Workers' compensation insurance without employees is a type of coverage that's usually for independent contractors. Even though every state I work in doesn't require workers' compensation for a sole proprietor, I write many "no employee" workers' comp polices every month. In other words, a workers' comp policy isn't legally required to comply with state statutes or regulations, albeit it's contractually required in many situations. Technically, the owner is an employee or at least an agent of their own small LLC or corporation, albeit their payroll is excluded, which is allowed.
I call them workers' compensation "ghost polices" because the only one covered is maybe a "ghost."
The reason for the popularity, and a popularity that's increasing from my experience, is the fact that so many contractors are requiring their subcontractors to have it. What typically happens is a person wants to get contracted to work for another, and they're told they need to have general liability (and/or professional liability depending on the type of work), and workers' compensation insurance in order to begin working.
The reason why is the main contractor's workers' compensation insurance is concerned that if you're hurt, and you're considered an employee by the state or the IRS (both of which prefer people to be employees over subcontractors), their workers' compensation might be liable for your medical bills.
Also, if you don't and you hire someone, many states have statutes or regulations that dictate a primary contractor's workers' compensation policy must become the primary policy to pay medical bills and potentially lost wages. So the solution is to require subcontractors to get their own workers' comp policy and that is likely to prevent a claim from working its way up the contractor chain so to speak.
The bad news is that even though there's not employees, if you buy a policy, there's almost always an estimated payroll that will have to be paid up front. Because workers' compensation are almost always audited at the end of the term (I don't know many that aren't) it's the amount of payroll from the audit, multiplied by the rate per class of work that determines the total insurance premium.
Along with the premium, workers comp policies also have what's known as an "expense constant," which is something the insurance policy holder must pay regardless of the premium because that's the minimum amount of money the insurance company requires to receive for the underwriting and processing of the paperwork. For many states, the only option for a workers' comp policy with no employees is the state pool, known as the Assigned Risk Plan. Minnesota is an exception to this rule and I do have at least one other place to write it, which is also cheaper in both expense constant and the amount of estimated premium required to put the policy in force.
For example, in Minnesota, the workers comp insurance premium for a construction worker without employees might be about $700 a year. Of that, about $220 is expense constant, and the rest is estimated premium for payroll. In other words, after the year is up and the policy's audit is complete, and it shows no reportable or billable payroll, the subcontractor can anticipate receiving about $480 back. The key is to do the audit. Regardless of the amount of money and the fact that an audit should only take a few minutes (plan on about half an hour at the most if you have proper records), many people don't perform the audit and never receive the deposit back. It's a shame because most of these people are working for about $25 – $30 an hour and that represents more than a day's pay.
Also, on one hand, getting a works' comp policy for about $220 a year net cost doesn't sound so bad, until you do the math and realize that it's more or less a tax on your labor because you don't receive anything for your $220. I guess you receive a nice piece of paper that's called a certificate of insurance that states you have workers comp, albeit that's not a huge amount of true value for your money. It's one of the reasons why I don't care to write these types of polices. I went into the insurance industry again to help people, not sell worthless non-covering polices.
While it doesn't happen often, once in a while I will get someone that grows and winds up hiring someone. Then the policy will actually provide some value, otherwise, forget it, it's nothing more than to satisfy a contractual requirement due to edicts by the state.
If you would like to get business insurance coverage, including workers compensation, general liability, professional liability, and/or commercial auto related to your subcontracting business, give me a call and let's discuss strategies for you to meet your contractual obligations while also protecting your assets that you're growing.
Robert Weinstein is a husband, dad, stock market junkie, real estate broker, and of course…Insurance agent. Interests include my family, economics, marketing, technology, real estate, finance/investing, history, and Asia.
Robert’s insurance expertise includes having the designation of Certified in Long-Term Care (CLTC) and assist in asset protection for families with members entering retirement.
Robert is also an accomplished syndicated writer whose work can be found in TheStreet, MainStreet, CNBC, Forbes, Yahoo Finance, Seeking Alpha, MSN Money, The Money Show, Stock Saints, Motley Fool, Fidelity, Minyanville, RealMoney Pro, and many national and international newspapers.