Workers’ Compensation Doesn’t Always Cover Owners, and That Can be a Big Problem

September 13, 2016

An employee of a subcontractor accidentally gets injured on your jobsite. The subcontractor carries workers’ compensation insurance. So, is your company in the clear or do you have reason to worry? The answer might depend on the “Workers Compensation and Employers’ Liability” box of their certificate of insurance (COI). In this article, we’ll explore the importance of that COI section and what it means for your business. 

The Basics of Workers’ Comp

Workers’ compensation, or workers’ comp, is a type of accident insurance paid by employers. The insurance covers medical expenses and lost wages until an employee returns to work. Policies also provide dependent benefits in the event of death from a job-related injury. Private insurance companies or state-run workers’ compensation funds generally provide the benefits and employees do not pay toward the coverage. 

Employees covered by workers’ comp insurance largely forgo their right to sue employers in court in exchange for the benefits. This is known as the no-fault system. However, one major exception to this rule is if employees believe they were intentionally harmed while working for their employer or a third party. 

State Rules

Every US state but one requires workers’ comp insurance for employees covered by state compensation laws. Texas is the only state without such a requirement. However, Texas does require coverage for construction companies on government contracts; otherwise the insurance is optional. Coverage requirements by state vary widely. Some states require coverage for even one employee while others set a minimum threshold of three or more. States also have different rules for job type exclusions. Any risk management program should involve thorough research of each state’s workers’ comp laws and requirements where the business operates. 

The Ownership Exclusion

Workers compensation insurance premiums are calculated based on: 1) the company’s industry, 2) type of work performed by each employee, 3) claims history, and 4) company payroll. Some states allow for coverage exclusions for company owners and executives. These positions usually generate the highest compensation numbers, so by omitting them from coverage, this lowers the payroll amount when calculating the overall premium. Companies could save money in annual workers’ compensation coverage costs if those excluded individuals carry very low risk of suffering a work-related injury.

Who is excluded from a subcontractor’s workers’ comp policy is very important to any company for which that subcontractor performs work. You might not expect the CEO of a multi-million-dollar electrical company to show up at your jobsite. However, with smaller companies, the owner not only is likely to visit the project but might be doing some of the work themselves. If they get injured and are not covered by workers’ compensation insurance, it could leave your company on the hook for payment. With the average comp claim costing $40,051 according to the National Safety Council, that’s a bill you want to avoid.   

Workers’ Comp and the Certificate of Insurance

A subcontractor’s COI provides answers. Insurance compliance staff should consult the “Workers Compensation and Employers’ Liability” section of the COI. The form asks “any proprietor/partner/executive officer/member excluded?” If a subcontractor indicates yes, they must provide an explanation. Assess the potential risk and determine if your company feels comfortable moving forward. If the excluded individuals will never come onsite, the risk is very low. However, if employees not covered by workers’ compensation will physically interact with a jobsite, proceed with extreme caution.

Staying Protected

Understanding and assessing COIs is critical for keeping a business covered against unnecessary risk and negligence. myCOI’s cloud-based software solution tracks COIs, proactively manages renewals, and calls out threats before they become problems. Plus, the software is backed by a team of insurance professionals working to keep your company protected. Interested in learning more or want to see myCOI in action? Request a product demo or subscribe to our newsletter for more risk management best practices.

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