In the simplest terms, workers’ compensation is a form of risk-pooling. Businesses pay into a collective compensation fund run by their state, and then report a claim during a policy term if an employee gets sick or injured on the job.
A comp policy is divided into three parts:
- Part A. Workers’ compensation insurance
This is the part of your policy that actually covers your employees if they get sick or injured on the job. There’s no deductible, and no upper limit for this coverage.
Workers’ comp is designed to provide protection for workers. It will cover medical expenses, lost wages, and ongoing care costs for long-term disability. It also covers death benefits and funeral expenses if the worker dies.
- Part B. Employers’ liability coverage
This is a lesser-known part of a workers’ comp policy, but it’s important because it protects your business from employee lawsuits. It’s a tradeoff: because employers pay into the workers’ comp fund, which offers unlimited coverage, they are granted immunity from employee lawsuits (except in cases of negligence).
- Part C. States
This is the part of the policy that lists the states in which your business operates, and determines which state’s laws apply to each employee.
The concept of compensating workers (and their families) if they are injured on the job dates back at least to ancient Sumeria. Rulers and governments have long understood that business owners and their workers are the keystones of a functioning economy, and that offering protection from the consequences of workplace injuries is in everybody’s interest.
Are you a history buff? The history of workers’ comp in the US is surprisingly fascinating! You can read a little more about it here.