Here’s the problem some of our clients have:
“I’m a sole proprietor. I am being required to purchase workers’ compensation insurance by a General Contractor for a job. But, no insurance company will insure me? What can I do?”
Workers’ compensation is required if you have employees. But insurance companies will not sell sole proprietors workers’ compensation. The risk of fraudulent workers’ compensation claims is extremely high.
The possibility of a sole proprietor having a non-work related accident, but filing a workers’ compensation claim to receive both medical care and wages is a greater risk than insurance companies are willing to take.
Yet we often get calls from business owners that are just starting up or do not even have employees but are being required by a general contractor to purchase workers’ compensation insurance. If the insurance is not purchased, the business owner “cannot even set foot on the job site.”
As that sole proprietor, you may be wondering, “What do I do?”
The answer to this question is incredibly complicated. As a Certified Work Comp Advisor, I have struggled with my clients to get this coverage that they so desperately needed. And this was no small feat!
I wrote this article to help untangle the messy insurance web of acquiring this important coverage for the sole proprietor. Below we will cover:
- Why the General Contractor wants you to have workers’ compensation insurance
- Barriers to getting coverage
- Potential solutions for getting a workers’ compensation policy
- Finding an advisor to help you get coverage
Why is the General Contractor requiring workers’ compensation insurance?
Most general contractors want to limit their exposure to claims so they require all subcontractors to have their own workers’ compensation coverage. In doing so, the general contractor is protecting themselves from subcontractors filing work comp claims on THEIR policy.
If contractors do not require their subcontractors to have their own work comp policy, they are essentially “lending” their work comp coverage to their subcontractors.
Wait a minute! How can an independent business owner file a claim on someone else’s workers’ compensation policy?
In Pennsylvania and most states, the courts have set a precedent that injured subcontractors can file a claim under the General Contractors workers’ compensation.
So again you ask, “What can I do?”
You can negotiate different terms on the contract or hire employees.
How lucrative the contract with the General Contractor is will determine if it’s worth it for you to hire employees.
Seems like an easy enough solution. Right?
Not so! Most General Contractors will not negotiate new terms and even if you hire employees, you are likely to run up against barriers to purchasing your workers’ compensation policy.
What are the potential barriers to getting workers’ compensation insurance?
As I just stated, even with the addition of employees, sole proprietors are likely to have problems acquiring workers’ compensation coverage. Here are 4 reasons why.
1. Workers’ compensation coverage is too big of an expense for your business.
For most businesses, workers’ compensation is the 2nd or 3rd largest operating expense after payroll. Because it is so expensive, some new businesses struggle to afford to purchase this coverage.
2. Insurance companies won’t insure you, because you don’t have enough of a track record.
This is an enormous problem for new businesses or businesses that do not have prior insurance. Without prior insurance, many insurance companies do not want to provide coverage for your business due in part to the large number of businesses that don’t survive.
There are a lot of costs for insurance companies just to issue a policy and even more if the policy is canceled mid-term, so they want to only insure businesses that will stay in force for the entire year.
Moreover, if they insure a business that goes bankrupt, the insurance company has to continue to provide coverage even though there is no premium being paid. You can imagine their caution with insuring entities without a track record!
There are a handful of insurance companies that will insure start-ups, but they are extremely limited. And these companies will almost always require that you have two or more employees. This can be a problem for small start-ups and sole proprietors.
3. Insurance companies don’t insure businesses who work in your industry.
Every business is assigned a workers’ compensation class code depending on their scope of work. This is generally determined by the Pennsylvania Compensation Rating Bureau (PCRB) or National Council on Compensation Insurance (NCCI), or some other state regulatory body. Your insurance agent should help you determine the correct class code for your business.
Obviously, the amount of risk varies widely for businesses depending on their industry or scope of work. For example, a roofing business has far more risk of filing a substantial work-related claim than an advertising firm.
As a result, insurance companies may not be interested in writing insurance policies for every industry.
If you are in a higher hazard industry, the number of insurance companies insuring your industry will be significantly reduced.
4. You can’t find the type of coverage you need.
General Contractors often require extra coverages on your workers’ compensation policy. These coverages can be hard to find.
These coverages might include:
- Waiver of Subrogation
- West Virginia Broad Form (Mandelitis)
- State-specific Coverage
- Stop-gap Coverage
- US Longshoreman and Harborman (USL&H)
This further limits your options and may even limit which insurance agencies you can work with to obtain coverage.
Insurance companies have limitations on what coverages they offer. Because of the specificity and complexity of some coverages, it can be difficult to find an insurance company that will provide the coverages that the General Contractor is requesting.
What are my options?
As a sole proprietor, you have two options when a General Contractor requires you to have your own workers’ compensation policy to get a contract. You can negotiate different terms with the General Contractor or you have to hire employees.
