As a small business owner, you may be considering insurance coverage for workers' compensation. If you do not have any employees, there are a number of alternative options for workers' comp. If you need to quickly provide an affordable certificate of insurance upon request, a workers' compensation ghost policy may be a good option if it is allowed in your state.
Before you decide if a workers' comp ghost policy is the right fit for your small business, however, you'll need to understand what a ghost policy is, see if you meet the requirements for a ghost policy and determine whether it exposes your business to additional risk.
What is a workers' comp ghost policy, and what does it cover?
Although a workers' compensation ghost policy is sold in the marketplace just like standard workers' compensation liability insurance, there are important differences between these policies. Importantly, a ghost policy, when used on its own, does not cover the business owner or employees. In fact, it doesn't cover anyone or anything.
Rather, a ghost policy is simply used to do business with a vendor or place of business, or to meet state requirements. For example, in some states, a ghost policy can be used as a certificate to meet the insurance requirements of the vendor, client or contractors. Again, the ghost policy doesn't offer any actual or tangible coverage, although some insurers can bundle this policy with an accident-only plan to create a low-cost insurance coverage package.
To purchase a workers' comp ghost policy, you need to be a business owner with no employees and no payroll (besides the owner). For example, your business can be a one-person S corporation, a sole proprietorship or a single-member limited liability company with no employees or contractors working for the business or plans to hire them. Other basic requirements include that the policyholder needs to be between the ages of 18 and 65 and that the policyholder must have a valid Social Security number.
Who should consider a ghost policy?
Because the business owner bears all of the liability and associated costs under a ghost policy, a workers' compensation ghost policy is best for low-risk jobs. For example, these could include desk jobs, such as accountants.
Although ghost policies can be written for businesses in with nontraditional needs, such as home repair services, there is still risk, especially in the case of landscaping and tree-trimming services. Under certain state laws, such as North Carolina workers' compensation laws, if a person hires a contractor with a ghost insurance policy and a worker is injured on your property, you could be held responsible for all medical costs.
In California, the law requires that employers, including those in the construction industry, carry workers' compensation insurance, even if they have only one employee. According to the state, you cannot file for an exemption from workers' compensation if any of the following conditions exist:
- You employ anyone in a manner that is subject to California workers' compensation laws.
- Your license is qualified by a Responsible Managing Employee.
- You hold a C-39 roofing classification.
There is an exemption for out-of-state contractors who are licensed in California but do not hire employees who reside in California. However, if you have out-of-state employees who are working in California, you must also provide a certificate of insurance from your workers' compensation insurance carrier in your state.
In most states, workers' compensation insurance is required by law. However, there is a patchwork of laws across the country. Ghost workers' compensation policies aren't available – or are banned – in certain states, such as California and Colorado.
Currently, Texas is the only state that does not require employers to have workers' compensation coverage. Electing workers' compensation insurance limits the amount and type of compensation that an injured employee may receive, and those limits are set in the law in Texas.
In Alabama, you can legally opt for a ghost workers' compensation policy if you regularly employ fewer than five full-time or part-time employees, including officers of a corporation in any one business, other than the business of constructing or assisting on-site in the construction of new single-family, detached residential dwellings. Employers of domestic employees, farm laborers or casual employees and municipalities with a population of fewer than 2,000 (according to the most recent federal census) in the state are not required to provide coverage but can elect to be covered by the provisions of the Alabama Workers' Compensation Law.
How much does a ghost policy cost?
The cost of workers' comp policies is based on payroll. Because there is no payroll when a business doesn't have employees, the cost of a ghost policy is typically lower than that of a traditional workers' comp policy. The savings on ghost insurance premiums can be noteworthy, especially in contract bidding wars. (In some cases, a contractor can offer a lower bid on a project, since many ghost insurance policies cost less than their traditional counterparts.)
For instance, insurance aggregator site Pogo quoted annual premiums for a one-year ghost workers' compensation plan at well under $1,000, although it varied by region, industry and other factors. To compare the cost with that of a standard workers' compensation policy, use the following formula:
(Annual employee payroll / 100) x workers' comp insurance rate* = estimated workers' compensation cost
Note that this formula relies on variables, and because workers' compensation laws vary by state, you will need to review state laws to get an accurate calculation of your workers' compensation insurance cost. Comp codes or class codes are assigned to different types of work an employee does and the risk of injury associated with the job. This risk is another factor that determines the cost of premiums.
Some ghost policies are underwritten through the state-assigned risk pool, but some insurers have access to a workers' comp ghost policy that is substantially less expensive than the pool in most states. Be sure to ask your insurance agent about this to find the most affordable option for you.
Finally, although ghost policies can save you money, sometimes it is better to opt for a traditional policy if the cost difference is minimal based on your business's class code and if there is a moderate liability risk. Just be sure to compare the numbers, and consider that traditional workers' compensation coverage pays for medical expenses and replaces a portion of missing wages when a covered person is unable to work. This coverage alone can be vital to cash flow and peace of mind, especially if you are the sole business owner.
If you're still unsure what type of business insurance you may need, read our guide to choosing business insurance policies.