Workers’ Compensation Insurance… It’s not just for your Employees

By Wendy Anderson, Law Office of Wendy Anderson, and Casey Elliott, Phoenix Insurance Group

Most employers are aware of their legal obligation to provide workers’ compensation insurance for their employees. Few of them, however, purchase it for themselves. Owners who work in their business would be well served to consider doing this for the protection it would afford them should they be injured while working because, like their employees, workers’ comp insurance payments are the only remedy available* when someone is injured on the job.

What is Workers’ Comp?

Workers’ compensation insurance provides medical expenses, lost wages, and rehabilitation costs to employees and contractors, and their employees, whose illness or personal injury arose out of and in the course of their job.  It also pays death benefits to families of employees who are killed while working.  “In the course” of a worker’s job can include anything from slipping on the rug in your office, falling off a step-stool on a worksite, or being injured in an auto accident while driving to pick up lunch for the boss.
Workers’ compensation is based on a “social contract” between employers and employees. Each party benefits from this contract, but also must abide by certain rules or limitations.

Benefit for the Employer

According to state and federal law, employers must purchase insurance to cover the medical and rehabilitation costs of employees and uninsured subcontractors injured on the job. In exchange, the employer will not be held liable for their workers’ injuries. For the cost of the premium, which is the only cost the employer will bear should an employee make a claim, the employer gets peace of mind that they won’t be named in a lawsuit.

Benefit for the Employee

Employees give up their right to sue their employers, however, they are guaranteed payments for pain and suffering without having to prove that their employer was negligent, resulting in much faster payments for medical care. Workers’ compensation is a “no fault” system in which an injured employee is entitled to receive medical and compensation benefits no matter who caused the job-related accident, even if the employee was partially or entirely to blame. For the prohibition against suing their employer, the worker gets medical expenses covered with, essentially, no questions asked.

Does a business owner have to buy Workers’ Comp?

According to Arizona law, if your company employs even one worker full or part-time, yes, you have to purchase insurance. In fact, it is a felony to not do so. If you fail to buy this insurance and your employee files a claim, the employee will be taken care of, with his or her medical costs covered by a special fund managed by the Industrial Commission of Arizona (ICA). The ICA then will seek reimbursement from your company and will tack on a penalty.  In fact, even if none of your employees files a claim, the ICA can penalize you if it discovers you have violated the law. Further, the ICA has the authority to shut down any business for non-compliance.

But on the bright side, workers’ comp is the only remedy for an injured employee. It should be a comfort for employers to know that they cannot be sued if one of their workers is injured while on the job. The damages awarded to an employee, if they were permitted to sue and you were found liable, could vastly exceed the cost of the insurance premium.

Does the owner of the business have to be covered?

In Arizona, the owner of a company, whether it is a sole proprietorship, partnership, LLC, or corporation, is not required to carry workers’ comp insurance on himself/herself, provided the company is covering its employees.

Electing not to cover the owner of the business in order to save on the expense may be a shortsighted decision, however. In a small business, often the owner is an active worker in the business and may be just as likely to face an injury as an employee.  Without insurance covering the owner, the situation could be dire.  The owner might be absent from the company during recovery, potentially reducing the company’s revenues and hurting ongoing sales efforts. That might mean less income for the owner, who simultaneously, might also have to personally fund any medical bills.

Many business owners might assume that their personal health insurance policy will cover any work-related injuries or illness. However, these insurance companies have started to wise up to the fact that owners are choosing to waive workers’ comp coverage for themselves, and then look to their health insurance to step in. Many health insurance providers are now specifically asking whether the accident or illness was work-related, and they can choose to decline claims that are.

What kind of costs are involved?

Worker’s comp premium is directly related to the payroll that a business pays its employees and uninsured subcontractors. Each classification (class code) and job function has a standard rate which is multiplied by the projected annual payroll; the riskier the industry, the higher the rate for the appropriate class code. The premium will also be impacted if the owners choose to include themselves in coverage.  But for many job and industry classifications, this may be money well spent!

What else do I need to know?

Worker’s comp policies will have an audit at the end of the policy term. Since a policy is based on projected payroll, the audit will determine if your projection was accurate. If the payroll was understated, which happens often and especially if the business is brand new, the audit will discover that additional premium is due. Similarly, if the payroll was overstated, the audit will discover the over-payment and reimburse the insured for that over-payment. If the insurance carrier offers a self-reporting or pay-as-you-go type option, then the audit will be seamless because you’re reporting the payroll and paying the appropriate insurance premium as you pay your employees.

Keep in mind that if your business hires contractors, those contractors are required to have their own workers’ compensation policy for their workers.  You’ll want to get written assurances of this, and perhaps even get a copy of the declarations page or certificate of insurance, before the contractors begin work, otherwise, you might be found liable for their lack of coverage and might be penalized for not covering them yourself.

If you own a business with employees or contractors, please contact either Casey or Wendy to understand your legal obligations and insurance options. Workplace accidents and injuries can happen at any time and its much to your advantage to have the proper insurance coverage when they do.

* An employee may opt-out of workers’ compensation coverage prior to any workplace injury; in such circumstance, that worker has the option to sue their employer for negligence.


CASEY B. ELLIOTT                                            WENDY M. ANDERSON
Phoenix Insurance Group                                Law Office of Wendy Anderson, PLLC
(602) 707-7707                                                   (480) 825-4509