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Workers' compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states. Workers' comp insurance consists of two components, with a third optional element. The first part covers medical bills and lost wages for the injured employee; the second encompasses the employer's liability, which covers the business owner should the spouse or children of a worker who's permanently disabled or killed decide to sue. The third and optional element of workers' compensation insurance is employment practices liability, which insures against lawsuits arising from claims of sexual harassment, discrimination and the like.

"Employment practices liability protects the unknowing corporation from the acts of the individual," says Todd Muller at the Independent Insurance Agents of America (IIAA), an industry association. "Whether you need it depends on the size of your business and how much control you have over the daily work of employees." This is something you may need to worry about as your company grows. Muller says it is often hard for small companies to get workers' compensation insurance at reasonable rates. Consequently, some states have a risk-sharing pool for firms that can't buy from the private market. Typically state-run and similar to assigned risk pools for car insurance, these pools generally don't provide the types of discounts offered in the voluntary market, and thus are an "insurance of last resort."

Because insurance agents aren't always up to date on the latest requirements and laws regarding workers' comp, you should check with your state, as well as your agent, to find out exactly what coverage you need. Start at your state's department of insurance or insurance commissioner's office.

Generally, rates for workers' comp insurance are set by the state, and you purchase insurance from a private insurer. The minimum amount you need is also governed by state law. When you buy workers' comp, be sure to choose a company licensed to write insurance in your state and approved by the insurance department or commissioner.

If you are purchasing insurance for the first time, the rate will be based on your payroll and the average cost of insurance in your industry. You'll pay that rate for a number of years, after which an experience rating will kick in, allowing you to renegotiate premiums.

Depending on the state you are located in, the business owner will be either automatically included or excluded from coverage; if you want something different, you'll need to make special arrangements. While excluding yourself can save you several hundred dollars, this can be penny-wise and pound-foolish. Review your policy before choosing this option because in most states if you opt out, no health benefits will be paid for any job-related injury or illness by your standard health insurance provider.

A better way to reduce premiums is by maintaining a good safety record. This could include following all the Occupational Health and Safety Administration guidelines related to your business, creating an employee safety manual or instituting a safety training program.

Another way to cut costs is to ensure that all jobs in your company are properly classified. Insurance agencies give jobs different classification ratings depending on the degree of risk of injury.

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