What is Workers' Compensation and How Does it Work?

Topics: Loss Control

When an employee suffers a job-related illness or injury, workers’ compensation is there to provide benefits to them. It is a state-mandated program, and each state has its own system and laws. Workers’ compensation previously was known as “workman’s comp.”

injured worker filling out workers' compensation form

For most types of employees injured on the job, workers’ comp provides benefits that can address the following:
  • Medical care and related medical costs
  • Retraining
  • Lost wages until the employee can return to work
  • Compensation for permanent disability Insured benefits also can go to survivors if a worker dies on the job.
The ability to transfer disbursements means workers' compensation coverage can function similarly to other types of insurance, such as health, disability, businessowners policy, life or general liability insurance – but it doesn't replace these policies.

Workers' compensation insurance provides payments regardless of who is at fault for work-related injuries. In exchange for this “no fault” environment, employees generally waive their right to litigation. In these situations, workers' compensation helps ensure businesses won't be financially crippled by costly disputes, but can still address and correct the issue at hand. Providing workers' compensation does not always guarantee an employee won't sue for injuries sustained on the job, because there are specific instances that permit a worker bringing his or her case to court.

The main purpose of workers' compensation is to address legitimate workplace accidents and carelessness. This includes incidents that occur off the employer's premises but in the service of the job, such as injuries sustained while traveling for work. It can cover both short- and long-term issues, like falling off a ladder or acquired carpal tunnel syndrome. Thus, workers' compensation protects an injured employee in a broad range of situations.


History of Workers’ Compensation

Although most people think that workers’ compensation originated from the Industrial Revolution, its history actually can be traced back to ancient Sumerian law. Drafted around 2050 B.C., these policies outlined requirements for compensating injuries to specific body parts. For example, pay out for a thumb injury was worth half of what you’d get for a finger.

The version of workers’ comp we’ve come to know in the U.S. is rooted in Germany, from Otto Von Bismark— the Prussian empire’s “Iron Chancellor” who introduced Worker’s Accident Insurance in 1881.

Phased in by 1884, Worker’s Accident Insurance sought to prevent civil lawsuits against employers by providing workers an avenue for seeking monetary compensation and medical considerations after acquiring injuries on the job. This gave employees a chance to recover and receive compensation without harming their employer’s reputation or bottom line.

Worker’s Accident Insurance became industrialized Europe’s first mandatory workers’ compensation policy. Austria, Norway, Finland, and the United Kingdom would go on to implement their own workers’ compensation laws before the turn of the century. Across the ocean, it would take the United States longer to hop on the bandwagon.


What isn’t Covered by Workers' Compensation?

Not all work injury claims are covered. These situations include:
  • A worker intentionally causes his or her own injuries or illnesses
  • The injury or illness occurs while the worker is doing something illegal
  • The employee was not in the course and scope of his/her job
  • The worker's behavior was in clear violation of company policy or protocol
  • The employee was under the influence of drugs or alcohol
  • The injury occurs after an individual is laid off or terminated


Why is Workers’ Comp Insurance Important for Small Businesses?

Workers’ compensation insurance is important for small businesses because it helps them avoid the actual cost of medical expenses and lost wages. Additionally, small businesses need workers’ comp because:
  1. In most states, workers’ compensation is a requirement. Be sure to check what is required by law regulations for your specific area by visiting the U.S. Department of Labor's State Workers' Compensation Officials webpage and clicking through to your state's site.
  2. It protects a business by helping avoid the actual cost of medical care and lost wages. A major claim can have a devastating financial effect on your business operations. Having access to effective loss control resources can help avoid accidents and with sound claims management, your injured employees can return to work sooner - thereby improving productivity and saving your business money.
  3. It helps protect your most valuable asset – your workforce. If your injured workers get the help they need, they can get back to full strength and help your business continue to succeed.


AmTrust for Small Business Workers’ Compensation Coverage

AmTrust is a leader in workers’ compensation insurance for small to mid-sized businesses. Contact us to find out how we can design specific insurance packages to fit your needs.

This material is for informational purposes only and is not legal or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.
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