Workers Compensation Insurance: How it Works & Who it Covers

In most states, employers are required to purchase workers compensation insurance, which provides employees who become injured or ill while working with medical and financial benefits. It can also include death benefits for families of employees who are killed on the job.

All regular employees, including full-time, part-time, and seasonal are entitled to receive workers comp benefits so long as taxes are deducted from their paychecks.

Employees covered by workers compensation can’t file a typical personal injury lawsuit in most cases; a workers comp claim is the only remedy available to them for most work-related health issues.

However, employees are covered for injuries and illnesses even in circumstances where employers weren’t negligent and regardless of who was at fault, which means they have strong protection if and when things go wrong.

All employers, including small business owners, need to understand workers compensation laws because they’re likely required by their state to have coverage — and employees need to understand it to ensure they get the benefits they’re entitled to if something happens to them at work.

On this page:

• Who Pays for Workers Compensation?
• How Does Workers Compensation Work?
• What Does Workers Compensation Cover?
• What Isn’t Covered by Workers Compensation?

Who Pays for Workers Compensation Insurance?

Employers must buy workers compensation insurance for employees in all states except Texas. However, the rules vary depending on where you live.

For example, in Alabama, workers comp coverage is required only for companies with five or more employees, but in Arizona, it’s required for all businesses, including sole proprietorships and small businesses that only hire family members.

This insurance must be purchased by companies across all industries, even those in which the chance of work-related accidents seems unlikely. The cost of workers comp insurance varies by the insurance agency, and there are serious consequences for employers that fail to buy workers comp coverage when required.

In some states, not having the required insurance is a criminal offense that can result in fines and jail time. Injured workers can also file a lawsuit against employers who fail to carry workers compensation coverage.

Companies should make sure they comply with the laws, as workers comp coverage is generally fairly affordable and the consequences of not buying mandated coverage are dire.

How Does it Work?

States have specific guidelines for workers compensation claims. Here are some basics of what you can expect at each stage of a claim:

1. An illness or injury is reported. The specific amount of time workers have to report varies, but injuries and illnesses should generally be reported as soon as possible.
2. The employee seeks medical assistance. Depending on the state, employees may be able to choose their own doctor or may have to visit a physician on an approved list posted by the employer.
3. The claims process begins. The employer provides the necessary claim forms to the injured worker and their medical care provider. The employer needs to be informed of the nature of the illness or injury, which must be connected in some way to job duties.
4. The employee files the claim. The employee will need to formally file a claim with the employer. The employer must notify their insurance company and follow the laws for reporting the injury to the Occupational Safety and Health Administration as well as to the state’s workers compensation board.
5. The employee receives benefits. These benefits could be paid by the insurer to either the care provider offering treatment or directly to the injured employee.
6. The employee returns to work. Eventually, the employee’s condition will ideally improve enough that they can return to work. If this doesn’t happen for a long time — or ever — the employee may be entitled to disability benefits.

What Does Workers Compensation Insurance Cover?

Workers compensation insurance covers most of the employee’s medical expenses and lost wages, as well as many costs incurred by the employer associated with the injury. Here are some of the key things workers comp policies will pay for.

Medical Costs to Treat Illnesses and Injuries

Employees will receive health care for work-related illnesses and injuries. Again, depending on the state, the employee may either be entitled to see a doctor of their choosing or one off a preapproved list of care providers.

Medical benefits are typically unlimited and there are no deductibles, copays, or coinsurance costs. Patients are entitled to coverage for not just standard medical bills, but also nursing care, surgical expenses, and even things like adaptive medical devices.

Lost Wages and Disability Benefits

Employees who miss enough work are also entitled to benefits for lost wages. Often, benefits for lost wages begin after about a week, but the specific timeline varies by state.

When a worker is temporarily disabled, they are entitled to receive disability benefits depending on whether they’re allowed to be on modified duty or are unable to work at all.

Employees could also receive permanent partial or total disability benefits when they’re deemed unable to ever return to work or when their earning power is reduced permanently due to a disabling injury. Permanent benefits don’t necessarily last for the rest of an injured worker’s life — the maximum length of time will differ by state. Some states require permanent benefits be paid for just 200 weeks, but others require 1,500 weeks.

Disability benefit payments are calculated based on the employee’s average weekly wages in the 12 months before being injured or becoming ill. This means overtime is taken into account as well. 

Death Benefits

In the event a worker is killed due to a job-related illness or injury, their family members may be entitled to receive death benefits. These benefits could be paid either to a surviving spouse or to surviving children under the age of 18.

Again, state laws differ dramatically on workers compensation death benefits. Some states require benefits to be paid for the rest of the life of the surviving spouse, while others require benefits to be paid only for a predetermined length of time.

Legal Costs if the Employee Sues

Because workers compensation is an exclusive remedy system in most states, employees generally can’t file a lawsuit against an employer over a workplace injury. Employees can, however, take legal action if there is a dispute over workers compensation coverage. Sometimes, employees try to sue despite the fact the law isn’t on their side.

Many workers compensation insurance policies provide coverage for legal costs and fees incurred by employers in resolving claims made in connection to work injuries. Employers who want to make sure they have this protection should ensure their insurance policy includes employer’s liability insurance.

What Does Workers Compensation Not Cover?

Although workers compensation provides broad coverage for employers and employees in the event of a workplace injury, there are some things it doesn’t cover, including independent contractors. Other situations not covered include:

• Customer injuries: Employers will need a general liability policy to make sure they’re covered if customers get hurt.
• Workplace safety improvements: Employers that need to make fixes to their workplace to prevent further injuries won’t get help from workers comp insurance to pay for these costs.
• OSHA fines and penalties: Most workers compensation policies don’t provide coverage if an employer is fined by OSHA for workplace safety violations after an on-the-job injury.
• Wages for replacement employees: Employers that need someone to fill in while an injured worker is recovering won’t have those wages paid for by workers compensation.
• Employee pain and suffering: Although successful personal injury lawsuits allow injured victims to recover compensation for their discomfort, workers compensation policies don’t.

Bottom Line

Workers compensation insurance is one type of business insurance that broadly protects both employees and employers.

It’s important for business owners to know their state’s laws and comply with their coverage obligations so there’s money available in the event of work-related injuries.

Similarly, employees should be aware of what they’re entitled to in such situations.