The answer to this question is that you need what is called a Workers Compensation “Ghost policy” or Workers Compensation “If Any Policy”. These are the same thing. They refer to a workers compensation policy in which there are no employees and the owner is excluded from Workers Compensation coverage. It sounds counter-intuitive to pay for an insurance policy that only covers the owner and the owner is excluded. The logical question would be “What am I paying for then?”. The answer is that you are paying for any sub-contractors you 1099 throughout your policy period that do not provide you with proof of insurance “certificate of insurance” naming you as additional insured. It also covers the company that hires you to do the job. They are required, as you are, to collect certificates of insurance showing that any subcontractors hired have workers compensation coverage. If they fail to collect these certificates the amounts paid to these subcontractors will be treated as additional payroll for workers compensation purposes.
So lets first think about how workers compensation is billed. Workers compensation is billed by classes of employees and the type of work they do on a percentage basis of payroll. For example, a painter might have a 15% rate of payroll. This means for every $100 you pay them as your employee (Workers Compensation is meant to cover your employees) you pay $15 in premium. Now if that same painter you pay $100 to is not an employee, but a 1099 subcontractor, and provides you with workers compensation insurance naming your business as additional insured, you would have to pay nothing. No problem.
Now you know if they are your employee and you take out taxes, you will have to pay 15 dollars for every 100 dollars of payroll. If you pay your painter as a sub-contractor and they have their own workers compensation insurance , you would have to pay zero. The problem arises when you have a 1099 employee that does not have workers compensation insurance. In this case, they fall under your policy and you will have to pay for workers compensation as if they were an employee. The reason for this is that if they were injured, your “if any” policy would cover them and pay for injury, lost wages, retraining, etc. that is covered under workers compensation. The insurance company is on the risk for your sub-contractor getting hurt and on your audit, after your policy period ends, they will charge you for this risk. If you are not planning for this, it is a bad day. So let’s look at how insurance is billed and what this audit is about.
Projected vs Actual: Your application is simply a projection of your business for a year in regards to number of employees, payroll, payroll class, coverage and gross revenue. It does not reflect what your premiums will be in actuality. This is done every year about two months after the end of the policy period at audit which is required per your application. The premium you agree to at application really means nothing until it is audited. At audit, if your payroll is less than what was projected you would get money back. If your payroll is more than what is projected you will have to pay more. Most people understand this and agree with this. The major problems I have run into in audits is lack of certificates of insurance naming you as additional insured. Simple as that.
UNINSURED SUB-CONTRACTOR = EMPLOYEE
That said, if you hired our painter and paid him 30,000 and he did not have insurance, you would owe 15% of that being 4500 dollars and the money is due within 30 days or your policy cancels. If you let this happen, you will be in a database of unpaid audits by your name and birthday and it will not be possible for you to obtain workers compensation from any company, for all insurance companies subscribe to this database.
This is the long and short of the if-any or ghost policy. Please call us if you would like a quote and we can usually have numbers for you in minutes and a policy to you in hours. The cost of these policies typically runs about 1200 but does depend on what state you need it for.
Understanding you will have to incur this cost and this cost is protecting your customers as much as you. You need to make sure you are figuring out the cost of your labor correctly and passing that cost on to your customer. In our painting situation, it would be a good idea to add 20% on to your labor costs for insurance.
- Evaluating your year halfway through and checking your projections on your application to make sure they are still in line.
- Being strict about your certificates of insurance. If someone does not have insurance, you will have to charge them for it. Simple as that. If you do not, they will rarely come forward with money when you are audited.
- Set the money aside for the additional audit. If you plan for it, you can pass this cost onto your customers.
Written by John M. Brown
John M. Brown Insurance Agency