A ghost work comp policy is a type of workers compensation policy that basically provides no medical coverage. This type of policy is designed for the contractor who does not have any employees and typically does a lot of subcontract work. This policy is written typically on an “if any” payroll and will exclude coverage for the business owner.
Whether a person or their business is an independent contractor or employee depends upon a variety of laws and criteria. There is no one size fits all approach and while a common test is to use the IRS Methodology, this can be impacted by a variety of federal, state, and local laws. In some cases businesses try to circumvent the employer-employee relationship and not purchase workers compensation coverage when they should. The hard truth is that when an uninsured injury occurs, and coverage may be found on a higher level policy jury’s usually try and award money.
Let’s look at the following example.
Joe Contractor is a single person operation who does floor installation for various retailers who sell floors. Annually Joe must provide the retailers a certificate of insurance showing that he has general liability and auto insurance. Here’s the problem, without a certificate showing workers compensation coverage the retailers end up paying for Joe Contractors workers compensation insurance. This drives up the retailers insurance costs and perhaps lowers the amount that Joe Contractor receives.
Here’s a few problems with this situation.
There are a variety of tests that can be used to determine whether or not Joe Contractor is an employee or independent contractor. If Joe is the exclusive installer for ABC Flooring, there could be an argument that Joe is an employee of ABC Flooring. If ABC Flooring sets the per sq. foot rate, install time, job description and duties, a very good case could be made by an attorney that Joe isn’t an independent contractor but an actual employee of ABC Flooring.
Since Joe doesn’t have any employees he doesn’t buy workers compensation insurance. There is a good chance though that when ABC flooring does their annual audit the insurance company reviews the certificates and charges the ABC Flooring for Joe. This is because the insurance company is indirectly providing workers compensation coverage to Joe, because he doesn’t have any. There is case law and legal ramifications all over the country on this and whether we can agree on intent of ABC Flooring and Joe, the reality is when there is a claim, people look for someone to pay the bills.
Let’s say that Joe was driving to the job site to install the floor sold by ABC Flooring at the designated time and place that ABC Flooring decided on and Joe is involved in a serious auto accident. If Joe is like most independent contractors he may not have purchased health insurance or has purchased a low cost high deductible health plan that could cost him upwards of $10,000 for medical costs. If Joe was an employee he could easily file for workers compensation coverage and that policy would pay his medical bills and loss of income while he cannot work. Without his own policy he may try to seek coverage under ABC Flooring’s workers compensation policy. This type of situation is exactly how insurance companies started paying for workers compensation coverage for independent contractors. Attorney’s who represented Joe were able to collect coverage from ABC Flooring’s Insurance Policy. When this started happening, insurance companies started charging businesses like ABC Flooring for uninsured subcontractors who do not have workers compensation coverage, because indirectly they are providing coverage.
Another claim scenario gone wrong is when Joe Contractor becomes injured at a home where flooring is being installed. Imagine buying flooring from ABC Flooring and the flooring installation. Joe shows up and falls down the stairs of the homeowner. When Joe fell he fractured his wrist and can’t install flooring for some time so he files a claim for medical coverage against the homeowner? There are so many ways where this could go wrong. Some home carriers may offer medical payments coverage from the homeowners policy while others may deny coverage and tell the homeowner that they had a duty to make sure their contractors are properly insured. When claims like this happen the home owner is upset at ABC Flooring and starts spreading negative reviews, ABC no longer uses Joe Contractors services, business slows….you can see how quickly things go bad when the right coverage isn’t in place.
When your business has a ghost workers compensation policy, you will have purchased workers compensation coverage and most likely excluded coverage on yourself. The Retailer will have received a certificate of insurance from your agent showing that you have coverage. This will then remove any liability from them and their insurance company from providing coverage to you, because you have purchased coverage.
