Does My Business Need Workers' Compensation Insurance?

State Law Determines Insurance Requirements

Construction workers installing new roof of building on construction site
•••

Visoot Uthairam / Getty Images

One question many business owners ask is whether they are obligated to buy workers' compensation insurance. The answer is usually yes. Most states require employers to purchase insurance if they employ workers who are covered by the state's compensation law.

Key Takeaways

  • Most states require employers to buy workers' compensation insurance, with exceptions for certain kinds of workers such as contract workers or farm workers.
  • Most states allow private insurers to sell workers' comp insurance.
  • Four monopolistic states require employers to buy insurance from a state fund.
  • Texas is the only state that doesn't require most employers to provide workers' comp insurance.


Laws Vary by State

Workers' compensation laws vary from state to state. In most states, businesses with any employees are required to purchase insurance. A handful of states require insurance only if a business employs at least a specified number of employees. Examples are New Mexico (three workers) and Alabama (five workers).

In many states, employers must include corporate executives when counting employees. Federal law also requires companies hiring contractors overseas to purchase Defense Base Act insurance, which is an extension of workers' compensation.

Most states require businesses to buy a workers' compensation policy even if they employ only one worker.

All workers' compensation laws contain exceptions for certain types of workers. Many laws exclude:

  • domestic workers,
  • independent contractors,
  • casual employees,
  • farm workers, or
  • real estate agents.

If you believe your workers are exempt from the law, you should verify their status with your state's worker's comp authority.

Most states have declared workers' compensation insurance the exclusive remedy (sole source of compensation) for employees injured on the job. Employers that have purchased workers' comp insurance are generally immune from lawsuits by their injured employees.

NCCI States

About two-thirds of the states are called NCCI states because they subscribe to the National Council on Compensation Insurance. The NCCI states allow private insurers to sell workers' compensation insurance.

While the NCCI states operate their own workers' compensation bureaus, each relies on the NCCI to perform various administrative functions. For instance, in many states, the NCCI is responsible for experience rating, including the calculation of experience modifiers.

The NCCI also develops and maintains the classification and rating system used in these states. In addition, it creates and publishes the forms and endorsements insurers use to issue workers' compensation policies.

Monopolistic States

Most states permit insurers to sell workers' comp insurance as long as they meet the financial requirements established by the state governing authority. However, four states prohibit the sale of private workers' comp insurance. Called the monopolistic states, they are North Dakota, Ohio, Washington, and Wyoming. These states require employers to buy insurance from a state-controlled fund.

In the four monopolistic states, the state fund performs many of the same functions that bureaus or the NCCI perform in other states. Examples are experience rating and administering deductible programs.

If your business conducts operations in one of the monopolistic states, all workers you employ in that state must be insured under a policy purchased from the state insurance fund.

Independent Bureau States

Eleven states and the District of Columbia are called the independent bureau states because they do not subscribe to the NCCI. These states include California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin. The independent states permit private insurers to sell workers' compensation insurance.

Each of the independent states utilizes its own classification and rating system. These systems often closely resemble those developed by the NCCI. The workers' compensation bureau in each state performs a wide variety of functions. For instance, the bureau typically calculates experience modifiers, collects premium and loss data from insurers, and develops the workers' compensation rates or loss costs used in that state.

Texas

Texas is the only state in the U.S. that doesn't require private employers to purchase workers' compensation insurance. (However, businesses that contract with government entities employers are obligated to buy insurance for employees working on that project.) Workers' comp insurance has been a voluntary coverage in Texas for over a century.

However, employers that do not purchase insurance lose some important defenses against lawsuits by injured employees. For instance, they cannot defend themselves on the basis that the worker's own negligence or the negligence of a fellow employee caused the worker's injury. If they lose a lawsuit, uninsured employers may be liable for punitive damages.

Frequently Asked Questions (FAQs)

Do I need workers' comp insurance for one employee?

In most states, you need to buy workers' comp insurance if you have one or more employees. However, a number of states only require employers to have workers' comp for businesses with more employees. They include New Mexico (three employees) and Alabama (five employees).

Who are the biggest workers' compensation insurance providers?

The top three workers' comp providers are Travelers, Hartford, and AmTrust.
The market is highly varied. The top 25 largest workers' comp insurers include five state insurance funds, a conglomerate, several multiline insurers, and some specialty insurers.


Article Sources

  1. New Mexico Workers Compensation Administration. "Determining Insurance Coverage."

  2. Alabama Department of Labor. "Insurance Requirement Information."

  3. Department of Defense. "Acquisition Strategy for Defense Base Act Insurance," Section 2, Page 3. 

  4. Pierce, Pierce & Napolitano, Attorneys at Law. "Four Exceptions to the 'Exclusive Remedy' Doctrine."

  5. NCCI. "NCCI State Map."

  6. Texas Department of Insurance. "History of Workers' Compensation in Texas."

  7. Texas Department of Insurance. "Workers' Compensation Insurance Guide."