Workers compensation provides payment to workers who are injured on the job. To break that down, it is a type of insurance that protects against the risk of an on-the-job injury making the worker unable to continue working and gain an income. Employers are taxed in order to create a guaranteed fund of money that worker’s compensation benefits can be paid from. This ensures that there are always benefits available to qualifying individuals.

Workers Compensation from the Beginning

Employee benefit systems similar to worker’s compensation have been found in ancient Rome, Greece and China where there were pre-determined payment schedules for workers who lost various body parts during the course of their labor. Throughout history, systems like this have existed but they did not exactly mirror the type of worker’s compensation benefits employers now must offer.

Most historians place the origins of modern worker’s compensation in Germany in the mid-1800′s. During the height of the industrial revolution, Germany’s government passed legislation that would protect railroad workers in the event of an on-the-job accident or injury. They were following the example of German worker guilds which provided certain benefits (including a disability payment benefit) to the guild members. As a socialist country, Germany was very concerned about offering social insurance programs and this model of worker’s compensation fit nicely.

In the 1880′s Workers’ Accident Insurance, a compulsory plan to provide for workers outside the railroad system who had had an accident on the job, was introduced. This was the first universal and formalized worker’s compensation plan.

Workers Compensation Progress through the Years

Workers’ Accident Insurance spread through Europe during the late 1800′s, though it was often called Workmen’s Accident Insurance, and by the 1890′s it had replaced England’s court run Employer’s Liability Act.

By the turn of the century, America had its own workers compensation plan in place with Maryland as the first state to adopt it. Unfortunately, the early plans in America placed a great burden on the injured employee. Instead of just showing the injury and receiving a benefit, the employee had to provide proof that he or she had been injured as a result of employer negligence. Then, after obtaining some sort of proof, the employee had to sue the company in order to be awarded benefits. While this protection was better than no protection, proving their case was difficult and many workers went through the time and expense of a court proceeding without ever receiving a benefit. By 1908, President Theodore Roosevelt stepped in and pointed out the one-sidedness of the present system.

Soon after, in 1911 to be exact, the state of Wisconsin adopted a new workers compensation law that allowed for a tradeoff between injured employee and responsible employer. Rather than forcing the employee to find the proof of the employer negligence and sue, the employer would automatically provide medical care and replacement wages to injured employees. But here is where the tradeoff came in; as a result of the benefits, the employee had to agree not to sue the employer for further damages. While we might credit President Roosevelt with this abrupt change of pace, the reality is more likely that the workers who were able to prove negligence under the old law and sue their employers were taking in more money for damages through lawsuits than employers might have to pay when taking care of the wages and medical expenses of every claimant. In addition, even the lawsuits the employers won had a price since they still had to take the time to defend themselves and had to bear the expense of legal counsel.

The one state that held out of the new form of worker’s compensation legislation was Florida. At that time, Florida had a very small population and no manufacturing jobs. But when Florida politicians decided to try and attract new residents and businesses to the state in 1935, they were forced to adopt the new worker’s compensation model.

You’ve got pen in hand, ready to sign a new client contract, and then you glance at the fine print. It says that to get the work, your IT business needs to carry five different kinds of insurance. That can’t be right! Or can it?

If you’ve already got E&O, general liability and small business property insurance, aren’t you insured for just about everything? Why would you need to get workers’ comp and employers’ liability, too?

Besides the fact that many states have laws that require companies with W2 employees to carry workers’ compensation coverage, these policies simply provide coverage that other types of business insurance don’t. To protect their own interests, your clients want to be sure that you’re protecting yours.

Liability vs. other types of insurance

First, it’s helpful to understand the difference between a liability policy and other types of insurance coverage:

Liability policies are designed to protect your business from the high cost of covered lawsuits or similar insurance claims, and any settlements that a court orders you to pay as a result.

Other types of commercial policies, such as small business property or workman’s comp insurance, reimburse your business for all or part of actual costs on covered claims, such as the replacement of a damaged piece of hardware or medical bills.

So depending on what situation you may end up dealing with – a lawsuit, injury or physical damage to property – you’ll need different kinds of insurance to be fully covered. Different types of insurance policies address situations involving different people, too: Some respond to claims from clients and others outside your business, while others are designed for claims from your own employees or subcontractors.

How each policy responds

Let’s talk about how the various types of insurance policies would respond in the event of an on-the-job injury. Suppose one of your employees is working at a client’s site and suffers a serious back injury while moving a heavy piece of equipment:

Not covered under general liability. Your general liability insurance policy covers claims of bodily injury or other physical injury or property damage. It is designed to protect your business against the high cost of lawsuits stemming from incidents that occur on your premises or at other covered locations where you normally conduct business. If it were a client that were to sue you over an injury caused by you or one of your employees, your general liability policy would respond. But a lawsuit from one of your own employees, claiming that your business is responsible for his on-the-job back injury, wouldn’t be covered.

Not covered under property insurance. Your small business property insurance policy covers only property damages, not bodily injury. So if your employee drops that heavy piece of equipment after suffering the injury, this policy would pay for any damages caused to the equipment or the building — but it wouldn’t help pay your employee’s medical bills.

Not covered under professional liability. Your professional liability or E&O insurance policy protects you only against lawsuits in which a client alleges that your business’s negligent acts, errors or omissions caused them a financial loss. Again, no coverage for bodily injury to an employee.

Covered! Your workers’ comp policy covers your employee’s medical and disability expenses in the event of an illness or injury, such as this case. So, if your employee is going to miss work for a few weeks while he recovers, it will pay him a portion of the income he’ll lose. It will also pay any bills for doctor’s visits, medication, diagnostic tests, therapy or hospital stays directly related to the on-the-job injury. So, if your employee is hurt on the job and you have workman’s comp coverage, you won’t have to pay those costs out of pocket.

Your employer’s liability policy, typically included as part of a workers’ comp policy, protects your company should an employee claim that his or her injury or illness was caused by your company’s negligence or failure to provide a safe workplace. So if the employee in this case sues you, this policy pays legal fees and any settlement the court may order you to pay, up to stated policy limits.

But I’m just a one-person operation!

What if you don’t even have employees? Can your client still insist that you carry workers’ comp? In short, yes.

In many states, unless your client can show that you, its subcontractor, carry your own workers’ compensation insurance, you will be automatically covered under the hiring company’s policy, at the hiring company’s expense. And of course, your client doesn’t want that. So even if your state doesn’t require it for one-person companies, you may have to buy coverage just to meet your client’s requirements.