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What is the Cost of Workers’ Compensation Insurance?

Updated: Dec 8, 2021


What is the Cost of Workers’ Compensation Insurance?
What is the Cost of Workers’ Compensation Insurance?

According to the National Safety Council, the average cost of a workers’ comp claim is $40,000. But the average cost of a workers’ compensation insurance policy varies from one company to another. There’s no standard cost that applies across the board. This is because insurance companies can use different factors, such as payroll, employees’ type of work, workers’ classification, and your claims history, to determine the costs of workers’ compensation insurance.


Workers compensation insurance is an important insurance coverage, which employers in most states are required to purchase. It covers the cost of medical care, lost wages, and other benefits when an employee gets hurt or becomes sick on the job. It can be daunting getting one that suits your company, but it can be easier when you understand the factors that affect your costs before signing up with any insurance company.


What Does Workers’ Comp Cover?


To help you understand what you are paying for, let’s quickly review what your workers' compensation premium covers. Workers compensation insurance premiums typically cover:

  • The employee’s medical expenses such as surgeries and physical therapy when ongoing treatment is needed

  • Compensation for temporary disability benefits, permanent disability benefits, and return-to-work supplements

  • Lost wages when the employee is unable to work, either because they're receiving treatment or recovering from a work-related injury or illness.

  • Death benefits to an employee's family if they die due to a work-related injury or sickness. It also covers the funeral costs of the deceased employee.


Note that while compensation requires that employees relinquish their right to sue your company, they may still seek redress in court if they think the injury or sickness occurred due to the company's negligence. This means that businesses need to prioritize the safety of their staff if they wish to save money on workers' compensation costs. This applies especially to high-risk jobs, such as healthcare, construction companies, and lumberjack.


Factors that Determine Your Workers Comp Insurance Costs

Four key factors that play the most significant roles in determining how much you pay for your workers' compensation premiums are your industry, payroll, claims history, and the local laws in the state where you are doing business.


Industry


Your industry typically affects your workers' comp insurance premium. Insurance companies generally classify high-risk jobs for higher premiums compared to low-risk jobs. The type of work your employees do equally affects the cost of workers' compensation. For instance, your accountant's workers' compensation would definitely cost you less than that of workers in the construction department, because they’re more likely to face workplace injuries. Essentially, the riskier the employee's job, the higher the premium you pay.


Payroll


Insurance companies calculate workers' compensation based on employees' annual payroll. Your company’s annual payroll affects your annual workers' compensation insurance cost. Insurance companies will charge you a specific rate for every $100 of your company’s payroll. This means that the more workers you have or, the larger your company, the more you will have to pay.


Claims History


Your claims history is another factor that you should also consider. If your business has had lots of worker's compensation claims in the past, your workers' compensation costs will likely be higher than other businesses with fewer or no insurance claims. Usually, they'll look at the number of claims and the seriousness of the claims when considering the workers' compensation premiums for your business. Typically, the more claims you have, the higher premiums you're likely to pay, as more claims are seen as an indication that your workers face more risks.


State Laws


Keep in mind that each state has its own laws concerning workers' comp payment. Many states require employees to carry worker's compensation for each employee. However, there are some exceptions. For example, Arkansas allows employers with less than five employees not to bother about workers' comp. At the same time, California mandates that businesses with at least one employee must provide workers' compensation for their workers. So make sure to consider this as you estimate your workers' compensation costs.


How to Calculate Workers’ Comp Premiums


The amount you pay for workers’ compensation is a particular percentage of every $100 in your payroll. Insurance companies in California, for instance, charge a $1.56 average premium in 2021 per $100 of payroll. Generally, most insurance turns will charge $1 per $100 of payroll for workers' comp in 2021. Also, as mentioned earlier, your premium is based on the classification or type of work your employees do every day, your experience modifier or claims history, and your payroll (per $100).


For example, the costs of workers’ compensation per $100 of covered payroll range from $0.55 in Texas to $2.25 in Alaska. But these numbers are not as straightforward as they seem. Here's a breakdown of the formula used:


Classification rate x Experience modification factor x (Payroll / 100) = Premium


The National Council on Compensation Insurance (NCCI), an insurance rating and data collection bureau specializing in worker's compensation, sets the rate that most states use. Using data obtained from millions of claims and companies, the NCCI analyzes trends and makes recommendations. The NCCI maintains an online searchable database of workers’ comp class codes. Insurance companies rely on these classification codes to calculate the amount of workers' compensation insurance premiums that a business pays.


How to Purchase Workers' Compensation for your Business


Most States allow business owners to purchase workers’ compensation insurance coverage from a private insurer. Some state governments also sell workers' compensation insurance to private companies. However, four states – North Dakota, Ohio, Washington, and Wyoming – mandate businesses to purchase workers' comp policy from the state fund.


Do You Need Help Finding the Right Workers' Comp Insurance Provider?


We understand that the process of finding an affordable and satisfactory workers’ comp package for your employees can be overwhelming. We are happy to help you with this, so you can focus on other key areas of your business. We are experts at assisting businesses to implement the best growth strategies successfully. Connect with us today for further assistance.


Also, as leading partners in the PEO, HR, payroll, and benefits outsourcing marketplace, we provide result-oriented services for small and medium-sized organizations and government contractors, serving as a trusted partner in integrated human resource compliance, risk management, employee benefits, employment practices liability insurance (EPLI), and payroll processing.