Workers’ Comp Insurance Cost: How Much Do Businesses Pay?

Workers’ Compensation Costs Faced by Businesses

Businesses that fall within a state’s workers’ comp insurance mandate must buy a workers’ compensation policy or self-insure. The requirement to buy insurance varies from state to state. But how much is workers’ comp insurance exactly?

Some states have very low costs because they exempt many businesses and workers from the system, while other states have high costs because they require virtually all businesses to participate. How much a business pays for workers’ comp insurance is influenced by a variety of factors.

Which Businesses Pay Workers' Compensation Insurance Premiums?

Workers’ compensation is an insurance system closely overseen and regulated by the state. The system was created to protect employees who suffer work-related injuries and occupational illnesses.

As a result, most states require almost all businesses to participate in the system. A notable exception is Texas. Texas does not require employers to buy workers’ comp insurance.

An acute injury from an on-the-job accident will pay the injured worker benefits like medical treatment and partial wage replacement. Workers with occupational illnesses from hazardous environments also qualify for benefits.

These benefits get paid by an insurer. When a worker suffers a covered injury or illness, the worker or their employer files a claim. The insurer reviews the claim and determines whether to pay it. If the insurer accepts it, the worker receives medical and wage replacement benefits.

The incentive for employers to participate is the legal immunity from lawsuits for on-the-job accidents this system offers. Specifically, once an employer buys a workers’ comp policy, it becomes immune from lawsuits brought by a work injury lawyer on behalf of injured workers.

Options Affecting the Cost of Workers' Comp Insurance

In most states, the workers’ compensation system gives employers three options for participating:

• Purchase a policy from a private insurance broker

• Participate in a state fund

• Self-insure by creating and managing a fund

A company’s workers’ comp insurance cost will depend on which of those options they choose. The state fund is usually the least expensive because it has the largest pool of participants. As a result, when the fund spreads its costs across the participants, the costs per participant drop. Only 25 states currently maintain a state fund.

The workers’ compensation insurance cost is usually higher for private policies. In states that license multiple insurers to offer workers’ compensation policies, competition between companies can drive down the cost of workers' compensation insurance.

Self-insurance is a complicated process because the company must hire a claim administrator to set up and run its fund. But for a large business, its workers’ comp insurance cost could be lower by self-insuring compared to paying an insurance company for a policy.

How Insurers Set Workers' Compensation Insurance Rates

How much does workers' compensation insurance cost? Insurers usually look at several factors in setting a business’s workers’ comp insurance cost.

First, the number of workers makes a difference. Administrative costs drop as a business has more employees. At the same time, the risk of an accident also increases.

Thus, the average cost of workers’ comp insurance will vary depending on the size of the business, with larger businesses paying more overall but with a lower workers’ compensation insurance cost per employee. In contrast, the average cost of workers' compensation insurance for a small business is lower, but it will often pay more per employee.

Second, certain industries pose greater risks for work-related accidents. This means that the insurer might set a business’s workers’ comp insurance cost based on the type of work performed and the risks to workers. Risky work like healthcare and construction, then, may have a higher workers’ compensation cost than less risky work like financial or legal services.

Third, one of the most influential factors is a business’s experience rating. An experience rating predicts how much the workers’ compensation policy will cost the insurer. The insurer considers factors such as how long the business has been open, the business’s accident rate and the amount paid in workers’ comp claims when calculating the experience rating for a policyholder.

Businesses with higher accident rates, more frequent claims, and more expensive claims may pay higher premiums. This factor encourages businesses to keep employees safe by providing training, safety equipment and worker incentives.

The True Cost of Workers’ Comp Insurance

When looking at workers’ comp insurance costs, businesses must also consider their savings. By having workers’ comp insurance, they become immune from most lawsuits for workplace accidents. This factor alone can justify the cost of workers’ comp insurance.

In addition to avoiding costly personal injury settlements and damage awards, businesses can lower their general liability insurance costs. This is the type of insurance that would cover the business for negligently injuring someone. Thus, they must consider their general liability and workers' comp insurance cost together.

Another goal of workers’ comp insurance is to make it easier for workers to join companies that perform potentially hazardous work. When companies do not have workers’ comp insurance, they may have to pay workers more to entice them into performing hazardous work.

Finally, companies that pay the cost for workers’ compensation insurance can focus on their businesses rather than worrying about workplace accidents and worker lawsuits. Similarly, workers feel more comfortable knowing that they can receive a workers’ comp settlement if they suffer an on-the-job injury or occupational illness.

Learn More About Workers’ Compensation Costs From ConsumerShield

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