Controlling Workers Compensation Costs for Employers

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Workers Compensation Owners Exemption

workers comp owner exemption

Owner exemption is endorsed by carriers

As a workers compensation consultant to employers, I have noticed a large number of companies, with the owner engaged in daily management activities, will exempt the owner from coverage under their workers' compensation policy.

This is an accepted practice in the industry. All carriers will give an endorsement on the policy that exempts the owner's payroll from work comp premiums.

Owner Exemption advised by their broker

When I ask the owner why they opted for exemption, the most common response is they were advised by their broker to exempt themselves. The reason given is that owner exemption will lower the annual work comp premiums. Occasionally, the owner will say they weren't aware of it and didn't know why they were exempt.

With the high cost of work comp insurance in California, anything that can lower premiums is considered a good thing. But, a careful examination of the issues has led me to an different approach.

Benefits of work comp coverage for the owner

Consider this: Workers' Compensation is a 'no fault' insurance system designed to 'provide all treatment requisite to cure and relieve1. injuries arising out of employment ( AOE/COE ).  Under this system, an injured worker has access to a tremendous range of benefits:-

  • A Death Benefit of between $250,000 and $320,000 (depending on the number of dependents).
  • Unlimited medical treatment for the sustained injury for the life of the injured worker.
  • No deductibles, co-pays, or treatments that are not covered.
  • Temporary Disability Benefits – two thirds of the 'average weekly wage' for the last 52 weeks, subject to the limitation of 104 weeks and a maximum benefit of $1,010.502.. This is not subject to income tax.
  • Between $4,000 and $10,000 in Supplemental Job Displacement vouchers.

Most owners spend a great deal of their time working on company business – usually extending into evenings, weekends, and even travel and while on vacation. The only requirement for coverage is that the injury/death occurred AOE/COE.

Cost of work comp coverage for the owner

One might think that Life and Health insurance with benefits of this magnitude would be very expensive and hard to get. Not really. Regardless of the owner's salary, there are minimum and maximum levels that are subject to premium. The amount of payroll subject to workers' compensation insurance premium cannot be less than $40,300 and is capped at $104,000. Currently, the pure premium rate for class code 8810 – Clerical (which the owner would fall into) is $0.49 per $100 of payroll. The published rate for the Top 50 Carriers is between $0.48 and $1.28 per $100 of payroll. The average rate is $0.88. This means that adding the owner to the workers' compensation policy would cost, on average, $916 annually – and possibly as low as $499. It would not be possible to find a Death and Medical policy that would give this level of benefits – even for many times that amount.

Other advantages of owner coverage

Since many owners are older, it is difficult for them to get both life and health insurance. In many cases, a physical is required before coverage can be placed. Depending on the owner's health, they might get declined for coverage. Certainly, an owner with a pre-existing medical condition would have coverage denied for that particular ailment, if not denied outright.

Another advantage is that premium paid during a year provides lifetime coverage for any injuries incurred during that year. With traditional health care insurance the owner would have to continue paying premiums (subject to rising premiums, decreasing benefits, or both) in order to get continued treatment and benefits. With workers' comp, medical treatment and disability benefits can extend past the year of injury without the requirement to pay additional benefits.

See the sections of the California Unit Statistical Reporting Plan and California Labor Code that pertain to covering an owner under the workers' compensation insurance policy.

1. California Constitution – Article 14, Section 4
2. $2012 maximum

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