Understanding what’s required and why
Workers’ Compensation is an important but often overlooked insurance policy for sports and recreation organizations. Many smaller organizations attempt to only carry Accident insurance when Workers’ Compensation may be required by state law. Workers’ Compensation tends to be more expensive, more difficult to administer, and less readily available from the private marketplace as compared to Accident insurance.
This article will explain the requirement to carry Worker’s Comp, the benefits it provides, what premiums are based upon, and how to properly set up a policy.
Is your organization required to carry Workers’ Compensation?
It can be difficult to determine if a particular sports or recreation organization is required
to carry Workers’ Compensation as state laws vary. Typically, most states require an organization to carry Work Comp if they regularly employ three or more employees, though it may be two or more or four or more in some states. The legal definition of employee includes officers and may also include workmen of subcontractors. Things are further complicated by various exemptions from the employee count if compensation is below a certain level. Some states have laws exempting certain sports league workers.
The best way to determine if Worker’s Comp is required is by contacting your state’s Workers’ Compensation commission. Our article Do Leagues Need Workers’ Compensation Insurance? may also offer some clarity.
One thing is certain in every state: if your organization is required to carry Worker’s Comp and fails to do so, and if a worker is injured, the penalties and liabilities can be severe. Most states have an uninsured employers fund that will pay the normal benefits on behalf of an injured worker whose employer failed to carry Worker’s Comp. After paying the benefits, the fund places a lien equal to the amount of benefits paid against the non-complying organization, which can easily result in bankruptcy.
Workers’ Compensation policies consist of two coverage parts
Part One: Statutory Workers’ Compensation
This pays the benefits to injured workers in accordance with the controlling state’s Workers’ Compensation Act. State Workers’ Compensation laws were developed to provide efficient compensation to injured workers and to protect employers against lawsuits. As a result, Workers’ Compensation is a no-fault system that pays without regard to negligence or wrongdoing on the part of the employer.
Below are the benefits Workers’ Compensation insurance pays to employees or employees of uninsured subcontractors who suffer occupational injuries or diseases while “on the job” and “in the course of employment.” Benefits vary from state-to-state.
- 100% of past and future medical bills
- Rehabilitation expenses
- Weekly lost wages based on a formula (usually 66.6% of average weekly wages for the prior year) for a predetermined number of weeks subject to a waiting period and a minimum and maximum payroll amount
- Lump sum awards for disabilities
- Lump sum awards for disfigurements
- Death benefits to dependents
Part Two: Employers Liability
Employers Liability responds to legal liability from occupational injuries and diseases to employees where recovery is allowed by law. Such claims are somewhat rare, but injured workers and third parties can sometimes file lawsuits to trigger coverage under Employers Liability. Examples of such lawsuits include loss of companionship by spouse, loss of household services by a family member, dual capacity lawsuits, third-party-action-over, and consequential bodily injury.
Operations in multiple states
Workers’ Compensation policies should be customized to account for multi-state operations since each state has its own Workers’ Compensation Act with unique requirements and benefits. Failure to properly set up the policy can result in uncovered claims. Unfortunately, it can be difficult to find a single insurance carrier that is licensed in all states, which can result in a hodgepodge of separate insurance policies and administrative hassle of separate billings and policy audits.
It is important to properly list all states with both known and unknown exposure under sections 3A and 3C of the policy. Otherwise, coverage in a particular state will not be triggered. This can be a problem since injured employees and their attorneys “forum shop” to bring their claim for Workers’ Compensation in the state that will have the highest level of benefits. The various state Workers’ Compensation acts may allow choice of state between state of hire, state of residence, state of primary employment, state of pay, state of injury, or state in agreement between employer and employee. For example, assume that the claimant has a choice between filing for benefits in the states of SC and VA and that the VA benefits are $20,000 greater and that VA was not properly added as a covered state. In this scenario, it is possible that the Workers’ Compensation carrier would pay benefits up to the SC level but the insured sports organization would be responsible to pay the remaining $20,000 out of pocket.
Section 3A (Known State Exposure): Section 3A of the policy triggers coverage for each state where the insured “knows” that an employee or uninsured sub will be working as of the effective date of the policy. The definition of “known work” is subject to varying interpretations. Some insurance experts advise that 3A should be limited to states where an employee is domiciled or where there is an existing contract for work as of the effective date. These experts don’t see the need to list states through which salesmen will be traveling or in which executives will be attending trade shows. However, other experts and some state Departments of Insurance would advise listing all states within which employees have even minimal contact under Section 3A.
Section 3C (Unknown State Exposure): Section 3C of the policy triggers coverage for states in which the insured is not aware of potential exposure as of the effective date of the policy. This section should included all states except those listed in Section 3A and the monopolistic states. It is important to note that Section 3C will not provide benefits for any state which should have been listed as a Section 3A state. The insurance carrier should be notified immediately if work begins in a 3C state after the effective date of the policy.
Monopolistic States: Sports organizations with worker exposure in the monopolistic states of ND, OH, WA, and WY must purchase Workers’ Compensation coverage directly from the respective state fund. Coverage for these states can’t be purchased through the private insurance marketplace. Since Employers Liability coverage is not available through the monopolistic state funds, a coverage known as “Stop Gap Employers Liability” should be endorsed onto either a private marketplace Workers’ Compensation policy or the General Liability policy.
Federal compensation laws
Some sports organization may have operations that fall under various federal compensation benefit laws that are not covered by the standard Workers’ Compensation policy form. If such exposure exists, it must be endorsed onto the existing Workers’ Compensation policy or a stand-alone policy must be purchased. Failure to address these federal exposures can create large uninsured liabilities as the benefits owed under these federal laws tend to be much higher than those under state Workers’ Compensation.
Examples of federal benefit laws creating liability include U.S. Longshoremen and Harbor Act (operations over navigable waters), Jones Act (seamen on vessels), and Foreign Defense Base Act. The USL&H and the Jones Acts may apply to certain water-based sports organizations.
How a Workers’ Compensation premium is determined
A Workers’ Compensation premium is based on a rate per $100 of projected payroll per classification code. Various types of classification codes are available for different types of workers such as clerical, sales, coaches, athletes, camp instructors, umpires, gate, concession, and field maintenance workers. Strict classification rules are set by the National Council on Compensation Insurance or the state equivalent. Each classification is assigned a different rate in each state depending on the statistical risk of injury. Rates can be further adjusted by a rating factor called an experience modification that is promulgated by NCCI (or state equivalent) that rewards or penalizes an insured based on their past safety and loss record. At the end of the policy year, an audit is performed to determine the actual payrolls and the premium is adjusted.
Sports risks are perceived as high risk
Insurance carriers that write Workers’ Compensation insurance may perceive sports and recreation organizations as high-risk business and often are not willing to voluntarily write this coverage. As a result, many end up being placed in state assigned risk pools that result in higher rates and less flexibility to add needed states of coverage. Of particular concern to insurance carriers are sports organizations with employee exposure in the areas of professional athletes, coaches, and umpires and the rates for these classes can be shockingly expensive and can vary greatly from one state to the next. On the other hand, organizations with employee exposure limited to the areas of clerical, officer travel, and event management are not considered to be high risk.
Get a quote
Contact Sadler Sports & Recreation Insurance at (800) 622-7370 to inquire about receiving a Workers’ Compensation proposal. We will ask you to provide information about the types of work and annual projected payrolls of your various types of workers.
