Workers' compensation insurance explained

By Allstate

Last updated: January 1

Workers' compensation insurance provides essential protection for both employers and employees in the event of work-related injuries or illnesses. To better understand it, we’ll get into what it is, the different types, how it works and what it typically covers.

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What is workers' compensation insurance?

Workers' compensation insurance (more commonly referred to as ‘workers comp’ or ‘workman’s comp’) helps pay for medical expenses and lost wages if an employee gets hurt or sick due to their job, according to the Insurance Information Institute (III). For example, if a warehouse worker injures their back while lifting heavy boxes, workers' comp may cover the medical bills and part of their salary while recovering. This benefit protects both the employee with support and the employer from potential legal issues.

Who needs workers' compensation insurance?

Designated to assist employees facing work-related injuries or illnesses (regardless of who was at fault). Worker's compensation insurance is mandatory in many states for most types of businesses. Workers’ compensation insurance is designed to benefit employees who face job-related injuries or illnesses (regardless of who was at fault), so many states require it for most types of businesses. If you run a business, you should check your state's specific regulations to ensure you’re in compliance with your state’s laws. However, any business that depends on employees should consider workers comp.

Who pays for workers’ compensation insurance?

An employer pays for workers’ compensation insurance, not the employee.

Is workers’ compensation insurance required?

Workers' compensation insurance is required in many, but not all, states, according to the III. You’ll need to check your state’s specific laws to see whether or not workers comp is required. You can look up your state’s official resources through the U.S. Department of Labor.

This requirement can also vary based on the type of business you have. For example, sole proprietors and partnerships are not required to get workers comp in many states, explains the III.

Types of workers’ comp coverages

When getting workers’ compensation insurance for your business, there are generally two parts to the policy, explains the III. Part One (Coverage A) provides the employees’ compensation coverage, and Part Two (Coverage B) liability coverage for employers.

Part One coverage

Part One covers the basic benefits mandated by law, including medical care, lost wages, rehabilitation services and death benefits if applicable according to the Department of Labor. These benefits may vary state-to-state.

Part Two coverage

Part Two extends coverage beyond what the law requires and is only triggered if the employer is found liable for gross negligence or misconduct leading to the employee’s injury or illness.

What is covered by workers’ compensation insurance?

Workers’ compensation insurance covers a range of aspects related to work-related injuries or illnesses. Let’s explore some of these coverages.

Wage replacement

This aspect ensures that employees receive a portion of their wages while recovering and unable to work.

Medical treatment

Workers' compensation covers the medical expenses incurred for treating injuries or illnesses sustained in the workplace.

Disability benefits

Employees with long-term disabilities may receive disability benefits, providing financial support for ongoing challenges.

Death benefits

In tragic cases where a worker loses their life due to work-related incidents, death benefits provide financial support to the deceased employee's family or dependents.

What’s typically not covered by workers' comp?

While quite comprehensive, workers' comp does not cover certain situations, such as:

  • Injuries resulting from drug/alcohol use
  • Injuries occurring off work premises or outside work hours
  • Pre-existing health conditions unaffected by work
  • Injuries from employee negligence or misconduct

How do claims work for workers comp?

When an employee suffers a work-related injury or illness, they file a claim with their employer's workers' comp insurance provider. The provider then investigates the claim, determines coverage, and handles medical payments and wage replacement. This often prevents lawsuits against the employer.

How is cost for workers’ comp insurance determined?

Premium costs vary based on the company's industry, location (requirements vary by state), payroll, safety initiatives, and claims history. Businesses can help control costs by implementing strong safety measures and creating an injury-prevention program. Ultimately, workers' compensation is a worthwhile investment for fostering a safe and supported workforce. By following these recommended guidelines, businesses can ensure compliance with workers' compensation regulations while safeguarding the wellbeing of their employees.