Workers' comp ghost policy
Workers’ compensation ghost policies can help small business owners secure contracts and comply with state laws without paying for full coverage. Here’s what you should know about purchasing a ghost policy for workers’ comp.
What is a ghost workers' comp policy?
A workers' compensation ghost policy is a type of minimum premium workers' comp designed for self-employed business owners who don't have employees but need to provide proof of insurance for legal or contractual obligations.
Ghost policies are a way to satisfy certain requirements without paying for a full policy. This can be appealing to single-person businesses that are often exempt from workers' comp regulations, including:
What does a ghost policy cover?
While a standard workers' compensation insurance policy covers medical expenses and disability benefits for employees who suffer work-related injuries or illnesses, a ghost workers' comp policy doesn't cover anyone or anything.
Its sole benefit is providing proof of workers' comp insurance to satisfy a potential client's contract terms or meet state business insurance requirements. This means any expenses from workplace injuries or illnesses will come out of your pocket, including:
- ER visits
- Medications
- Lost wages
- Legal protection
These bills can be catastrophic for a small business. That's why many self-employed individuals with no employees still opt for the financial protection full workers' comp insurance can provide.
It's also important to know that if you go with a ghost work comp policy, your insurance carrier will likely audit your business to confirm that you don't have any employees who require workers' comp benefits.
Should an assessment determine that you have employees, your insurer will charge you for standard workers' comp coverage.
Workers' comp exemption vs. ghost policy
A workers’ compensation exemption is a legal status allowing business owners who don’t have employees to opt out of buying insurance.
A ghost policy is a type of policy purchased to show proof of insurance for contracts. Although they come at a minimum premium, these policies exist for compliance, not protection.
What happens when I hire employees with a ghost policy?
Should you have a ghost policy and hire an employee, you should contact your insurance provider immediately. Many policies have a temporary workers’ comp provision that will cover your employee until you secure a full workers’ comp policy.
If you don’t disclose employees, your insurer may retroactively charge you an additional premium for full workers’ compensation coverage from the time you first hired the employee. You could also face hefty state penalties.
What are the requirements for a ghost workers' comp policy?
Because a ghost workers' comp policy offers proof of insurance without any real coverage, there are two simple requirements to obtain a policy:
- You’re the sole proprietor or qualifying business owner
- You don’t have any employees—full-time, part-time, or seasonal
Who should get a ghost workers' compensation policy?
Most one-person businesses are exempt from workers' comp insurance requirements in their state, so a ghost policy offers a cost-effective way to obtain proof of insurance without paying for actual insurance coverage.
Here are a few examples of when you might need a ghost workers' comp policy:
Your state requires proof of workers' comp coverage (even if you’re exempt)
Some state laws require proof of workers' compensation insurance for every business, even if the business is exempt from actually carrying this coverage. A ghost policy can meet these state requirements.
Find workers' comp requirements in your state
You need proof of coverage for a contract or job
A new client might ask to see proof of workers' comp coverage before hiring you for a job. A ghost policy gives you the proof you need to meet that requirement.
If you're a subcontractor, you might need to show proof of insurance to a general contractor (GC). Because most general contractors and subcontractors carry their own business insurance, a ghost policy can give you the certificate you need to get the job.
You’re a sole proprietor, one-person LLC, or S corp
Many states exempt certain one-person businesses, including limited liability companies (LLCs) and S corps. If you qualify for this exemption in your state but still need to provide proof of workers’ comp coverage, a ghost policy can help you meet that obligation.
How much does a workers' compensation ghost policy cost?
The insurance premiums for a full workers' compensation policy, including benefits, are based on several factors, such as your payroll and the type of work you do.
Because ghost policies offer no actual benefits beyond proof of insurance, they typically charge a minimum premium between $750 and $1,200 per year.
Are ghost policies accepted in my state?
Although many states and professional clients allow ghost policies, commercial insurance regulations are often changing. Before you purchase any insurance coverage, it's crucial to check your local workers' compensation laws and industry requirements.
