What is Workers’ Compensation Insurance and What does it Cover?

Workers’ compensation insurance is business insurance that pays medical bills and lost wages for employees who are hurt or become ill because of their job. It works as a trade: the injured employee receives benefits without having to prove the employer did anything wrong, and in exchange the employer is protected from most lawsuits over that injury. Minnesota’s Department of Labor and Industry calls it a no-fault system designed to provide benefits to injured employees and to limit employers’ liability.

A workers’ comp policy covers five types of benefits: medical care, wage-loss payments, permanent disability benefits, vocational rehabilitation and death benefits for surviving family. It does not cover injuries caused by an employee’s intoxication, self-inflicted injuries, ordinary commuting or, in Minnesota, good-faith personnel decisions such as a layoff. Most policies also include employers’ liability coverage for the lawsuits that still get through.

Whether you must buy it depends on the state. Minnesota requires coverage from a single part-time employee. South Dakota doesn’t require it by law, but an uninsured employer faces an employee lawsuit or double non-medical benefits. The cost averages about 1% of payroll nationally, and rates fell in both Minnesota and South Dakota for 2026.

Key Takeaways

• Workers’ comp is a trade. Injured employees get benefits regardless of fault; employers are protected from most injury lawsuits.
• It covers five benefit types: medical care, wage loss, permanent disability, vocational rehabilitation and death benefits.
• Minnesota requires it from one part-time employee. Penalties run $200 to $1,000 per employee per week uninsured, and business licenses aren’t renewed without proof of coverage.
• South Dakota doesn’t require it, but going without is expensive. An injured employee may sue, or claim benefits plus double the non-medical compensation.
• Premium follows payroll. It is calculated from payroll, a class rate and your experience modification factor, and frequent small claims move the mod more than one large claim.
• Rates are falling. Minnesota’s 2026 base rates dropped 4.6% and South Dakota’s 5.1%.

How Does Workers’ Compensation Insurance Work?

Workers’ compensation insurance works on a no-fault basis: when an employee is injured or becomes ill because of work, the employer’s insurer pays the benefits set by state law. The injured worker doesn’t have to prove negligence on the part of the employer, and the employer can’t use the employee’s own negligence as a defense, as Minnesota’s Department of Labor and Industry explains.

The employer pays the premium, and each state’s law, not the policy, sets the benefits.

What Is the Exclusive Remedy Rule?

The exclusive remedy rule means workers’ comp benefits replace the employee’s right to sue the employer over a work injury. South Dakota’s statute states the whole bargain in one sentence: an employee’s workers’ compensation rights “shall exclude all other rights and remedies” against the employer “or any employee, partner, officer, or director of the employer, except rights and remedies arising from intentional tort” (SDCL 62-3-2).

Two points surprise business owners. The protection extends to co-workers, partners, officers and directors, not just the company. And the exceptions differ by state: South Dakota’s statute carves out intentional torts, while Minnesota’s exclusive-remedy statute contains no such express exception; its written exception is for employers who fail to insure (Minn. Stat. 176.031).

What’s the Difference Between Workers’ Compensation and Employers’ Liability?

A standard workers’ compensation policy has two main parts. Part One, workers’ compensation, pays the benefits required by state law with no dollar limit. Part Two, employers’ liability, defends and pays lawsuits over employee injuries that the exclusive remedy doesn’t block, such as a claim by an employee’s family or a third party that sues your business after an employee is hurt using its equipment. Employers’ liability carries stated limits, so check them when you review your policy.

Does Workers’ Comp Cover Pre-Existing Conditions?

Yes, when work makes them worse. In Minnesota, compensability reaches “any condition that is caused, aggravated, or accelerated by employment activities” (Minnesota DLI). An employee with an old back injury who re-injures it lifting stock at work generally has a compensable claim, even though the original condition wasn’t work-related.

What Does Workers’ Compensation Insurance Cover?

Workers’ compensation insurance coverage pays for the medical care and income an employee loses because of a work injury or occupational illness. Minnesota describes three basic benefit types publicly, “wage loss, medical and vocational rehabilitation,” while its adjuster training separates out a fourth, compensation for the permanent loss of use of a body part (Minnesota DLI). Add death benefits, and workers’ comp covers five categories in all.

Medical Benefits

Medical benefits pay for treatment of the injury: emergency care, doctor visits, surgery, hospital stays, prescriptions, physical therapy and related travel. In Minnesota there is no dollar cap and no time limit. The employer must furnish treatment that “may reasonably be required at the time of the injury and any time thereafter to cure and relieve from the effects of the injury” (Minn. Stat. 176.135). Nationally, medical care made up more than 47% of workers’ comp benefits paid in 2023 (NASI).

