Workers' compensation

What workers' compensation is

Workers' compensation is a statutory insurance system that pays benefits to employees who suffer bodily injury, disability, or death arising out of and in the course of employment, including occupational disease. Because the benefits are set by law rather than negotiated between the parties, the policy does not contain the usual dollar limit for these benefits — it promises to pay whatever the applicable workers' compensation law requires.

Two ideas define the system:

• No-fault. The injured worker does not have to prove the employer was negligent. Proving that the injury is work-related is normally enough.
• Exclusive remedy. In exchange for prompt, predictable benefits, the employee generally gives up the right to sue the employer for damages over the injury.

The benefits

Most workers' compensation laws provide the same broad families of benefits:

1. Medical benefits — treatment for the work injury or illness, typically with no deductible and no dollar cap on covered care.
2. Income (disability) benefits — wage replacement, paid as a percentage of the worker's average wage rather than the full wage, and usually after a short waiting period. Disability is classified as temporary total, temporary partial, permanent partial, or permanent total.
3. Death and burial benefits — income benefits to surviving dependents plus a burial allowance.
4. Rehabilitation benefits — medical and vocational rehabilitation to help the worker return to gainful employment.

The two parts of the policy

A workers' compensation policy is written in two coordinated parts:

• Part One — Workers' Compensation: pays the statutory benefits described above.
• Part Two — Employers Liability: pays damages when an employee's work-related injury falls outside the comp statute and the employer is sued directly. Unlike Part One, Employers Liability is written with dollar limits.

Think of Part Two as the safety net for the gaps the exclusive-remedy rule does not close.

How coverage is obtained and priced

Depending on the jurisdiction, employers may buy coverage from private insurers, from a state fund, or — if they meet financial requirements — qualify as self-insurers. Employers rejected in the voluntary market are typically covered through an assigned risk plan or residual market pool.

Premium is based on payroll, not on the number of employees. The insurer applies a rate for each job classification to every $100 of payroll in that class, then adjusts the result. Larger employers are usually subject to an experience modification factor, which lowers premium for better-than-average loss experience and raises it for worse. Because payroll is only estimated when the policy is written, workers' compensation policies are auditable: the insurer audits actual payroll after the term and issues an additional premium charge or a return premium.

How it interacts with other coverage

Workers' compensation is occupational coverage only. Group medical and disability plans commonly exclude or offset benefits payable under workers' compensation, so a worker is not paid twice for the same loss. Coverage that responds to both work and non-work losses is described as 24-hour coverage; workers' compensation by itself is not. Off-the-job injuries and illnesses remain the job of health, disability income, and life insurance.