Insurance and Hiring a Domestic Employee

Many people have turned to hiring a nanny or part time maid as both parents have obligations on their time and their days get over scheduled. Often, people wonder if they need new insurance coverage. I know this is a small departure from my usual writings on commercial insurance, but I think you may find it helpful.

There are a few things to consider for insurance after you have decided to hire a domestic employee. The easiest is workers compensation. This paragraph is specific to Illinois, and each state has separate requirements that basically fall into three categories. The first category is that usually domestic employees are not required to be covered under workers compensation. The second is that full time employees are required to be covered and the third is that even part time employees are required to be covered. In Illinois, Any worker or workers employed for a total of 40 or more hours per week for a period of 13 or more weeks during a calendar year by any household or residence must be provided workers compensation insurance. However, if the position is part time (35 hours) it is not required. Workers compensation for a domestic employee ends up costing about $600, so it's nice to avoid when possible.

As far as liability insurance, your homeowners insurance will extend coverage automatically. At renewal, you should make them aware you have a regular domestic employee. This would be true of a nanny or any other domestic employee. Your homeowner's insurance covers any bodily injury they may cause to a non-household member and any property damage they may cause in the course of their work outside the home.

Homeowners insurance would also apply as normal (with the deductible) to any theft of your property committed by your employee.

The household's auto insurance also extends to your employee driving your vehicle. So you can have your employee drive your auto without additional coverage. No notification of the carrier is required. Despite what a personal lines agent may tell you, the employee would not be considered a household member and should not be rated on your policy.

Following the above conditions, you should not require any additional coverage.

Workers Compensation Audits

You may or may not be aware, that your workers compensation premium is just an estimate. Sure, you faithfully paid your bills all year, even renewed your policy. Months after your policy expires, the insurance company can send you a bill for thousands of dollars. And can even send your business to collections, because you owe. So how does this happen?

Workers compensation policies are issued on payroll forecasts, but payment is due on actual payroll. And if you admit you can't document one of your subcontractors workers compensation polices, you could owe for them as well. So how do you avoid this? Be informed and document! First - be honest with your broker and help them write an accurate policy. Give them accurate payrolls based on history and expectation. Break out payroll by job duties and help your broker assign good class codes. This helps a good estimate be used for your policy and minimize audit premiums. If you over estimate, you can earn a refund - you will get your money back.

So what happens at the end of the year? You will either get a paper audit form or a "physical audit" where someone comes to examine your records. Do not staff out the audit. Call your broker first for advice. The auditor is looking for ways to grab your money - keep it! If you have employees with split responsibilities - you need to keep payroll records by job duty. In the office 4 days answering the phone and one day making deliveries? Document! There is no form for this, make your own. It will pay off.

Second, the auditor wants to see source documents. Quarterly and annual payroll tax records, payroll records. Know what you have - and know what can be verified. Most payroll reports are generated by employer internal reports. What you can document is the truth. Don't contradict yourself, and you will come out with a no surprises audit. Let your broker be your advocate, and they will tell you what your options are. Don't trust your broker that much? Call me.

What does an insurance policy being auditable mean?

Auditable insurance policies means the premium listed on your policy is estimated and won't be finalized until an audit at the end of the term.

All insurance policies are based on certain ratable elements. Those are the key pieces of information that determine how much you pay. For property insurance, the cost is based on the total insured value. It may even be printed on your policy in cost per $100 of insured property value. If you buy a new building, under most policies you have to schedule the building, pay and additional premium, and the insurance company raises your limit.

You don’t notify the insurance company, and there might not be coverage. But it doesn’t work like that with liability insurance. On a general liability policy or a workers compensation policy, the carrier agrees to defend you against claims. They rated you at the beginning of the policy on payroll or possibly gross sales. You pay a premium based on the estimated sales or payroll at that time. If you sell more goods, or hire more staff, you aren’t required to call the insurance company and list them on your policy. Clients and staff names aren’t listed on a normal liability policy or workers compensation policy, anyway.

But what if the business shrinks over the year? Well, with an audit at the end of the policy term some of the premium can be returned. If the business had more sales than estimated or more payroll, then the insurance company had more risk then they anticipated. In that case a bill is generated and additional premium due.

All workers compensation is auditable. Some general liability is auditable, particularly contractors, wholesale, and manufacturing. Professional liability and executive liability (directors & officers, employment practices & fiduciary) is never auditable. Check your policy, so you know what’s coming. And if your business is growing, ask your agent if you can get a non-auditable general liability policy. You could save a lot of money.