How workers' comp ghost policies put businesses at risk

Some small business owners are hiring ghosts. "How?" you might ask.

Instead of signing up for legitimate workers' comp insurance and covering themselves and their employees, they get a "ghost policy," named as such because it covers no one.

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A ghost policy is an attempt to show proof of workers' comp coverage when bidding on a job—but without offering the certificate holder access to any benefits in the event of an accident.

Colorado is one of 23 U.S. states to have banned ghost workers' comp policies, and for good reason. The cost of this "not-exactly workers' comp" insurance can be devastatingly high for business owners and their workers. Here's a closer look at ghost policies and why you'll want to avoid them.

High potential for abuse

First, let's talk about why they exist in the first place. A sole proprietor working at a desk job—an artist, for example—may not need workers' comp insurance at the same level a tree trimming business would. In the few states where ghost policies are legal, it's possible for a sole proprietor to choose a ghost policy and leave themselves uncovered.

But these situations are rare. More often, businesses that need to show proof of workers' comp coverage to bid on jobs and are using ghost policies to cut corners.

A 2012 investigative series by The News & Observer in Raleigh, N.C. found multiple instances of abuse of ghost policies in the state. Overall, the paper confirmed that of the roughly 140,000 policies written and sold each year in North Carolina, just over 16,000 were ghost policies targeted to "high-risk employers that couldn't buy workers' compensation insurance on the open market," the paper said.

Unfortunately, this practice isn't without consequences. In one extreme case, a contractor from North Carolina lost his business when a worker dubiously classified as an independent contractor suffered a paralyzing injury in an on-the-job auto accident. The ghost policy left everyone exposed.

Someone will pay

In Colorado, where workers' comp insurance is mandatory for employers, the potential for abuse was such that in 2005 the legislature enacted a law allowing for the state Division of Workers' Compensation (DWC) to levy fines of up to $500 per day.

In the years since, companies found to be in violation of Colorado's requirement to carry full workers' comp coverage have been targeted for hundreds of thousands in fines. Some of those penalties have since been deemed excessive, but the spirit of enforcement makes sense when you look at the data.

According to the Colorado Division of Workers' Compensation, Colorado workers filed 27,243 lost-time claims in 2013, the latest year for which there is workplace injury data available. There's no way to know for sure how much income, revenue, and profit got lost in those claims, but a quick review of workers' comp judgments in the state suggests the total could range well into the tens of millions.

Imagine how much worse those figures might have been if Colorado regulators had authorized insurers to write ghost policies.

The benefits of having Colorado workers' comp coverage

Workers' compensation benefits protect both a business and it's employees through:

• Medical care coverage. In the event of a qualifying workplace injury or occupational illness, you can file a claim to cover your employees' medical costs.
• Replacing lost wages. Injuries can put your employees out of work for 62 days on average. Your coverage ensures they get some of their salary while they recover.
• Saving big versus out of pocket costs. Businesses that choose workers' comp coverage usually save 50% versus paying out of pocket to settle claims.
• Protection against lawsuits. Workplace injuries don't always begin and end with a hospital bed. Sometimes there are court filings and depositions to deal with. With workers' comp coverage, your business is protected against resulting lawsuits.

Remember, workers' comp coverage is required by law in Colorado as soon as you have one or more employees. But even if you don't have employees, do you really want to take the risk that your personal health insurance coverage will make you whole in the event of an accident? Trying to buy a ghost policy means making that bet—and living with potentially devastating out-of-pocket costs if you lose.

Are you a business owner and ready to learn more? At Pinnacol, we can get your company and your employees covered with Colorado workers' compensation insurance.