Most states require employers to provide workers’ compensation insurance for their employees. Executive officers and owners, however, are generally not required to be included in the coverage but have the option if they so choose. Here, we’ve put together a quick review of workers’ compensation exclusions to help you better educate your business clients who may have questions.
Sole Proprietors/Partner Exclusions
Sole proprietors and partners are generally exempt from having to include themselves in their business workers’ compensation coverage under most state’s workers’ compensation acts.
Executive Officers of a Corporation
Employers are often confused about what circumstances statutorily permit the exclusion of an executive officer from coverage under a workers’ compensation policy. In most states, executive officers of a corporation are automatically included under a state’s workers’ compensation act unless they file for an exclusion from the policy, and only if they are:
- Officers and members of boards of directors of certain types of corporations.
- Owners of professional corporations.
- General partners.
- Managing members of limited liability companies.
Owner inclusion and exclusion rules will vary by state – many states require owners and officers to sign and file specific workers’ compensation state inclusion or exclusion forms, depending on how the business is organized.
State Specific Rules
It is essential that brokers and policyholders understand the statutory inclusion and exclusion rules for each state they operate in. Below is a summary of the most common requirements that vary by state.
- Specific ownership or voting stock percentages may need to be met for an owner or officer to elect exclusion. The specific ownership requirement can range from 1 to 50 percent.
- Limits to the number of owner exclusions allowed or which officer titles qualify for exclusion.
- Exceptions for specific industries or operations. The most common exceptions are for construction and farming operations.
Protect Your Clients
Issues involving owner and officer exclusions can go unnoticed until the final audit. When these audit discoveries lead to large additional premium invoices, broker-client relationships can be negatively impacted. Most of these issues arising at final audit can be traced back to the ownership, entity type and intent to exclude not being properly documented on the original application for coverage. Similarly, mid-term entity and ownership changes not reported to the workers’ compensation carrier can also lead to problems at final audit. If the workers’ compensation carrier is not notified of a mid-term ownership or entity change, qualifying owners and officers may not be able to retroactively exercise their right to elect exclusion from coverage.
Luckily, there are a few simple steps that can be taken to mitigate the risk of a large additional premium audit bill resulting from owner and officer payroll being picked up at audit.
- Review the entity, ownership breakdown and titles of owners with your clients prior to submitting for coverage and at every renewal.
- If an owner or officer elects to be covered or isn’t eligible to elect exclusion, be sure their payroll (subject to the applicable state’s owner office payroll limitations) is included in the estimated payrolls on the quote.
- Review newly issued policies to ensure the owner and officer inclusions and exclusions were handled correctly.
- Remind your clients to let you know if they are making changes to their business entity or ownership structure prior to the date of change.
Choose the Right Partner
When it comes to business insurance, many wholesale brokers are generalists and not experts on workers’ compensation coverage. In some cases, they might not have the information needed to assist their retail clients with questions regarding when a business can exclude an owner, an officer or themselves from a policy.
At RIC, a division of Worldwide Facilities, we are workers’ compensation experts. We partner with you to help each of your business clients better understand their rights and determine whether their state and legal business status allow for owner and officer inclusion and exclusion.