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A workers’ compensation ghost policy technically doesn’t exist. It’s just a workers’ comp policy that applies to a special scenario where the business doesn’t have any employees aside from its owners, and they are excluded from paying for coverage. Essentially, it’s workers’ compensation that doesn’t include any payroll by the time it was issued.
People who apply for a ghost policy usually do so to meet the insurance requirements of their customer, client, or employer. For example, a homeowner may require their contractors to present workers’ comp insurance before working or doing business with them.
How Does a Ghost Policy Work?
A ghost policy is an affordable policy designed specifically with independent contractors, sole proprietors, or partnerships in mind. These business structures don’t have any employees, but the people they work with may require them to present proof of workers’ comp insurance. Ghost policies are also usually valid for one year.
A ghost policy is a minimum premium policy. Like other workers’ comp policies, it’s based on the payroll for the year. Payroll is then multiplied by the classification rate to determine the base coverage premium. Since there is no payroll, however, the policy has no rating basis. Because of this, it doesn’t cost as much as an average policy that covers employees and is only subject to the minimum premium assigned by the insurance provider or the state.
This type of policy also doesn’t offer any real insurance coverage, which is why it’s called a ‘ghost’ policy. It doesn’t provide any benefits to the owner/s in case they get involved in an accident that leads to injury. The assumption is that the policy only serves to meet state requirements or as proof of insurance before they do business.
The table below summarizes some important features of a ghost policy:
|Features of a Ghost Policy|
|Usually issued through the state’s insurance fund, although premium pricing may be available.|
|Typically used by contractors with no employees who need to show proof of insurance for jobs or projects that require it.|
|Doesn’t pay out medical or indemnity benefits to the EXCLUDED Owner Or Officers.|
|Minimum earned policy where the employer is excluded.|
Why Would You Need a Ghost Policy?
Ghost policies are a good option for business owners and contractors who know that they’re not going to hire any employees for the year. They’re also perfect for the following people:
- Self-employed business owners who have no subcontractors or employees
- Self-employed business owners who don’t have payroll aside from themselves
- Contractors that do HVAC, plumbing, home inspection, electrical, or landscaping work that already have liability insurance
A ghost policy is also a common choice for subcontractors who are planning to work on a construction project but may not want to spend the money for a full policy. The policy offers the protection that a general contractor needs to avoid liability in case of accidents at a price that the subcontractor can afford. It also allows the subcontractor to qualify for potentially lucrative contracts even though they’re just a one-man operation.
The policy can also serve as an interim policy for a new employee who’s hired while the ghost policy is still in effect. It’ll offer them protection until their employer can purchase a full workers’ comp policy.
When Do You NOT Need a Ghost Policy?
Ghost policies—because of their low costs—are often subject to abuse by unscrupulous employers. Instead of signing up for legitimate workers comp coverage, they get a ghost policy that won’t provide their employees access to benefits in the event of an accident. Some states have banned ghost policies because of these high-risk employers.
Essentially, for business owners that have real, live employees, a ghost policy should never be an option. Getting a ghost policy in such cases constitutes fraud and will have massive consequences for the business owner down the road. It’s also a huge risk for employees since they won’t have any protection in case they get injured while on the job.
Self-employed business owners may also be better off signing themselves up for a legitimate workers’ comp policy instead of opting for a ghost policy. This way, they’ll receive coverage for their medical expenses and missing wages in case they have an accident or injury at work. There are also plenty of affordable policy options where the costs would be comparable to the price of a ghost policy.
How Much Does a Ghost Policy Cost?
The minimum premium for a ghost policy written through the North Carolina Rate Bureau is $1,500 for minimum limits. If you go up to the $1,000,000/$1,000,000/$1,000,000 limits, the minimum premium is $1,620.
The caveat is that all that money is due up front. There are no payments made on it, so you have to pay the entire premium up front before the policy can be issued.
Business owners also have to remember that ghost policies are subject to audit. If the insurance provider determines that there’s additional exposure, the policy may be cancelled, and the business owner may be on the hook for the audit balance or the unpaid premiums.
How Do You Get a Ghost Policy?
Most standard insurance carriers—in North Carolina at least—don’t like to issue a ghost policy. Most, in fact, will say that there needs to be a minimum payroll or a minimum premium associated with a workers’ comp account if they’re going to write it. So, the majority of all ghost policies end up getting written through the North Carolina Rate Bureau.
Because of this, hiring an independent agent to help you through the process is crucial since you can’t personally send your own application to the North Carolina Rate Bureau.
A ghost policy is a type of workers’ comp policy that covers no employees and is usually used as proof of insurance. If you need a ghost policy, check with your insurance agent to see if it matches your business needs.