Boo! What is a Workers’ Compensation Ghost Policy — and Why Should You Care?

In the construction industry, there’s a reasonably high risk of injury on a job site. It can be a good idea — or even a legal requirement — for businesses to have a workers’ compensation policy that covers employees’ injury or illness in the workplace. But, there’s a surprising type of insurance that can leave construction workers without coverage: a ghost policy.

A workers’ compensation ghost policy is an insurance policy that covers … no one.

Only contractors or self-employed business owners without employees on payroll can get workers’ comp ghost policies. The policy exempts an owner from insurance coverage; it only applies to the non-existent employees. What’s left is an insurance policy that effectively covers a ghost. 

If a contractor with a workers’ comp ghost policy is injured while at a construction site, that policy won’t pay out for medical expenses and care. So, what’s the point?

When a Workers’ Comp Ghost Policy can be Helpful

Contractors or self-employed business owners may have liability insurance, which can offer similar protections to workers’ compensation in case of an accident, depending on the circumstances. While liability insurance provides enough coverage for individuals in some cases, other circumstances require documentation of workers’ compensation coverage.

Workers’ comp ghost policies can be helpful if:

• A client or general contractor wants to see proof of coverage or a certificate of insurance.

• A contractor or self-employed small business owner needs a low-cost policy.

• A state requires workers’ compensation coverage.

State labor and employment agencies may provide a database of businesses that have workers’ comp coverage. Workers, construction clients and other consumers can use these databases as a resource to get peace of mind about a business or potential employer, ensure a business’s compliance with regulations or file a claim.

Workers’ compensation laws are set at the state level, so whether workers’ compensation insurance is legally required and where you can obtain it differs by location. Check the U.S. Department of Labor’s list of state workers’ compensation boards to determine local requirements.  

When a Ghost Policy Might not be Right

If a contractor or small business owner is at high risk of injury, having a workers’ compensation ghost policy without other liability insurance could result in costly issues down the road. 

Workers’ comp ghost policies aren’t a good idea if:

• The potential policyholder is at risk of injury and doesn’t have other liability insurance.

• The contractor or small business owner with a ghost policy has employees or hires employees.

• A state forbids, or doesn’t provide, workers’ compensation ghost policies.

Remember that ghost policies don’t apply to small business owners with employees. If a contractor with a ghost policy hires an employee or subcontractor, it would violate the terms of the ghost policy. What’s certain is that new hires would not be covered in case of illness or injury in the workplace unless they have their own liability or workers’ comp insurance policies.

How Ghost Policies can Affect Growing Construction Companies

Let’s say Christine’s Construction is a general contractor that’s been hired to build a neighborhood of new homes in Fort Mill. The neighborhood’s architect, Arnel, has already checked in on Christine’s Construction, and knows that Christine has a workers’ compensation policy that protects her employees from injury or illness on the job. 

Arnel and Christine want the worksite to be as safe as possible, so Christine is requiring all her subcontractors to show proof of coverage before they start working.

Halfway through the homebuilding project, Christine’s subcontractor, Tomás, is injured. The proof of coverage Tomás showed Christine was a workers’ compensation ghost policy, which won’t pay out for his medical expenses and care. 

If Tomás also has a liability insurance policy in place, he may be able to submit a claim to recuperate expenses. If Tomás doesn’t have any other policy in place, he collects nothing. In either case, Tomás’ certificate of insurance may relieve Christine’s Construction of liability. 

Of course, the unique details of each situation and state regulations determine liability, fault and protection. Consult an attorney to learn more about the benefits and risks of using or accepting workers’ compensation ghost policies. 

If you’re looking for a way to track your team’s credentials and work time, Certum Solutions can introduce your construction business to QuickBooks Enterprise Contractor Edition. If you’re not sure whether it’s the tool for you, ask Katie to walk you through a demo.