What Is Workers’ Compensation Insurance

Workers’ compensation insurance is essential coverage for any business that employs employees. Without it, you risk exposing your business to significant financial liability when workers suffer injuries and illnesses on the job. Workers’ compensation insurance protects your company from significant losses and protects your employees from potentially serious financial consequences. According to the National Academy of Social Insurance (NASI), employers paid over $100 billion in workers’ compensation costs in a recent reporting year, underscoring just how significant this coverage is. The unfortunate truth is that many companies fail to carry workers’ compensation coverage because they don’t realize how much it costs or how essential it is for their business. Fortunately, with a basic understanding of what types of coverage exist and some key points to keep in mind, you can get workers’ compensation insurance at an affordable rate.

What is Workers’ Compensation Insurance?
Workers’ compensation protects employers from financial losses due to employee injuries. This type of coverage is regulated by state laws — administered through agencies like your state’s Department of Labor or Workers’ Compensation Board — and is designed to cover a certain percentage of an employee’s salary for some time. After an employee suffers an injury, the employee’s wages are covered by the insurance company for a set period. The employee can file a claim with the insurance company to receive financial compensation for lost income. If you operate a business in one of the states with workers’ compensation laws, you need to have this type of insurance. According to the Insurance Information Institute (III), workers’ compensation is a no-fault system, meaning benefits are paid regardless of who caused the injury. But there are many exceptions to the list of covered injuries and illnesses. Workers’ compensation laws do not cover pregnancy, cancer, autism, epilepsy, rashes, and headaches unless a job injury causes them.

When Should You Get Workers’ Compensation Insurance?
This coverage is mandatory in all states, as well as in many other countries. There is no exact number of days before you need to get workers’ compensation insurance. It’s good to get it before an employee gets hurt or becomes sick. You can’t be too cautious about protecting your business’s bottom line. However, it’s good to obtain workers’ compensation insurance when hiring your first employees. The U.S. Small Business Administration (SBA) recommends that business owners review their state’s specific requirements before bringing on any staff, as penalties for non-compliance can include significant fines and business shutdowns.

Types of Workers’ Compensation Insurance
Chartered – This type of insurance is the most common type of workers’ compensation insurance required in all states. It pays a percentage of lost wages to the employee if they are injured at work. Most standard chartered policies are offered through private carriers such as The Hartford, Travelers, or Liberty Mutual, as well as through state-run funds in certain states.
Self-funded – This is a hybrid policy that combines the idea of a self-funded plan and a worker’s compensation insurance claim. A company self-funds its workers’ compensation insurance by contributing a certain percentage of payroll to the insurance company. An employee files a workers’ compensation claim, and if they win, the insurance company pays the employee, and the company does not have to pay a deductible. According to the Self-Insurance Institute of America (SIIA), self-funded arrangements are most common among mid-size to large employers with stable, predictable claims histories.

Hybrid – Sometimes called a “partial workers’ compensation policy,” this is a type of policy that combines workers’ compensation insurance with other types of insurance. Hybrid policies usually include health insurance and disability income coverage. These arrangements are sometimes structured as part of a broader employee benefits program reviewed by human resources professionals and legal counsel.

General liability workers’ compensation insurance – With a general liability policy, you’re protected from property damage, bodily injury, and specific compensation claims. With this type of coverage, you’re generally covered for lawsuits filed by an injured worker or a third party injured on the job. It is important to note that general liability and workers’ compensation are separate policies — general liability does not replace workers’ compensation coverage, as clarified by the Insurance Information Institute (III).
Contractual obligations coverage protects your company against claims made by workers’ compensation claimants and provides liability protection for certain types of contracts your company signs with other parties.

How Much Does Workers’ Compensation Insurance Cost?
The cost of your workers’ compensation policy will likely be based on numerous factors, including the amount of coverage you choose, where you get it, how long you’re insured, the number of employees you have, and your business location. The lower your cost, the more likely you will get a policy that excludes a large portion of claims. According to Insureon’s 2025 pricing data, the median monthly cost of workers’ compensation insurance for small businesses is approximately $45 per month, though this figure varies significantly by industry risk classification. High-risk industries such as roofing or logging carry substantially higher rates than low-risk office environments. Many insurers, including those rated by AM Best, use a system of National Council on Compensation Insurance (NCCI) class codes to determine base rates for each industry.

Source: National Council on Compensation Insurance (NCCI) and Insureon 2025 Cost Report. Rates are approximate averages and may vary by state.

How Much Does a Business Need to Register for Workers’ Compensation?
If you operate a business in one of the states with workers’ compensation laws, you need to register with the state insurance department. In most states, this is a one-time requirement. The registration process typically involves paying a fee and filing a form. Once registered, you should have a certificate of insurance that shows workers’ compensation insurance covers you. If you operate in one of the states with hybrid insurance policies, you should review your policy to see if it is a partial or hybrid policy. Depending on your policy, you may be covered for only a portion of the insurance you need to protect your business from financial losses from workers’ compensation claims. It is essential to purchase the correct insurance to protect your business from workers’ compensation claims and financial losses. If you operate in a high-risk industry, you should consider purchasing higher insurance. The U.S. Department of Labor’s Office of Workers’ Compensation Programs (OWCP) provides federal-level guidance for certain categories of workers, including federal employees and longshoremen, whose coverage may differ from standard state programs.

Worker Benefits and Policies
Worker benefits and workers’ compensation insurance policies vary based on the type of coverage you choose. With a general liability policy, you’ll get comprehensive protection for your business. Most policies include coverage for business interruption and property damage. Coverage for business interruption means your company is protected for costs if a disaster, such as a fire, wipes out all its assets, including inventory and equipment. According to the National Safety Council (NSC), the total cost of workplace injuries in the U.S. — including wage losses, medical expenses, and administrative expenses — exceeded $167 billion in a recent year, making robust workers’ compensation coverage a financial necessity for employers of all sizes.

