What Is Workers’ Compensation Insurance?
Workers' compensation insurance covers medical care and lost wages for an employee injured or made ill on the job, in exchange for the employee generally giving up the right to sue the employer over the injury. It's regulated at the state level, and most states require nearly every employer with employees to carry it; Texas is the only state that lets most private employers opt out entirely as a "non-subscriber."
By LLC Register · Last reviewed October 1, 2026
Comprehensive Guide
What Workers' Compensation Insurance Actually Covers
Workers' compensation insurance pays for medical treatment and a portion of lost wages when an employee is injured or becomes ill because of their job, regardless of who was at fault for the injury. In exchange for these no-fault benefits, an injured employee generally gives up the right to sue their employer over the injury in court, except in narrow circumstances such as an employer's intentional misconduct. This trade-off, guaranteed benefits in exchange for limited lawsuits, is the basic structure behind workers' compensation in every state that has it.
Who Regulates It
Unlike federal payroll taxes or federal workplace safety rules, workers' compensation is primarily a state-law system. Each state sets its own rules for which employers must carry coverage, what benefits an injured employee receives, and which state agency or insurance department oversees claims and disputes. The U.S. Department of Labor notes that individuals injured on the job while employed by private companies or state and local government agencies should contact their state workers' compensation board, confirming that state systems, not a federal one, handle most workers' compensation claims.
Federal Workers' Compensation Programs
The Department of Labor's Office of Workers' Compensation Programs (OWCP) administers separate federal programs for specific categories of workers: the Federal Employees' Compensation Act (FECA) for civilian federal employees, the Longshore and Harbor Workers' Compensation Program for maritime workers, the Federal Black Lung Program for coal miners, and the Energy Employees Occupational Illness Compensation Program for certain nuclear weapons workers. These programs don't apply to most private-sector employers; they're specific to these federal and federally connected categories of work.
How States Decide Who Must Carry Coverage
Most states require workers' compensation coverage once an employer has one or more employees, though some set a higher threshold, commonly a specific employee count, before coverage becomes mandatory, and the rules on whether an owner or corporate officer counts as an employee for this purpose vary by state. Washington is a notable example on the strict end: its Department of Labor & Industries requires mandatory industrial insurance, the state's version of workers' compensation, for any employee, with no minimum employee count exemption.
Texas: The One State Where It's Largely Optional
Texas stands apart from every other state by letting most private employers choose not to carry workers' compensation coverage at all, a choice that makes the employer a "non-subscriber." An employer that chooses this route must notify both its employees and the Texas Department of Insurance, Division of Workers' Compensation, of that decision. Non-subscriber employers remain exposed to direct lawsuits from an injured employee without the liability limits that subscribing to the system would normally provide, which is a significant trade-off against the cost savings of not carrying the coverage.
How to Get Coverage
Most employers purchase a workers' compensation insurance policy from a licensed insurance company. Depending on the state, you may also be able to qualify as a certified self-insurer if your business meets the state's financial requirements, or join a group self-insurance arrangement with other employers in your industry. Check with your state's insurance department or workers' compensation board for which options are available and how to get a policy started.
What Happens If You Don't Carry Required Coverage
In a state where coverage is mandatory, operating without it typically exposes the employer to state penalties, potential criminal liability in some states, and direct lawsuit exposure for a workplace injury that coverage would otherwise have resolved through the no-fault claims process instead.
Practical Considerations
Coverage Requirements Can Depend on Industry, Not Just Employee Count
Some states set different workers' compensation rules for specific higher-risk industries, such as construction, regardless of the general employee-count threshold that applies to other businesses. Check whether your industry has its own specific requirement separate from the general rule in your state.
An Owner's Own Coverage Status Varies by State
Whether a business owner or corporate officer is automatically covered, automatically excluded, or can opt in or out of their own state's workers' compensation system is inconsistent from state to state. Confirm your own status separately from confirming coverage for your employees.
Premiums Are Usually Based on Payroll and Industry Classification
Workers' compensation premiums are typically calculated using your payroll amount and an industry classification code reflecting the riskiness of the work, which is why two businesses with the same number of employees can pay very different premiums.
This Is Not Legal or Insurance Advice
Whether your business is required to carry workers' compensation, and what coverage level is adequate for your specific risks, depends on your state and industry. Talk to a licensed insurance agent and, if you're considering going without coverage in a state like Texas that allows it, a business attorney about the liability trade-offs involved.
Sources
The official sources used for this article.
DOL: Workers' Compensation | dol.gov/general/topic/workcomp |
|---|---|
DOL: Office of Workers' Compensation Programs | dol.gov/agencies/owcp |
Texas Department of Insurance: Workers' compensation coverage | tdi.texas.gov/wc/employer/coverage.html |
Washington Department of Labor & Industries: Workers' compensation | lni.wa.gov/insurance |
Created by: LLC RegisterLast reviewed October 1, 2026
Updated: October 1, 2026
Frequently Asked Questions
Is workers' compensation insurance required in every state?
Nearly every state requires most employers with employees to carry it, though the exact employee-count threshold and rules vary by state. Texas is the exception, allowing most private employers to opt out entirely as a non-subscriber, as long as they notify employees and the state of that choice.
Does workers' compensation cover federal employees?
Federal civilian employees are covered under a separate federal program, the Federal Employees' Compensation Act, administered by the Department of Labor's Office of Workers' Compensation Programs, rather than through a state workers' compensation system.
What happens to an employer in Texas that chooses not to carry workers' compensation insurance?
A Texas employer that opts out, becoming a non-subscriber, must notify its employees and the state's Division of Workers' Compensation of that choice. In exchange for not carrying coverage, the employer loses the liability protections that subscribing to the system provides and can be sued directly by an injured employee.
Is a business owner automatically covered by their own workers' compensation policy?
It depends on the state. Some states automatically include owners and corporate officers in required coverage, others automatically exclude them, and some let an owner choose to opt in or out. Confirm your specific state's rule rather than assuming your own coverage matches your employees'.
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