I recently received an email from a small contractor in Georgia, an owner operator type, with no employees who is required to carry a workers compensation policy by the general (hiring) contractor providing him with work. He thought the whole thing was a sham! Who am I to disagree!
A workers compensation ghost policy is a policy that a business owner with no employees buys that excludes the individual or owner from coverage. Yes, there would be coverage for any employee the owner hires and most of the time even coverage for uninsured subs he may use. The typical price for one of these policies would run between $1000 and $2000, a significant sum for a small business owner. In fact if the owner never hires an employee or uses an uninsured sub, coverage would probably never apply! So why is he required to buy such a thing?
The answer is a twisted path of individual state regulations, rules and statutes. With a fix we’re not likely to see. You see the problem comes when a small owner only contractor wants to work for another contractor. The hiring contractor needs the sub to secure a workers compensation policy so he, the hiring contractor, will not be charged at audit by his workers compensation insurance company for having an uninsured sub. It’s the state statutes that allow this situation to occur. Let’s not blame the hiring contractor. Remember, when they use an uninsured sub, the state will typically consider the sub to be a statutory employee who then comes under the workers comp laws of that state. If the sub were injured while working for the hiring contractor then the hiring contractors workers comp company would have to pay the claim. So they will collect premium, from the hiring contractor. When the sub secures his policy he gets a certificate naming the hiring contractor who then puts it in his audit file. The insurance company auditor then reviews the certificates and places a mark in the column marked “has workers comp.” Really? You’d think if it was really about coverage the auditor would pick up the fact that the owner/operator sub did not purchase the coverage on himself.
These policies can hurt both the hiring contractor and the subcontractor they hire. Here’s an actual case study that you may want to review. A word of caution to both parties, be careful with the use of these policies!
The fix will only occur when the state legislature modifies their work comp laws to allow single business owner/operators (mostly small artisan type contractors) to opt out of their state’s work comp laws. (Some places do this.) What difference should it make if the small business owner is a Corporation, LLC, Sole Proprietor or Partnership? If they have no employees why shouldn’t they be able to opt out of the state law?
So there you have it. A policy that potentially does not provide coverage for anybody, that costs the small contractor/business owner a couple of thousand in premium and that really does not serve the hiring contractors needs at all. Hmmmm, maybe sham is a good word!
Sorry about the ranting!
Thanks!
