What Is Workers’ Compensation Insurance? How Does It Work?

Workers’ compensation insurance pays vital benefits to employees when injured or sick because of their job. To know more about it, continue reading this article.

Anyone in this world of uncertainties can have to deal with unexpected injuries. Before we delve too deeply into the discussion, know what workers’ compensation insurance is. Workers’ compensation insurance provides wage replacement and medical benefits to employees injured in employment in exchange for mandatory relinquishment of the employee’s right to sue their employer for the tort of negligence.

By accepting workers’ compensation benefits, the employee waives the right to sue their employer for injuries. It may include a partial salary compensation and coverage of medical costs. Workers’ comp is not like unemployment benefits or disability insurance.

What is workers’ compensation insurance?

Workers compensation, generally referred to as ”workers comp,” is a government-mandated program that benefits workers who become injured or sick on the job or as a result of the job. It is a disability insurance program for workers, delivering cash benefits, healthcare benefits, or both to the employees who suffer injuries or illness due to their jobs. The employee waives the right to sue their employer for damages by receiving workers’ compensation benefits.

In the United States, workers’ compensation is handled primarily by the individual states. The required benefits differ significantly state by state. Texas is the only state that does not require employers to possess workers’ compensation. The compensation includes partial salary repayment and coverage of medical expenditures. Keep in mind that workers’ compensation is not the same as unemployment benefits or disability insurance.

Workers’ compensation includes partial pay replacement for the period during which the employee is not able to work. The benefits may also possess reimbursement for healthcare services and occupational therapy. Most workers’ compensation programs are delivered by private insurers, from premiums paid by the individual employers. Each state has a workers’ compensation board, a state agency that oversees the programs and interventions in disputes.

Furthermore, requirements for workers’ compensation differ from state to state, and not all employees are covered in some states. Some states exclude small businesses from the authorization for coverage. Others have different requirements for various industries. Usually, workers’ compensation benefits are taxable at the state or federal levels, reimbursing for much of the lost earnings. Taxes may be due to recipients who also have income from the social security disability or additional security income programs.

How does workers’ compensation work?

Workers’ compensation covers the expenditures of work-related injuries and illnesses, like medical bills and lost wages. Almost every state requires businesses with employees to have workers’ comp coverage. Since it’s required by law, many business owners sign up for workers’ compensation coverage without understanding what it does or how it works. That inevitably leads to serious confusion as soon as an employee makes a claim. If you want to be prepared for the assertion, you need to know what to expect.

If your company has at least one employee, you require workers’ comp insurance. Many state laws mandate businesses to buy this coverage as soon as they hire their first employee. Even if your business is in a state that doesn’t demand a workers’ comp insurance policy for just one employee, you should still forcefully consider a policy as soon as you hire someone. If that employee suffers a work-related illness or is just on the job, you could be left paying for some hefty legal and medical bills.

What are workers’ compensation benefits?

Workers’ compensation is a type of insurance purchased by employers for the coverage of employment-related injuries and illnesses. Although the payment is usually modest, it comes with great benefits, yet it covers medical care from the injury or illness and costs for retaining. It also compensates for any permanent injuries and provides benefits to survivors of workers who are killed on the job.

In addition, workers’ compensation insurance covers replacement income. But keep in mind that if a person collects workers’ compensation benefits, they cannot sue the employer. And workers’ compensation benefits do not cover pain or suffering. Wage replacement is usually 2/3rds of the worker’s average earnings, but there is a fixed maximum payment that the benefits will not go over. That may seem modest, but remember that these benefits are not taxed. So as long as the employee was making a fair wage, they should have no significant problems.

The eligibility for wage replacement begins instantly after a few days of work are missed because of a specific injury or illness. You may have to be taken off work by doctors approved by your employer or the workers’ comp system. Those doctors may also decide when you return to work, either light-duty or full duty.

Workers compensation examples

Workers’ compensation is the insurance against workplace injuries. To have a better understanding of it, check out the examples below:

  • The workers can claim against slips and falls harm at the workplace. However, it should be immediately reported to the management before the statute of limitations runs out. Else, it may result in the rejection of the claim.
  • In a construction zone, workers may get struck by an object from a high level; they can claim against these injuries.
  • A worker may claim injury due to a machinery accident as well. However, these have become lower since employers overlook implementing many safety measures for machinery operators.
  • In factory jobs where heavy lifting is needed, the workers working for more than ten hours may pull or overexert their muscles. A worker can claim hurt due to overexertion from workers’ compensation insurance.

What is workers’ compensation, and how does it work?