Employee Benefits and Policies
Employee benefits and workers’ compensation insurance policies also vary based on the type of coverage you choose and the price you pay. With a general liability policy, you’ll probably get a business owners’ policy that includes a variety of benefits, such as disability income coverage, medical expense coverage, and life insurance. Providers such as The Hartford, Chubb, and Travelers offer bundled business owners’ policies that can be customized to include workers’ compensation riders depending on the state. According to Bureau of Labor Statistics (BLS) Injury, Illness, and Fatalities data, there were approximately 2.8 million nonfatal workplace injuries and illnesses reported by private industry employers in a recent survey year, reinforcing the critical need for comprehensive employee protections.
-No-Fault benefits – These benefits cover medical treatment and lost wages due to an on-the-job injury.
-Medical treatment benefits – These benefits may include in-network coverage for medical expenses, as well as coverage for out-of-network expenses.

• Treatment benefits – These benefits may include non-medical services such as rehabilitation or physical therapy. Many state workers’ compensation programs, including those administered by the California Division of Workers’ Compensation (DWC) and the New York Workers’ Compensation Board, mandate that insurers cover vocational rehabilitation services in addition to standard medical care.

Conclusion
Every business is affected by the risk of injuries to employees. Whether you run a salon, a school, or a manufacturing company, your workforce has been involved in activities that put them at risk of getting hurt. To protect your business against this risk, you should have workers’ compensation insurance. Workers’ compensation policies come in various forms and can be purchased by any industry, type of business, and location. For further guidance, the Insurance Information Institute (III) and the U.S. Small Business Administration (SBA) both offer free resources to help business owners understand their obligations and find appropriate coverage as of March 31, 2026.

Frequently Asked Questions

What does workers’ compensation insurance cover?

Workers’ compensation covers medical expenses, a portion of lost wages, rehabilitation costs, and death benefits when an employee is injured or becomes ill due to their job. It typically does not cover injuries that occur outside of work duties, pre-existing conditions unrelated to the job, or illnesses such as cancer or epilepsy unless a workplace incident directly caused them.

Is workers’ compensation insurance required for all businesses?

Workers’ compensation insurance is mandatory in virtually every U.S. state, but the specific requirements — including how many employees trigger the mandate — vary by state. Some states require coverage as soon as you hire your first employee, while others set a minimum threshold of three to five employees. The U.S. Department of Labor provides a state-by-state overview of requirements.

How much does workers’ compensation insurance cost per month?

The median monthly cost for small businesses is approximately $45 per month, according to Insureon’s 2025 data. However, costs are calculated based on your payroll size, industry risk classification (using NCCI class codes), claims history, and state regulations. High-risk industries like roofing can pay upward of $29 per $100 of payroll, while low-risk office businesses may pay as little as $0.35 per $100 of payroll.

What happens if a business does not have workers’ compensation insurance?

If a business operates without required workers’ compensation coverage, it can face significant penalties including fines, stop-work orders, and in some states, criminal charges. The business owner may also be personally liable for an injured employee’s medical bills and lost wages. The Insurance Information Institute (III) notes that penalties vary widely but are consistently severe enough to threaten business viability.

Can an employee sue their employer even if workers’ compensation is in place?

In most cases, workers’ compensation is the exclusive remedy for workplace injuries, meaning employees generally cannot sue their employer in civil court if workers’ comp coverage is in place. However, there are exceptions — such as cases involving intentional harm by the employer or claims against third parties whose negligence contributed to the injury. An employment attorney familiar with your state’s laws can clarify the specific rules that apply to your situation.

What is the difference between workers’ compensation and general liability insurance?

Workers’ compensation covers injuries and illnesses sustained by your own employees on the job. General liability insurance covers bodily injury or property damage claims made by third parties — such as customers or vendors — not your employees. These are two separate policies that serve different purposes, and having one does not replace the need for the other, as clarified by the Insurance Information Institute.

Does workers’ compensation cover part-time or temporary employees?

Yes, in most states workers’ compensation coverage extends to part-time and temporary employees in addition to full-time staff. Independent contractors are typically not covered under a standard workers’ compensation policy, though misclassification of employees as contractors is a common compliance issue flagged by state labor departments. The Bureau of Labor Statistics tracks injury rates across all employment types, including part-time and contingent workers.

What is a workers’ compensation class code?

A workers’ compensation class code is a four-digit number assigned by the National Council on Compensation Insurance (NCCI) or a state rating bureau that categorizes the type of work employees perform. Insurers use these codes to determine the base rate for your policy. Each code carries a different rate per $100 of payroll based on the historical injury frequency and severity for that type of work. Assigning the wrong class code — whether accidentally or intentionally — can result in policy cancellation or back-owed premiums.

How do I file a workers’ compensation claim?

The workers’ compensation claims process generally involves four steps: the employee reports the injury to their employer, the employer notifies their insurance carrier, the insurer investigates the claim, and — if approved — benefits begin. Timelines for reporting vary by state, and delays in reporting can jeopardize an employee’s benefits. The U.S. Department of Labor’s OWCP outlines the federal claims process, while state workers’ compensation boards handle the process for most private-sector workers.

Are sole proprietors required to have workers’ compensation insurance?

Sole proprietors without employees are generally exempt from workers’ compensation requirements in most states, but this varies. Some states allow or require sole proprietors in certain industries — particularly construction — to carry coverage. Additionally, many general contractors require subcontractors to carry their own workers’ compensation policy before they can work on a job site. It is advisable to check your state’s requirements with the U.S. Small Business Administration or a licensed insurance broker.