Workers' compensation

What workers' compensation is

Workers' compensation is a government-mandated insurance program. State law requires employers to provide benefits to employees who are injured or become ill because of their work. It is "government insurance" because the state writes the benefit rules, not because the state always sells the coverage. In most cases the employer buys a policy from an insurer, but the benefits it pays are the ones the statute sets.

The employer pays the entire cost. Employees do not contribute to workers' compensation premiums.

The trade-off: no fault, exclusive remedy

Workers' compensation rests on a bargain between employers and workers:

• The employer accepts liability without fault. A worker hurt on the job is paid whether the employer, the worker or nobody was careless.
• The worker gives up the right to sue. In exchange for guaranteed benefits, workers' compensation is the employee's exclusive remedy against the employer for a covered work injury. The worker cannot also bring a negligence suit against the employer for that injury.

Benefits are paid periodically, like wages, directly to the injured worker, and the insurer does not wait for a formal award when liability is not disputed. When an employer or insurer does dispute a claim, a state board or agency decides it, not a jury.

What is covered

Coverage applies to an injury or disease that arises out of and in the course of employment: an accident on the job or an occupational disease caused by the work. An injury or illness that happens off the job is not covered. That gap is filled by other coverage, such as disability income insurance, group health insurance or a state disability benefits program.

The four benefits

1. Medical benefits. Hospital, surgical, physician and prescription costs for the work injury, usually with no deductible, no coinsurance and no dollar limit. Medical benefits begin immediately.
2. Disability income (indemnity) benefits. A percentage of the worker's average weekly wage, commonly two-thirds, subject to a state maximum. They start after a short waiting period of a few days (often three to seven), which is paid back retroactively if the disability lasts long enough. They are classified as:

• temporary total: cannot work at all for now, expected to recover;
• temporary partial: can do some work at reduced earnings while recovering;
• permanent total: will never be able to work again;
• permanent partial: a lasting partial loss. The statute pays specific losses, such as a hand, a foot, an eye or a finger, from a schedule of a set number of weeks for each body part.

1. Rehabilitation benefits. Medical and vocational rehabilitation to return the worker to employment, including retraining.
2. Death (survivor) benefits. A funeral allowance plus income to the surviving spouse and dependent children when a work injury or disease causes death.

Workers' compensation benefits received by the worker are not taxable income.

The policy and how employers comply

The standard Workers' Compensation and Employers' Liability policy has two main coverage parts:

• Part One, workers' compensation: pays whatever the state statute requires. It has no policy dollar limit, because the law sets the benefits.
• Part Two, employers' liability: covers lawsuits that fall outside the statute, such as a third-party-over action, in which a party the injured worker sued brings a claim against the employer. In New York, such a claim against the employer is allowed only for a grave injury or under a written agreement by the employer to indemnify. In most states Part Two has stated dollar limits; for employees subject to New York law it is unlimited.

An employer meets the legal requirement in one of three ways:

• Private insurer: buying a policy from a licensed insurance company;
• State fund: buying from a state-run fund. A competitive state fund competes with private insurers. A monopolistic state fund is the only permitted source of coverage (North Dakota, Ohio, Washington and Wyoming);
• Self-insurance: a large, financially qualified employer, approved by the state, pays claims from its own funds.

Premiums are based on payroll and the job classification of the work, adjusted by the employer's own loss record through experience rating.

Exam tip: workers' compensation means employer-paid, no-fault, exclusive remedy, job-related only, and four benefits: medical, disability income, rehabilitation and death.