Understand the basic coverage and exposures to negotiate a construction risk financing plan.

Most states require contractors to purchase workers’ compensation insurance. Some exceptions, such as Texas, do not require this, and other states have exemptions that allow smaller contractors to opt out of the system based on their number of employed workers. 

Many contractors purchase workers’ compensation insurance since they would lose the exclusive remedy protection if they do not have this coverage in place. Contracts entered into by the contractor with an owner or contractor will also require workers’ compensation before the work begins.

The Coverage

In most states, private insurance companies provide workers’ compensation, but a few states exclusively provide this coverage, such as Wyoming, North Dakota, Ohio and Washington. For instance, a contractor who lives in Texas but has work in North Dakota will be required to obtain coverage directly from North Dakota.

The standard workers’ compensation policy provides two types of coverage: statutory workers’ compensation benefits payable under the covered states’ laws and employers liability insurance for claims by employees or dependents that fall outside the protection of the workers’ compensation law. 

Contractors should be aware of the covered states provision. Incidental exposures in states not listed under the policy must be addressed through the other state’s provision. In most cases, underwriters will provide coverage for all states except monopolistic states, but the employer’s liability coverage will be allowed in these monopolistic states. This will provide coverage for incidental exposures, such as transportation or actual project work.

Liability for Subcontractors

In most states, the statute specifies that an upper tier contractor will be liable for workers’ compensation benefits to an uninsured subcontractor’s injured employee. 

If you do not insure subcontractors and provide appropriate insurance certificates to certify coverage, this can result in long audits and additional premiums. A basic workers’ compensation manual specifies that if a contractor cannot show evidence of insured subcontractors, the auditor can automatically add the subcontractors’ payrolls to the contractor’s audit. 


The standard workers’ compensation policy excludes coverage for any federal acts, such as Longshore and Harbor Workers Act (USL&H), Defense Base Act, Outer Continental Shelf Lands Act and Federal Employers Liability Act (FELA). Unless coverage has been added to the contractor’s workers’ compensation policy by an endorsement, these acts will not be covered.

Construction Risk Financing Plans

Workers’ compensation insurance may be obtained under the following risk financing plans: 1) a guaranteed cost policy, which contains no deductible liability to the contractor, 2) a large deductible policy, which requires the contractor to pay a portion of the claim through a deductible reimbursement, 3) a retrospective program, which requires the contractor to be responsible for losses within its loss limit and 4) a dividend plan (flat or sliding scale), which provides a return premium to the contractor based on the incurred losses. 

From these four plans, the underwriting community provides many derivatives, including scheduled credits and debits.

Some contractors fund their workers’ compensation exposure through self insurance, captives or a combination of the two to manage the overall cost of the program.

When negotiating your workers’ compensation program, do not overlook certain coverage endorsements, including:

  • Executive officers, partners and sole proprietors coverage
  • Maritime Employers Liability Coverage (Jones Act)
  • Employers liability limit to coordinate with the umbrella/excess liability program
  • ULS&H as appropriate
  • Stop gap endorsement
  • Voluntary compensation endorsement
  • Alternate employer endorsement 
  • Blanket waiver of subrogation endorsement as required by the contract
  • Defense Base Act coverage
  • Foreign Voluntary Workers’ Compensatio

Workers’ Comp  Protocols

1.  Experience rating modifier–Many contractors and owners use this as one of their pre-qualifications before obtaining work. The National Council on Compensation Insurance (NCCI) announces the modifier, but in some cases, specific states, such as Pennsylvania, announce this. 


The data included within the modifier will be the most recent four years, with the most recent year eliminated. The formula compares actual to expected losses. 

Contractors can take several actions to manage the modifier. Conduct periodic claims meetings to review reserves, be sure payrolls have been assigned to the proper workers’ compensation classification and the correct states, and assure that losses and payrolls insured under an OCIP/CCIP have been filed correctly with the bureau. 

2.  Audit time issues–Each year, the insurance company will conduct an on-site audit. Presenting the information appropriately and documenting all subcontractors’ certificates of insurance will be important. 

In some cases, an auditor may not agree with how specific payroll has been assigned to a work class. Have all classifications and descriptions on hand for any required discussions. Also, be aware of issues related to driver payrolls, appropriate payroll limitations and overtime surcharges.

3.  Classifications–Review classifications periodically for accuracy, and work out any disputes (with appropriate documentation) with the insurance company in advance.


4.  Claims management–Preparing claims handling documents that promote best practices for adjusting, supervising and managing workers’ comp claims plays a large role in overall risk management protocols. 

This can include everything from establishing return-to-work procedures to selecting defense counsel. Having an effective working relationship between the insurance company adjuster (or third-part administrator) and the contractor will pay dividends for years to come. 

Construction Business Owner, May 2012