The choice of doctor differs between the states. A Minnesota employee may generally choose their own provider, with exceptions for certified managed care plans (Minnesota DLI employee guide). A South Dakota employee makes the initial choice, but changing providers requires the employer’s written permission (SDCL 62-4-43).

Wage-Loss Benefits

Wage-loss benefits replace part of an employee’s pay while they recover. Both states pay two-thirds of the average weekly wage for temporary total disability, when the employee can’t work at all, up to a state maximum. They differ for temporary partial disability, when the employee returns at lower pay: Minnesota pays 66⅔% of the difference between the old and new wage, while South Dakota pays one-half of the difference (Minn. Stat. 176.101; SDCL 62-4-5).

Waiting periods also differ. In Minnesota, wage loss isn’t paid for the initial three calendar days, but if the disability lasts 10 days the employee is paid for the entire time (Minnesota DLI). In South Dakota, no temporary disability benefits are paid unless the employee is incapacitated for seven consecutive days, after which compensation runs from the date of injury (SDCL 62-4-2). A five-day absence earns two days of pay in Minnesota and none in South Dakota.

Permanent Disability Benefits

Permanent disability benefits compensate for lasting damage after the employee has recovered as far as they will. Permanent partial disability pays for the permanent loss of use of a body part, based on a rating under state law, and is separate from wage replacement. Permanent total disability pays ongoing benefits when the employee can’t return to gainful work; Minnesota’s minimum permanent total rate is $960 per week effective October 1, 2026 (Minnesota DLI benefit rates).

Vocational Rehabilitation

Vocational rehabilitation helps an injured employee return to work, through job placement, retraining or a modified role. Minnesota’s program is structured: rehabilitation aims to return the employee to a job related to their former employment, retraining is capped at 156 weeks, and it must be requested before 208 weeks of temporary total and temporary partial compensation have been paid (Minn. Stat. 176.102). South Dakota pays the temporary total rate for the entire period an employee is in an approved program, with no comparable week cap in the statute (SDCL 62-4-5.1).

Death and Survivor Benefits

Death benefits support the family of an employee killed on the job and pay funeral costs. The two states take very different approaches (Minn. Stat. 176.111; SDCL 62-4-16):

• Minnesota: burial expense up to $15,000; a surviving spouse with no dependent children receives 50% of the weekly wage for 10 years; minimum total dependency compensation of $60,000.
• South Dakota: burial expense up to $10,000; a surviving spouse receives benefits for life or until remarriage, plus $50 per month for each dependent child.

What Doesn’t Workers’ Compensation Cover?

Workers’ comp only covers injuries that arise out of and in the course of employment, and state law sets specific exclusions. The exclusions are narrower than most employers assume.

Intoxication and Self-Inflicted Injuries

In Minnesota, the employer isn’t liable if “the injury was intentionally self-inflicted or the intoxication of the employee is the proximate cause of the injury” (Minn. Stat. 176.021). The standard is strict: intoxication must have caused the injury, not merely been present, and the employer carries the burden of proving it.

South Dakota’s exclusions are broader. Benefits are denied for injuries caused by “willful misconduct, intoxication, illegal use of drugs or failure to use a furnished safety appliance” (SDCL 62-4-37). That last exclusion has no Minnesota equivalent, and it gives South Dakota employers a practical step: provide the safety equipment and document that you did.

Commuting and Personal Activities

Ordinary travel to and from work generally isn’t covered, and neither are injuries from purely personal activities. Minnesota adds an important exception: when an employer “regularly furnished transportation to employees to and from the place of employment, those employees are subject to this chapter while being so transported.” Minnesota also excludes injuries caused by a third party or co-worker acting for personal reasons unrelated to the job (Minn. Stat. 176.011, subd. 16). Driving as part of the job, such as deliveries or travel between job sites, is covered.

Good-Faith Personnel Actions

Minnesota excludes mental injuries that result from good-faith personnel decisions, including “disciplinary action, work evaluation, job transfer, layoff, demotion, promotion, termination, retirement or similar action” (Minn. Stat. 176.011, subd. 16). Claims about how those decisions were made belong to employment law, not workers’ comp.

Is Workers’ Compensation Insurance Required?

