As a small business owner, you may be considering business insurance 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.
Before you decide if a workers’ comp ghost policy is the right fit for your small business, you’ll need to understand what a ghost policy is. This information will help you determine whether you meet the requirements for a ghost policy and whether it exposes your business to additional risk.
A workers’ compensation ghost policy is sold in the marketplace just like standard workers’ compensation insurance, but there are important differences between these policies. 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.
A ghost policy is simply used to do business with a vendor or place of business, or to meet state requirements. 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.
In addition, the policyholder must be between the ages of 18 and 65 and must have a valid Social Security number.
A ghost policy does not provide actual insurance coverage; it is simply used to meet insurance requirements held by vendors, partners or clients.
A workers’ compensation ghost policy is best for self-employed individuals who have no employees and work in low-risk jobs. If you need to show proof of workers’ comp but don’t have any employees, a ghost policy may be a good choice.
However, not everyone who is self-employed needs a ghost policy. You’ll benefit from it the most in these situations:
Though ghost policies can be written for businesses that need specialty insurance, your risk will be higher in this case. Consult an insurance agent to determine whether a ghost policy is the best choice for your situation.
Workers’ comp laws vary from state to state, so be aware of how these differences might affect your business. In North Carolina, for example, if someone hires a contractor with a ghost insurance policy and that worker is injured on your property, you could be held responsible for all medical costs.
In California, the law requires that employers carry workers’ compensation insurance, even if they have only one employee. According to the state, you cannot file for a workers’ compensation exemption if any of the following conditions exist:
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 work 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 in some states, like 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. Employers of domestic employees, farm laborers or casual employees, and municipalities with populations of fewer than 2,000 are not required to provide coverage but can elect to be covered by the provisions of the Alabama Workers’ Compensation Law.
>> Learn more: How Much Workers’ Compensation Do You Need?
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 a full policy.
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. You can compare the cost with a standard workers’ compensation policy by using 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 can be vital to cash flow and peace of mind, especially if you are the sole business owner.
Jamie Johnson contributed to this article.