What Is a Ghost Policy for Workers Comp?

Workers’ compensation insurance protects employees who suffer work-related injuries or illnesses, covering medical costs and lost wages. While standard policies are common, a “ghost policy” is a less understood type of coverage for specific business structures. This niche product serves a unique purpose for business owners navigating contractual requirements without traditional employees.

Definition and Purpose

A ghost policy refers to a workers’ compensation policy issued to businesses with no employees, such as sole proprietors or independent contractors. This policy does not provide workers’ compensation benefits for injuries, as there are no employees to cover and the owner is usually excluded from coverage. Its primary function is to satisfy contractual or regulatory requirements for demonstrating proof of insurance. For instance, a general contractor might require subcontractors to provide a Certificate of Insurance (COI) showing workers’ compensation coverage before work begins.

The “ghost” aspect means it provides no “real coverage” for an injured worker, including the business owner. Instead, it serves as an administrative tool to meet a minimum insurance requirement. It allows self-employed individuals or small business owners to secure contracts by presenting a COI, without incurring the higher premiums of a traditional policy that covers payroll. This makes it a cost-effective solution for those exempt from mandatory workers’ compensation requirements but still needing proof of coverage.

Eligibility and Conditions

Eligibility for a ghost policy centers on the absence of employees. This policy is for business owners, such as sole proprietors, partners, or members of a Limited Liability Company (LLC), who perform all work themselves and do not have a payroll for other individuals. A fundamental condition is that the owner must be explicitly excluded from coverage on the policy, meaning they would not receive benefits if injured.

The policy is typically written with an “if any” payroll, indicating that there is no active or anticipated employee payroll for the policy period. This structure allows the insurance company to charge a minimum premium, reflecting the absence of risk for employee claims. The core principle of having no employees remains consistent across jurisdictions where ghost policies are permitted. Businesses seeking this policy often engage in contracting work and need to demonstrate compliance to larger entities or for licensing purposes.

Scope and Implications

A ghost policy’s functional boundaries are strict and carry significant implications if a business’s circumstances change. If a business holding a ghost policy hires even a single employee, the policy immediately becomes inadequate and potentially dangerous. A ghost policy provides no coverage for employees, leaving the business vulnerable to severe legal and financial consequences if an employee is injured on the job.

Operating with a ghost policy when employees are present can lead to substantial penalties for non-compliance with state workers’ compensation laws. These penalties can include hefty fines, personal liability for employee medical expenses and lost wages, and in some cases, even jail time for the business owner. Therefore, a business must transition from a ghost policy to a standard workers’ compensation policy as soon as any employee is hired, regardless of whether they are full-time, part-time, or temporary. Insurance carriers typically conduct audits, often annually, to verify that no employees have been hired, and discovery of undeclared employees will result in significant additional premiums and potential policy cancellation.