For proper employer and employee protection, workers’ compensation coverage should be written by an agent or broker that is highly knowledgeable. Unfortunately, many agents are simply salespeople who do not fully understand workers’ comp regulations and coverage options, for example, the option to save premium dollars by choosing to exclude coverage for the company’s owners. Electing this exemption is a short-sighted decision that puts the company and its owners at great financial risk for very little reward in premium savings.

Most employers know they need to comply with the laws and provide this coverage to their employees, but many don’t fully understand why. Perhaps the most important reason is that if workers’ comp coverage is in effect, an injured worker is prohibited from suing their employer and their sole legal remedy to their injury, illness or death is the state’s workers’ comp system and the statutory benefits it provides. Conversely, employers have unlimited liability from workers’ comp lawsuits when there is no coverage in place.

Most business owners reject the notion that they would sue their own company for any workplace injuries, arguing that since they own and run the business they would never stop paying themselves or give up their income from the business in the event they were injured. They mistakenly believe that their health insurance would handle the associated medical expenses, so why pay twice for the same “coverage”?

This thinking is flawed; here’s why. First, let’s address the “nothing is going to happen to me” bias of the business owner. Something as simple as a car accident, while engaged in an activity that can reasonably be connected with a business purpose, is a workplace-related injury. According to the Bureau of Labor Statistics, most workplace injuries (almost 60% in 2018) are the result of common, everyday missteps — such as overexertion, falls, slips and trips — not violent events, vehicle crashes or exposure to harmful substances. Claims data shows that business owners are just as likely to be injured on the job as their employees.

Second, let’s address the belief that health insurance coverage will pay the owner’s medical expenses. If the health insurer determines that the injuries of the owner resulted from a workplace injury, they will likely deny coverage or seek reimbursement from the business. Let’s not forget about deductibles, coinsurance and copays; there are none for the injured owner who is covered by workers’ comp, which is not the case for health insurance. Most people would never run the risk of having no coverage for their large medical bills; however, this is exactly the risk that the business owner is accepting by exempting themselves from workers’ comp coverage.

Similarly, the idea that an owner injured in connection with their work will not suffer lost wages (because they will keep paying themselves) after an injury doesn’t hold up. They might keep paying themselves, but for how long? Will the business be sustainable without the owner’s services for an elongated period? Most companies find that other employees have to step up and be compensated more in the absence of an owner, or they must hire someone to take over the owner’s responsibilities if their impairment keeps them from the business for more than a few weeks. It is unrealistic to think there will be no impact on the business owner’s (or the company’s) income following an owner’s injury.

Finally, what are the real savings associated with exempting the owner(s) from coverage? The owner’s services usually fall into the payroll classification that carries the lowest rates, typically management, clerical or sales, and not the higher-rated classifications of other employees. In addition, most states place a cap on how much of the owner’s annual compensation the insurance company can charge when covering them. For example, in New York that cap is as low as $37,700, meaning that the business is only paying a premium on that much of an owner’s compensation and usually at the lowest rated payroll classification code rate. This often means the premium savings from exempting an owner from workers’ comp coverage may only be a few hundred dollars.

Are a few hundred dollars of potential savings worth the potential risks to business owners? I have yet to discuss this matter with a client who still elects to exempt themselves from coverage after these issues are fully explained. That tells me that most business owners, once they have received proper advice, tend to make the smart business decision.