Why employers need workers' compensation insurance: program benefits both businesses and employees.

Workers' compensation premiums represent one expense employers should not forego. Except for a few employment scenarios, the law requires employers to carry workers' compensation coverage, either through a carrier or if the company qualifies, through self-insurance.

Despite this fact,

Randy Weddle, an attorney for Holmes, Weddle & Barcott, PC in Anchorage, said that he's surprised to learn that a lot of employers don't have workers' compensation insurance. "You could get in a lot of trouble not having it," he said. "There are terrible penalties." These can include jail time and fines in the thousands of dollars.

In addition to having coverage, employers must also post workers' compensation information for employees, make forms available for employees and file claims for each instance of work related injury or illness within 10 days of knowing that an employee has been injured or ill. Employers must also distribute three copies of the form (one to the employee, one to personnel, and one to the insurance claim adjuster) and file an electronic annual report along with fees for the Second Injury Fund and Workers' Compensation Fund.

Like most things in life, exceptions apply. The Alaska State Division of Labor lists certain employers who are not required to provide workers' compensation insurance. These include sole proprietors in a sole proprietorship, part-time babysitters and noncommercial cleaning people, among others. For a complete listing, refer to the Division of Labor's Web site at www.labor.state.ak.us/wc or call (907) 465-2790.

The concept of workers' compensation (originally called workman's compensation) started during the Industrial Revolution. Suing employers provided the only recourse for injured employees or the surviving families of employees killed on the job. These lawsuits often ended unsuccessfully and cost injured employees even more lost work time.

These lawsuits hurt employers, too. They could strip companies of revenue, both through awards and the legal process itself, and also eroded morale and portrayed management as the bad guys.

Workers' compensation provided a solution that limits employees' means of obtaining restitution. They cannot sue the employer because of exclusive liability. Workers' compensation also provides nearly immediate relief to the employee by providing a percentage of the injured employees' wages, medical care, and, if needed, employment re-training to pursue other employment. Surviving families are also compensated.

Common Misconceptions

Misconceptions about workers' compensation still circulate among employers, especially those small enough not to have a full-time benefits administrator. Here are a few of the more common urban legends of the workers' compensation system:

* If the company is not to blame, the employee will lose his claim. This is simply not true. Like motor vehicle insurance, workers' compensation is no-fault. A few exceptions do exist, however. If an employee is injured on the job while intoxicated, using illegal drugs, willfully inflicting injuries upon himself, or committing a serious crime, it is possible the claim may be denied if these actions contribute to the incident.

But claim denial is unlikely, said Lynne Seville, vice president, Risk Management at Willis of Alaska Inc., in Anchorage. "In my 17-year insurance career, I have never seen a claim successfully denied under these statutory requirements, but that doesn't mean that there hasn't been," she said.

Often it's difficult to prove that drugs, booze or an employee's bad intentions caused an accident, also known as proximate cause. And self-inflicted injuries usually have more to do with fraud than claim denial. Most of the time, the employee will be compensated regardless of the circumstances.

Employers need to realize that a workers' compensation injury is far different than a visitor suing for tripping over a broken sidewalk. "It's different from the civil liability system," Weddle said. "If an employee gets hurt on the job, he is compensated. Small employers often take it personally, like being sued. They often get upset if there's a claim." Not only is this erroneous thinking, but it also leads to discouraging employees from making legitimate claims.

* Workers' compensation claims are paid by the company. Not directly, anyway. The funds paid to injured employees come from the profits earned by the workers' compensation company. Remember, the employee is not personally suing the company or the insurer.

For every dollar paid out by the workers' compensation insurance company, the employer will pay slightly more for the annual Second Injury Fund fee, which is a percent of the compensation paid by the insurer. In 2005, this was six percent. The Second Injury Fund pays claims to employees with permanent disabilities.

* Discouraging employees from filing claims helps businesses avoid increased premiums. Though excessive claims are one factor that can swell the cost of premiums, it is illegal to discourage employees injured or made ill on the job from filing a claim.

Instead, employers should provide a few paragraphs in their employee handbook as to how employees should file a workers' compensation claim using the Report of Occupational Injury or Illness form, which is available on the Division of Labor's Web site. Employees must know to whom they should report a claim and that they should do so right away. During employee orientation, new employees should be introduced to the person responsible for processing claims.

Workers' compensation rates are also based on other factors, such as payroll, which many employers overlook. This can cause a serious problem with the budget of a small, growing company, noted Reuben Willis, an agent for State Farm Insurance in Juneau. A firm that drastically increases its payroll through rapid growth will find that its workers' compensation premium will grow in proportion, creating an unplanned expense.

"That kind of hit can be devastating," Willis said. "If it's not taken care of in an appropriate time frame, that insurer won't want to keep insuring the company. Then the policy lapses and if an employee is injured, the penalties for being uninsured are severe."

The nature of the employment and the inherent risk involved also impact rates. Some seemingly innocuous employment may have more risks than one might imagine. For instance, a construction worker's risks are obvious--falls, using power equipment, and chemical agents are used in the trade. However, even an office employee has risks, such as repetitive motion injury and stress.

If it seems like a business has been misclassified, or the rates are too high for some other reason, that business can request arbitration from the National Council on Compensation Insurance and the Alaska Review and Advisory Committee.

* Employees often fake on-the-job injuries. According to an Aug. 7, 2000, article in the Los Angeles Times, "Anti-Fraud Drive Proves Costly for Employees" by Ted Rohrlich and Evelyn Larrubia, only one to two percent of claims are bogus. "Fraudulent claims make up a small proportion of all workers' compensation claims," Seville said.

The fact is, cases of fraud are much more sensational than legitimate claims, so they receive an inordinate amount of press coverage. "Injured Plumber Caught Water Skiing," is a much more exciting headline than "Injured Plumber Can't Drive Anymore."

Some injuries are difficult to diagnose or cure. For example, back injury symptoms can come and go, creating the illusion of fraud, when in truth, the employee cannot consistently work for eight hours at a time.

To minimize fraudulent claims, Seville recommends good claims management systems that start from the hiring process onward. Employees should know that fraudulent claims are punishable by law and grounds for termination of employment.

* There's nothing employers can do to reduce accidents. Wrong! Employers can do plenty to make the work place safer. As in most areas of business, education is the key.

"Employers should learn everything they can about how to manage the entire employment process from hiring to safety programs and injury prevention to claims management," Seville said. "Learn how to manage the process and actively manage the process. Monitor claims runs and have regular, open communication with your claims adjusters and your insurance broker. Too many employers ... react in crisis mode."

As a baseline, employers must follow OSHA's (Occupational Safety and Health Administration) rules to the letter, and work to go beyond them. Looking at data from the Alaska Division of Workers' Compensation can give businesses an idea of how employees are commonly hurt. According to the Division's 2003 annual report, the most recent year available, the top five injuries by body part are back, 16 percent; finger, 11.5 percent; multiple parts, 10.9 percent; leg, 10 percent; and hand, 6.9 percent.

Analyzing workers' compensation records and charting how employees get injured will better equip employers to lessen the number of injuries, perhaps without much expense. Reducing back injuries may be as simple as cracking down on existing lifting procedures and posting instructions illustrating the proper lifting form. Providing box knives with a safety hood would prevent many cutting injuries. After every incident, employers should figure out a way to prevent a similar incident from happening again and take concrete steps to ensure that it won't.

As the old saying goes, 'accidents happen.' But if employers start out with an understanding of how the workers' compensation program functions, stay consistent with filings, and make the company culture one of safety, it will help the workers' compensation program run smoothly and more cost-effectively.