1.You can negotiate with the General Contractor to waive the work comp requirement.
You can potentially persuade the General Contractor to waive this coverage based on the fact that you don’t have any employees. This exception will depend on how badly the General Contractor wants to work with you.
2. You can hire employees to be eligible to purchase workers’ compensation coverage.
If the General Contractor is not willing to waive the requirement, you may want to consider hiring some employees. Hiring employees is the only way to solve this problem.
Sometimes a contract with a General Contractor is lucrative enough that it makes sense to hire employees, even if it is on a part-time basis. You could even hire seasonal or part-time employees.
If you decide to hire employees, you will need to consider several factors including how many employees and what kind of work you will be hiring them to do for you.
Your insurance agent is an invaluable resource who can give you insight into what the insurance company will be looking for when they consider writing a worker’s compensation policy for you. You should seek their advice before moving forward with hiring employees.
Your Insurance Agent
Be careful about which insurance agent you choose to apply on your behalf.
Many companies don’t realize that you can shoot yourself in the foot if you’re not picky about your insurance agent. Commercial insurance is not like personal insurance. Shopping around does not always give you more options. In fact, it often limits your options.
In commercial insurance, once an agent applies on your behalf, no other agent can submit an application to that same insurance company for a full year.
Insurance Company Standards
There is a lot of gray in writing an insurance policy when there is no prior coverage. How the insurance company writes your policy will vary widely depending on:
- The type of work
- The number of employees
- The amount of payroll
- The amount of subcontracted work
- The coverages required
- The states/locations of the job site
- The availability of modified duty
- The safety practices of the insured
Having an insurance agent who is familiar with how insurance companies will perceive your company is a necessity for getting the coverage you need along with the best premium.
Your insurance agent should play a vital role in helping you determine your payroll, your office payroll, and the amount of subcontracted work your company will farm out. Your agent should be able to guide you in these decisions so that you not only can get workers’ compensation coverage but also get a good premium.
Your Payroll
To maximize taking on employees to get a contract, you need to make sure you take on the right type of payroll and the right amount of payroll to maximize your chance of getting insured.
Because some companies may not write workers’ compensation for your industry, to obtain the coverage you may need to hire a different type of employee that would qualify for coverage with that company. (This may not even be a possibility! But you can always try!)
For example, to qualify for coverage from Insurance Company Z, your business might need to employ two office people. Your application would need to reflect this. Your insurance agent can help you identify who you need to hire to get the policy you need.
Office Payroll
Office payroll is the least expensive payroll listed on a workers’ compensation policy. Because there is so little premium from Office Payroll the insurance company may be hesitant to offer all the extra coverages and increase their exposure without the extra premium to support it.
Percentage of Subcontracted Work
As a sole proprietor or small business, you may be inclined to hire out a portion or even all of the work that the general contractor includes in the job contract. If you are considering this, it is imperative that you discuss it first with your insurance agent.
Subcontracting work dramatically impacts how the insurance company will respond to your request for workers’ compensation coverage. As mentioned above, if you don’t have workers’ compensation coverage, the general contractor is essentially lending you their coverage.
This is true also for any subcontractors you would hire to help with the job. The subcontractors you farm out work to would be able to file a claim on the general contractor’s workers’ compensation policy if they themselves do not have workers’ compensation.
As a result, insurance companies are very wary of providing coverage to anyone who may have uninsured subcontractors. The higher the percentage of subcontractors the more likely the insurance company will have to pay a claim on behalf of one of those subcontractors.
The insurance company may also want to be certain that you are paying an adequate premium to cover the subcontractors you hire.
Let’s say you’re workers’ compensation premium is only $500 because you only employ office staff. Now let’s say that you hire a sole proprietor to do excavation work. The insurance company is essentially lending your coverage to that excavator but only charging you for office employees. They are not charging what they would normally charge to cover excavators. This is a greater risk than the insurance company is willing to take.
I need an advisor to help me get workers’ compensation coverage.
For start-up companies or firms with new employees, workers’ compensation insurance can be a very tangled web. The numerous factors and implications that must be considered to get cost-effective and complete coverage require a thorough knowledge of workers’ compensation issues.
Our team has over 30 years of combined work in workers’ compensation and risk management, as well as, numerous insurance designations testifying to the time and effort they have dedicated to being experts in these fields.
At Baily Insurance Agency, our team has the proven expertise to design an insurance policy that exceeds your expectations.
As a sole proprietor you have unique insurance needs. And as a contractor, there are many coverages that you need to consider. If you are looking for an insurance agent, we’d love to talk to you.
We recognize that Baily Insurance Agency isn’t the right agency for every business. To determine if we might be a good fit for you, take a look at our 5 step process to create an effective commercial insurance program.
