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Workers Compensation Ghost Policy

Problems created and issues surrounding a workers comp ghost policy

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The workers compensation ghost policy...it's just about the most ridiculous thing anybody ever came up with! It can create a very BIG PROBLEM at audit requiring an audit dispute resolution to correct! As a side note, the term "ghost policy" is really not an insurance term. It's more of a made up term to describe the situation where an owner is excluded from coverage and who has no employees. Just keep that in mind. Here's a real case study of a Ghost Policy gone wrong....and let me tell you a story:
  • You need to buy a workers compensation policy because you are a contractor and the company who has just hired you says..."You can do this work but you have to have a workers compensation policy in order to get on the job site, do you have one?" And your response is..."But I'm not required to have one. Can I still have the job?" and the company says..."No, but if you go and get a policy you can." So you head off to your local insurance agent...you know, the one you bought your homeowners insurance from...and you say..."Hey, I can get this job if I have a workers comp policy. Can you get me something cheap? And your agent says..."Sure! how about we get you a policy that you pay for but won't provide you with any coverage. It's cheap. How does that sound?" and you say..."Well if that's all I need to get on the job then go for it!" ....And that's how it all begins...

So just to recap, the workers comp ghost policy is a policy that someone pays premium dollars for and then has no coverage? That's pretty close. Here's a few points to consider:
  • A ghost policy is usually issued on a sole proprietor, partnership, LLC or other entity where the owner or owners maybe by statute or are allowed to be excluded from coverage under the workers compensation policy and there are no active or obvious employees to generate ratable payroll.
  • Since the premium of a workers comp policy is based on payroll, the owners are excluded and there are no employees then the deposit premium is usually whatever the minimum premium charged by the insurance company may be. This is usually very low.
  • Once the policy is purchased valid certificates of insurance can be issued to requesting parties. This is a problem.

Pitfalls and Problems with the Ghost Policy:
  • This type of policy is usually written only for the purpose of providing a certificate of insurance or some other form of proof of coverage to a hiring party.
  • The hiring party, the one who has made the requirement that workers compensation be in place, has reasonable expectations that when they receive proof of insurance coverage, the subcontractor hired is actually covered under the policy.
  • When properly completed, the proof of insurance or certificate of insurance will indicate whether or not the owners are included in coverage under the workers comp policy. If the coverage indicator is incomplete then the hiring company should be wary!
  • There is potential for the hiring party to incur an unexpected workers comp claim generated from the uninsured owner of the ghost policy if injured while on the hiring parties job.
  • Since the ghost policy was based on no ratable payroll, if the subcontractor should hire or somehow acquire statutory employees under him during the policy period then all funds paid to them will be at audit charged as a ratable exposure basis. Simply stated the one who purchased this ghost policy could be in for a very big surprise at the end of their policy period and faced with a very large audit bill!

So do not be fooled by a ghost policy. Whether you're the subcontractor buying the policy or the hiring party requiring coverage, be wary! These policies have caused many, many problems and continue to do so today! If you have any questions at all about the problems with or how these policies can have an adverse effect on your business....CALL US!

Do not be fooled! You know the old saying, "If it sounds too good..."

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