What is Workers' Compensation Insurance?

Workers' compensation insurance covers medical and wage benefits if an employee is hurt or becomes ill on the job. Each state mandates coverage, and pay and medical benefits differ by state. Workers' compensation is regarded as social insurance since it is based on a social contract between management and labor. In exchange for acquiring workers' compensation insurance, business owners are shielded from civil lawsuits filed by injured employees. However, each benefit has limitations. Businesses purchase workers' compensation insurance, which is underwritten by insurance firms and, in some jurisdictions, publicly sponsored state funds.

Workers' compensation covers medical bills, lost income, and rehabilitation expenses for employees injured or ill "in the course and scope" of their employment. It also provides death payments to the families of workers murdered on the job.

What Factors Determine the Cost of Workers' Compensation Insurance?

In each state, enterprises with comparable accident patterns and expenses at the workplace are divided into "classes." Rates for each class are based on the five-year loss experience of all firms within that class. This creates an equal system in which premiums are proportional to the real loss experience of the business class. On top of this data, economic considerations for each state are applied to determine the rate for each class in a specific state.

An "experience rating" mechanism permits the change of class rates based on a company's loss history. This approach gives business owners great control over the cost of their workers' compensation insurance – safe businesses are rewarded with reduced premiums, while dangerous businesses are punished with higher rates.