Even if you get the go-ahead to have a ghost policy, you must classify all of your employees with accurate job codes. Misclassifying employees, such as labeling full-time staff as 1099 workers, can lead to significant penalties, namely:
- Substantial fines
- Legal liability for unpaid employee benefits and taxes
- Criminal fraud charges
Plus, if an employee gets injured and you don't have workers' comp coverage, you're on the hook for their medical and disability expenses.
Do general contractors accept ghost policies?
Historically, most general contractors accepted ghost policies from sole proprietors or subcontractors to work on a jobsite. However, GCs are becoming increasingly wary of ghost policies for a handful of reasons, including:
- The lack of actual coverage
- Significant financial and legal liability risks
- Increased audit exposure
- Rising scrutiny from GC insurers, legal advisors, and industry leaders
Due to these considerations, a lot of larger, higher-end firms require real workers' compensation coverage for any electrician, plumber, or other type of subcontractor they hire.
Many states are also taking a harder stance on workers' comp regulations. For example, Florida businesses must have full workers' comp coverage—not ghost policies—if they:
- Have at least four employees
- Operate in the construction industry, including carpenters and painting businesses
So, are ghost policies legal?
Ghost policy rules are constantly changing across states and industries. Because these policies provide zero coverage, more states are starting to prohibit them from being used in place of standard workers' comp.
Currently, ghost policies are permitted (and still legal) in about half of the nation's states, including:
Keep in mind, these regulations are subject to change at any time. Speak to your insurance agent about the most up-to-date laws in your area.
Are ghost policies legal in monopolistic workers' comp states?
Monopolistic states, including Ohio, North Dakota, Washington State, and Wyoming, require businesses to purchase workers' compensation insurance from state-run funds rather than from private insurance providers.
Therefore, ghost policies typically aren't available in monopolistic states. However, small business owners can usually file an owner exemption if they have no employees.
Is my business eligible for a ghost insurance policy?
Your small business may be eligible for a ghost workers' comp policy if it checks these boxes:
- You have no employees
- You have zero payroll, besides yourself
- You're exempt from workers' comp insurance
- You need proof of workers' comp for a contract or client
- Your state allows ghost policies
This could function as an economic option that saves your business money on monthly workers' comp costs.
But keep in mind, this policy will not provide you with any level of workers' comp protection. So, if you get sick or hurt on the job, your ghost policy won't cover any of your medical bills, lost wages, or legal expenses.
Can I cancel my ghost policy early?
If a small business owner wraps up a specific job or project, they might be tempted to cancel their ghost policy before the policy period is up. While it’s typically not illegal to cancel early, there may be a few contractual and financial consequences, such as:
- Minimum premium payments: Most insurers will still require you to pay the full minimum premium amount.
- Short-rate penalties: Canceling a ghost policy early can trigger an early cancellation fee, which is typically higher the sooner you cancel in the term.
- Final audits: Your insurance carrier might still audit your business records to determine whether you hired employees during the policy term. If payroll records are found, they can retroactively charge you an additional workers’ comp premium.
- Contractual issues: Ending your coverage might make you ineligible for certain contracts or cause issues with licensing boards that require proof of workers’ comp.
- Premium increases: Having a history of cancellations and coverage lapses may result in higher premiums and restricted coverage options.
What are ghost policy alternatives?
Ghost policies aren’t for everybody. If you’re a small business owner or contractor looking to save money on workers’ comp, here are some alternatives to consider:
- Pay-as-you-go workers’ compensation is a payment option that can save you money on upfront insurance costs. Premiums are determined based on actual payroll per pay period, reducing the risk of overestimating (or underestimating) payroll at audit time.
- Minimum premium workers’ compensation provides standard workers’ comp coverage at a set minimum premium, even if the calculated premium based on payroll is lower. This option is popular with small businesses with minimal payroll.
How do I get a workers' comp ghost policy?
If you’re ready to explore small business insurance options, we can help.
Complete our easy online application to compare free quotes for workers’ compensation policies, or speak to one of our licensed insurance agents about ghost policies and other specialized coverage.
Once you find the right policy for your small business, you can begin coverage in less than 24 hours and get a certificate of insurance (COI) so you can operate your business with peace of mind knowing you're fully covered.
Hear from customers like you who purchased workers' compensation coverage.