Workers’ compensation is insurance that provides cash benefits and medical care for workers injured or who become ill due to their job. Employers pay for this insurance and shall not require the employee to contribute to the compensation cost. The employer’s insurance carrier pays weekly cash benefits and medical care, as directed by the workers’ compensation board.

The workers’ compensation board is a state agency that processes the lawsuits. If board intervention is necessary, it will determine whether that insurer will reimburse for cash benefits and medical care and the amounts payable. No one party is bound to be at fault in a workers’ compensation case. The amount that a claimant receives is not decreased by their carelessness nor increased by an employer’s responsibility.

However, a worker loses their right to workers’ compensation if the injury results solely from their intoxication from drugs or alcohol or from the intent to injure themself or someone else. A claim is paid if the employer or insurance carrier agrees that the injury or illness is work-related. If the employer or insurance carrier denies the claim, no cash benefits are paid until the workers’ compensation law judge decides who is right.

Suppose a worker is not receiving benefits because the employer or insurance carrier argues that the injury is not job-related. In that case, they may be eligible for disability benefits in the meantime. However, any payments made under the Disability Program will be subtracted from future workers’ compensation awards.

If you can return to work, but your damage prevents you from earning the same wages you once did, you may be allowed a benefit that will make up two-thirds of the difference. You may also return to work in light or alternate duty before fully healed.

Workers’ compensation health insurance

Workers’ compensation insurance provides coverage against medical expenses and lost wages for work-related injuries and illnesses. It protects employees at your clinic. Even if you take actions to ensure a secure work environment, you can’t prevent every accident. From carpal tunnel syndrome to needlestick damage that transmits hepatitis, an injury or illness can be financially disastrous for an undersized healthcare company.

In addition, workers’ comp can pay for medical bills and partially missed earnings while an employee is recovering. Most states demand this coverage for businesses with employees. Workers’ compensation health insurance can help pay for an injured employee’s direct medical costs, such as an ambulance ride, and ongoing medical costs, such as medication. It also covers partial lost wages while the employee is recovering. Moreover, it provides disability benefits for lasting injuries.

Benefits of workers’ comp coverage

Workers’ compensation insurance safeguards your business and your employees.

Protects your small business

Workers comp covers your small business when an employee gets ill or injured on the job. It will pay for the employee’s medical expenses and partial lost wages, expenses you would likely have to pay out-of-pocket if you don’t have coverage. Most policies also include a death benefit to help lessen the financial burden of funeral expenses if an employee suffers a fatal accident at work.

A workers’ compensation policy will also include employer’s liability insurance in most states. Policies with this benefit will cover legal fees, settlements, and judgments if an employee decides to sue your company over their injuries. Suppose your business is in a state where workers’ comp insurance doesn’t include employer liability coverage, like states with a workers’ compensation state ‘fund.’ In that case, you may want to purchase ‘stop-gap insurance.’

Protects your employees

A work-related injury or illness could be devastating for an employee, especially an extended absence. Workers’ compensation makes sure your staff are taken care of if they cannot work due to a work-related injury or illness. Workers’ compensation makes sure your team is taken care of if they cannot work due to a work-related injury or illness.

How much does workers’ compensation cost?

Every state has its regulations when it comes to workers’ compensation insurance, so the fee of a policy will depend on where your employees are located. Companies with more employees and more significant risks pay higher rates for workers’ compensation coverage because they are more likely to face workplace injuries. The cost of the workers’ compensation depends on the state where your employees work, your annual total payroll, your industry, your claim history, and the type of work your employees do.

According to the research, the average cost for all claims combined in 2018-2019 was $42,008. The most costly lost-time workers’ compensation claims because of injury result from motor-vehicle crashes, averaging $81,971 per workers’ compensation claim filed in 2018 and 2019.

What types of injuries are covered by workers’ comp?

Workers’ compensation covers countless types of injuries. Some of those are mentioned below:

  • Muscle pains, strains, and tears
  • Bone fractures
  • Repetitive strain or stress such as carpal tunnel, tendonitis, and back pain
  • Cuts, pictures, and lacerations
  • Slips, trips, and falls
  • Getting crushed or stuck between objects
  • Electrocution
  • Being struck by an object or equipment
  • Falls

What types of injuries are not covered in workers’ comp?

Workers’ comp does not cover all types of injuries. These injuries include events when you or the person responsible for your damage acted outside the scope of employment. A personal injury lawyer might advise you to pursue a civil suit against the person responsible for your injuries in these circumstances. Such circumstances include:

  • When a drunk employee or one under the effect of drugs caused the incident.
  • A self-inflicted injury such as if the injured person started a fight with a coworker.
  • The employee engaged in unlawful activities.
  • The employee was not on company time when they suffered their damage.
  • The employee violated safety rules or company policy.
  • One party intentionally inflicted harm upon another.

