Owner and officer exclusions in workers' compensation insurance

Director on what business leaders and their insurance advisers need to know

Owner and officer exclusions in workers' compensation insurance

Workers Comp

By Alicja Grzadkowska

Executive officers and owners of businesses typically aren’t required to be included in workers’ compensation insurance, but they can be if they so choose. Brokers may encounter clients who have questions around this option, and they should be aware of workers’ comp exclusions that come with leaders being covered by this insurance.

Sole proprietors and partners are generally exempt from having to include themselves in their business workers’ comp coverage, according to workers’ comp acts. On the other hand, executive officers of a corporation are automatically included under most acts. Notably, each state’s acts may provide exceptions for certain owners and officers who are automatically covered to elect exclusion from the policy.  

Brokers should also know that owner and officer inclusion and exclusion rules vary by state.

“Many states require owners and officers to sign and file specific workers’ compensation state inclusion or exclusion forms depending on how the business is organized,” said Brenna Lemmon, director of worker’s compensation at RIC, a division of Worldwide Facilities. “It is essential that brokers and policyholders understand the statutory inclusion and exclusion rules for each state they operate in.”

The most common requirements that differ between states include specific ownership or voting stock percentages that may need to be met for an owner or officer to elect exclusion. The specific ownership requirement can range from one to 50%, explained Lemmon. Other common requirements that can change from state to state are limits to the number of owner exclusions allowed or which officer titles qualify for exclusion, and exceptions for specific industries or operations, the most common being construction and farming operations.

Keeping up to date with the various state acts and their associated exclusions for owners and officers of companies can help brokers both protect their clients and their standing with those clients.

“Issues involving owner and officer exclusions can go unnoticed until the final audit. When these audit discoveries lead to large additional premium invoices, broker-client relationships can be negatively impacted,” said Lemmon. “Most of these issues arising at final audit can be traced back to the ownership, entity type and intent to exclude not being properly documented on the original application for coverage. Similarly, mid-term entity and ownership changes not reported to the workers’ compensation carrier can also lead to problems at final audit.”

It’s important to note that if the workers’ comp carrier isn’t notified of a mid-term ownership or entity change, qualifying owners and officers might not be able to retroactively exercise their right to elect exclusion from coverage.

Brokers can follow a few key steps to help mitigate the risk of a large additional premium audit bill arising from owner and officer payroll coming up at audit for their clients, according to Lemmon. These include the following:

  • Review the entity, ownership breakdown and titles of owners with clients before submitting for coverage and at every renewal;
  • If an owner or officer elects to be covered or isn’t eligible to elect exclusion, ensure their payroll (subject to the applicable state’s owner office payroll limitations) is included in the estimated payrolls on the quote;
  • Review newly issued policies to ensure the owner and officer inclusions and exclusions were handled correctly;
  • Remind clients that if they are making changes to their business entity or ownership structure prior to the date of change, to keep their agent or broker informed.

Brokers can also turn to RIC experts to benefit from expertise on this and many other workers’ compensation-related issues.

“When it comes to business insurance, many wholesale brokers are generalists and not experts on workers’ compensation coverage. In some cases, they might not have the information needed to assist their retail clients with questions regarding when a business can exclude an owner, an officer or themselves from a policy,” said Lemmon. “At RIC, we are workers’ compensation experts. We partner with you to help each of your business clients better understand their rights and determine whether their state and legal business status allow for owner and officer inclusion and exclusion.”

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