The General Contractor
Another common scenario where a ghost policy could be needed is where Joe Contractor bids jobs to find work. Let’s say that Joe has just been awarded a job installing flooring in 4 new homes that General Contractor is building. Joe is going to work as a subcontractor under a General Contractor. Joe provides his certificate to the general contractor but still doesn’t have workers compensation coverage because it’s just him.
There’s a couple of different ways things could go wrong here that could present coverage challenges. Let’s examine a few.
Joe Contractor shows up a the job site to start installing the flooring in the house. There’s a lot of activity at the houses and construction is behind schedule so all hands need to focus on hitting the upcoming deadline. While Joe is installing the flooring one of the General Contractors employees needs help unloading a few appliances and they ask him to pitch in for a few minutes. Joe is very appreciative to have been the chosen flooring installer and this is a big job. He wants to appear thankful so he hops up into the back of the truck to help unload the appliance. As Joe is helping unload he mis steps and falls off the back of the pickup truck and the appliance lands on him. Joe has severe back injuries and internal bruising and broken ribs from the appliance landing on him.
- Was Joe working at the direction of the General? Was Joe following the General Contractors orders?
- Should the General Contractor pay for his medical bills?
There are many situations where this claim may be turned into the insurance carrier and they end up paying for Joe’s injuries.
- What happens if Joe asks for help from one of the General Contractors employees and they are injured?
- What happens if Joe brings help for a few days because he is behind schedule. Joe intends to pay them cash to keep it outside of W-2 wages and doesn’t want the hassle of the paperwork and work comp. What happens when that person is seriously injured on the job?
When your business has a ghost workers compensation policy, you will have purchased coverage and most likely excluded coverage on yourself. The General Contractor will have received a certificate of insurance from your agent showing that you have coverage. This will then remove any liability from them and their insurance company from providing coverage to you, because you have purchased coverage. If you have payroll shown you will also have coverage for your temporary employee and their claim costs.
The Independent Contractor
All Independent Contractors have a need for workers compensation coverage. The Federal and state laws about when a business should buy workers compensation coverage vary, but generally if you have employees, you should purchase coverage to protect them from injury and protect your business from claims. As an owner of a small business, you are the profit center for your company and should purchase coverage for yourself too. Occasionally people will try and cobble some accident insurance, disability and health insurance to meet the need of workers compensation, but the reality is the best replacement for workers compensation is workers compensation.
Depending on the state you reside you may be able to purchase coverage for yourself. Some states laws automatically exclude owners but in most cases there is an option for them to opt in. Typically to purchase coverage on your self you may need to ask the insurance company whether they will cover you. In some cases they want to know that you have health insurance in place and set an agreed payroll to base the premium on. The reason they do this is that many independent contractors don’t typically pay themselves through normal W-2 wages so it can be difficult to determine how to rate the policy and what indemnity coverage is available.
Ghost workers compensation policies are fairly inexpensive. In most scenarios a policy can be had for $600-$1,000. If your business is actively looking for work you may be more attractive as a hire because you have the proper coverages that allow protection for the General or Retailer. They know that they won’t have any issues like mentioned above because you and your business has purchased insurance coverage.
The Ideal Policyholder
Purchasing a ghost policy is not without risk. For a low fee your company can basically buy the certificate of insurance and show coverage but also can have some significant exposure. The ideal policy holder for a ghost work comp policy is as follows.
- You are the only employee and do not intend to hire any employees
- You don’t hire subcontractors
- You do not have any payroll except for owner payroll.
Do not buy a ghost work comp policy if you intend to hire employees or occasionally have employees throughout the year. In scenarios where your company might have a part time employee it’s best to just purchase a workers compensation policy. Since the work comp policy is based off actual exposure you may be able to purchase for the same cost or less than a ghost work comp policy. You can still exclude coverage for owners and protect your company from potential medical claims from injured workers.
It’s important to be honest when purchasing a ghost workers compensation policy. Failing to buy the right policy could have significant risks for your business.
If you would like a quote or to visit about how DirectWorkComp can help your business please reach out to us at 888-399-1190 or drop us a note at [email protected].