Is My Business Obligated to Buy Workers Compensation Insurance?

State Law Determines Insurance Requirements

Businessman with question mark over his head

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 compensation law.

Laws Vary by State

Workers' compensation laws vary from state to state. Most states require employers to purchase insurance if they employ even one worker. A few 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. Most laws exclude domestic workers, independent contractors, and casual employees. About three-quarters of the states exclude workers employed on farms. Some exclude taxi drivers 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.

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 include 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.

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.

Independent States

Eleven states and the District of Columbia are called the independent 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 and Oklahoma

Texas is the only state in the U.S. that doesn't require private employers to purchase workers compensation insurance. (Public employers are obligated to buy insurance.) 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.

Oklahoma passed a law in 2013 that allows employers to opt out of workers compensation requirements if they provide benefits to injured workers under an alternate benefit plan. However, the law was declared unconstitutional in early 2016 by the Oklahoma Workers Compensation Commission. The Commission found that the benefits provided to workers under alternative plans were inferior to those afforded under the workers compensation law. The future of Oklahoma's opt-out law is uncertain.

Edited by Marianne Bonner