workers comp insurance by the state you can still be sued for workers comp benefits.
Misconception #2: “I have figured it out, to not have to buy workers comp I just need to use 1099’s (subcontractors) and then I will never need workers comp insurance”
This is another popular but very incorrect idea that is very common especially with contractors. By only using 1099’s you may be setting yourself up for headaches from an insurance standpoint. To explain there are two types of 1099’s (or to use an insurance term subcontractor):
- Uninsured Subcontractors: An uninsured subcontractor is anyone that you pay as a 1099 that does not have work comp insurance of their own. From an insurance standpoint an uninsured subcontractor is no different than an employee; they can make a workers comp claim the same way. For this reason your uninsured subcontractor costs will be counted as payroll at your workers comp audit. Often this comes as a surprise to the business owner who thinks that a 1099 does not count as an employee and therefore does not affect their audit but by then it is too late and the additional costs can be very high. Lastly many insurance companies do not like to insure businesses that use a high number of uninsured subcontractors so coverage can more expensive or difficult to find. The reason for this is there are fewer controls in place for a 1099 versus an employee and therefore they are more likely to get injured or even make a false claim. If you are considering using uninsured subcontractors I would strongly recommend contacting your commercial insurance agent for help and guidance.
- Insured Subcontractors: An insured subcontractor is a 1099 that has their own work comp insurance. The most important factor in working with insured subcontractors from an insurance standpoint is getting and always keeping a current certificate of insurance showing that workers comp insurance is in place at the same limits as your policy. I would recommend keeping a file for each insured subcontractor to keep certificates of insurance together and organized. It is a best practice to always request a new certificate of insurance from the insured subcontractor’s agent before you allow work to begin on each job. This is to insure that the work comp policy did not cancel or lapse since the last time a certificate was received.
The Bottom Line:
Almost every business no matter how many employees they have has some need for workers comp insurance to protect them from employer liability. There is no way around it and there is no shortcut; it is a need of virtually every business owner. It does not have to be hard though, with the help of a quality commercial insurance specialist, like all insurance, should give you peace and not anxiety. Are you working with the right commercial insurance agent?