In addition, workers’ compensation does not usually cover contractors or subcontractors, meaning if you are not an employee, an attorney might advise you to pursue compensation from the responsible party directly. Third parties such as a building owner, property owner, or equipment manufacturer may also have liability in some circumstances.

Do you get paid if you are injured in a work accident?

According to the law, any worker injured at work may be entitled to claim compensation if their injuries were caused by a no-fault accident. A no-fault accident is one in which the sufferer is not at fault. For you to get paid compensation for damage at work, the accident must have been caused by a third person. These two examples show a better understanding of when you may or may not be entitled to get paid if you are harmed at work:

  1. You look into your phone while standing atop a ladder stacking items on high shelves. If you fall because you were distracted by your phone call and lost your balance, the accident is your fault. In this case, you may not be entitled to a compensatory payment.
  2. You are standing atop a ladder doing the same work, but this time without a phone. Instead, you fall and get injured because the ladder provided was not fit for that purpose. And your employer has already been made aware of this. In this circumstance, the accident is caused due to your employer’s negligence, and you should get paid.

Difference between workers’ compensation and employers’ liability insurance

  • Workers’ compensation covers the cost related to the injury without alleging any liability on the employer’s side. In contrast, the employer’s liability insurance covers expenses if the employer gets sued for retributive damages.
  • Employers’ liability covers the employer if they are somehow responsible for the accident, whereas workers’ comp must cover the accident-related costs.
  • The employers’ liability coverage is broader than the workers’ compensation coverage because it responds to a wide array of claims. Workers’ compensation kicks in whenever there is an injury in the workplace, and the employers’ liability is triggered when an employee sues the employer for negligence.

What claims does the employer’s liability insurance cover?

Employer’s liability insurance covers neglect claims over occupational illnesses or injuries. When employees receive compensation for workplace injuries, they usually decide not to sue the employer. One type of claims employers’ liability insurance covers is those direct claims from employees alleging negligence. In addition, your employers’ liability insurance policy covers legal defense costs, potential settlements, judgments, or court-awarded damages.

However, there are other types of liability claims your insurance policy would cover:

Third-party action lawsuits

If your employee suffers harm when using a tool at work, they can choose to sue the manufacturer for making a flawed tool. But if the manufacturer thinks that your poor maintenance was the real cause of the injury, they can sue your company to cover their losses.

Loss of consortium

An employee’s family member usually files this type of case. If an employee dies or suffers a severe bodily injury that prevents them from working or fulfilling their daily duties and obligations, their spouses or another family member can sue the employer for negligence.

Dual-capacity lawsuits

For example, if the employer manufactures or supplies the product that causes the injury, the employee can sue the business both as a manufacturer and employer.

Bodily injury

Suppose an employee suffers a severe, life-threatening injury, and their immediate family member suffers a heart attack as a consequence of a highly stressful event. The family member can sue the company for injuries.

Is workers’ compensation benefits the employer?

Workers’ compensation coverage is beneficial for the employer and the employee. The employer fulfills their statutory responsibility to compensate employees for lost time from work, medical benefits, and restoration services related to the injury or illness. The employee receives a prompt, guaranteed. As a business owner, workers’ compensation insurance reduces your risk of crippling financial loss in the case of a severe accident involving one of your team members.

In addition, your employees who are covered by workers’ comp can receive financial protection if harmed while performing their regular duties. If you are an employer, there are three main ways to have workers’ comp insurance benefit you:

  1. Suppose if, due to an accident at work, your team members are injured, you want to be able to take care of them. Employees usually cannot afford significant out-of-pocket medical expenses and recoup lost wages. When covered by a workers’ compensation policy, employees who have sustained a work-related injury recover lost wages and other recommendations.
  2. If you do not have workers’ compensation insurance for your business, employees or their families could sue in civil court for workplace damage or death. This situation could be financially devastating for uninsured business owners and even open them to a criminal investigation. Running a company can be fast-paced and stressful. Business owners ought to reduce their chances of complicated legal problems whenever possible. Investing in workers’ comp is one essential way to do this.


No one knows when you may get to deal with risk and uncertainties. Workers ‘ compensation is designed to keep you safe from unexpected tragedies at work. If you fall, slip, or get injured at work, you will be provided with coverage. It is beneficial to save you from high out-of-pocket costs when you are even unable to get up. By accepting workers’ compensation benefits, you as an employee waive the right to sue your employer for damages. It may include a partial salary reimbursement and coverage of medical costs.

John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.