Are Ghost Policies Legal?

Some entrepreneurs are resorting to unconventional methods to cut costs. Instead of obtaining legitimate workers’ compensation insurance for themselves and their employees, they are opting for something called a “ghost policy” – a policy that provides no coverage to anyone.

A ghost policy serves the purpose of demonstrating proof of workers’ compensation coverage when bidding for jobs. However, in the unfortunate event of an accident, the certificate holder does not receive any benefits.

The Issue of Abuse

Let’s begin by examining why ghost policies exist. For instance, an artist who works as a sole proprietor in a desk job may not require the same level of workers’ compensation insurance as a business involved in tree trimming. In states where ghost policies are legal, a sole proprietor does have the option to choose a ghost policy and remain uninsured.

However, such cases are rare. More often than not, businesses in need of proof of workers’ compensation coverage for job bids resort to ghost policies in order to take shortcuts.

A 2012 investigation by The News & Observer in Raleigh, North Carolina uncovered numerous instances of ghost policy abuse in the state. The newspaper confirmed that out of approximately 140,000 policies sold annually, over 16,000 were ghost policies sold to “high-risk employers who were unable to purchase workers’ compensation insurance on the open market.”

Unfortunately, this practice has serious consequences. In one extreme case, a contractor from North Carolina lost his business when a worker, incorrectly classified as an independent contractor, became paralyzed in an on-the-job car accident. The ghost policy left everyone exposed and vulnerable.

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Consequences and Fines

In Colorado, where workers’ compensation insurance is compulsory for employers, the potential for abuse was so significant that the legislature passed a law in 2005 allowing the state’s Division of Workers’ Compensation (DWC) to impose fines of up to $500 per day.

Over the years, companies found to be in violation of Colorado’s requirement to carry full workers’ compensation coverage have faced hundreds of thousands of dollars in fines. Although some of these penalties have been deemed excessive, the intent behind the enforcement becomes clear when examining the data.

According to the Colorado Division of Workers’ Compensation, there were 27,243 lost-time claims filed by workers in 2013, the latest year for which workplace injury data is available. While it is impossible to determine the exact financial impact caused by these claims in terms of income, revenue, and profit, a brief analysis of workers’ compensation judgments in the state suggests that the total could amount to tens of millions of dollars.

Imagine how much worse these figures could have been if Colorado regulators had authorized insurers to issue ghost policies.

Advantages of Colorado Workers’ Compensation Coverage

Having an active workers’ compensation policy in Colorado offers several benefits:

  • 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.
  • Replacement of lost wages: On average, injuries lead to an average of 62 days of work absence. Your coverage ensures that employees receive a portion of their salary while they recover.
  • Significant cost savings: Businesses that choose workers’ compensation coverage typically save 50% compared to paying out of pocket to settle claims.
  • Protection against lawsuits: Workplace injuries can lead to legal complications, including court filings and depositions. With workers’ compensation coverage, your business is shielded from potential lawsuits.
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Remember, workers’ compensation coverage is legally mandated in Colorado as soon as you hire one or more employees. Even if you don’t have employees, do you really want to take the risk of relying solely on your personal health insurance coverage in the event of an accident? Opting for a ghost policy means taking that gamble – and potentially facing overwhelming out-of-pocket expenses if you lose.

Are you a business owner seeking more information? At Cake, we can help you secure Colorado workers’ compensation insurance for your company and employees in under 5 minutes.

Garrity Traina