Yes, in almost every state, but not in all of them, and Minnesota and South Dakota sit at opposite ends. The U.S. Department of Labor notes that Texas is the only state where employers may formally choose whether to opt in to the system (U.S. DOL, 2016). South Dakota takes a different route: it has no requirement to buy coverage, but it penalizes employers who go without.

Minnesota: Required From One Part-Time Employee

Minnesota sets no minimum headcount. According to the Department of Labor and Industry, “an employer with only one part-time employee generally must provide coverage,” including minors, part-time workers and workers who aren’t citizens (Minnesota DLI). Every covered employer must insure with an authorized carrier or be approved to self-insure (Minn. Stat. 176.181).

The consequences of going without are specific:

• Penalties of $200 to $1,000 per employee for each week uninsured, based on the premium avoided (Minn. R. 5220.2865).
• Reimbursement plus 65%: if the state’s Special Compensation Fund pays an injured employee’s benefits, the employer must repay them plus a penalty of 65% of those benefits.
• Criminal exposure: willful failure to insure is a gross misdemeanor.
• No business license: state and local agencies must withhold issuing or renewing a business license until the applicant shows proof of coverage (Minn. Stat. 176.182).

South Dakota: Not Required, but Uninsured Employers Pay Double

South Dakota’s Department of Labor and Regulation states plainly that “it is not required by state law that employers have workers’ compensation insurance, but if they do not, the employer can be sued civilly”. The department recommends that employers carry it “to avoid civil lawsuits”.

Going without is not free of consequences. When an uninsured employer’s worker is hurt, the employee chooses how to proceed: sue the employer for damages in court, or claim workers’ compensation benefits in circuit court, where the award is the medical benefits plus twice the other compensation normally payable. Either way, the employer pays directly, without an insurer or the exclusive-remedy protection.

Who Is Exempt From Workers’ Comp?

Minnesota exempts specific owner and family groups, including:

• Sole proprietors and their spouse, parent and child
• Partners in a partnership
• Executive officers of a closely held corporation that had fewer than 22,880 payroll hours in the preceding year, who own at least 25% of the stock
• Managers of an LLC with 10 or fewer members, under the same hours and ownership tests
• Casual workers not in the usual course of the business
• Household workers paid less than $1,000 in cash in a three-month period
• Family farm employees

Exempt owners and officers may elect to be covered, which many do so their own injuries are insured. Farm work is treated differently in each state: South Dakota exempts farm and agricultural laborers outright (SDCL 62-3-15), while Minnesota’s family farm exemption applies only below a payroll test, under $8,000 in cash wages or a higher limit when the farm carries qualifying farm liability coverage (Minn. Stat. 176.011, subd. 11a).

Are Independent Contractors Covered by Workers’ Comp?

No, true independent contractors aren’t covered by your policy, but the label on the contract doesn’t decide it. In Minnesota construction, the test changed on March 1, 2025: a worker providing construction services is an employee unless they operate as a business entity and meet all 14 factors in the updated state test (Minnesota DLI). A contractor who fails the test is treated as your employee, and their injury becomes your claim. At audit, insurers also charge premiums for uninsured subcontractors, so collect certificates of insurance from every subcontractor.

Which Workers Are Covered by Federal Programs Instead?

A handful of workers fall under federal programs rather than state workers’ comp. The U.S. Department of Labor’s Office of Workers’ Compensation Programs runs four: the Federal Employees’ Program, the Energy Workers’ Program, the Longshore Program for maritime workers such as dock workers, and the Black Lung Program (U.S. DOL OWCP). Crew members of vessels are excluded from Longshore and fall under the Jones Act instead.

Why Do Businesses Need Workers’ Compensation Insurance?

Businesses need workers’ compensation insurance because workplace injuries are common, predictable and expensive to pay without it. Private employers reported 2.5 million nonfatal injuries and illnesses in 2024, a rate of 2.3 cases per 100 full-time workers (BLS). Three events account for about 80% of cases that require days away from work, and the median case keeps an employee out for 8 days (BLS SOII Table 2):

The local picture adds weight. Minnesota reported 57,100 nonfatal workplace injuries in 2024, a rate of 2.8 per 100 workers, above the national 2.3; agriculture and construction led the state’s 84 fatal work injuries (BLS Minnesota).

South Dakota recorded 29 work deaths in 2024, a rate of 5.8 per 100,000 workers, 76% above the national rate, and transportation incidents caused 17 of them (BLS South Dakota). In a state where coverage is optional, that is the strongest case for buying it.

The businesses First State Insurance works with most often include contractors, trucking companies, retail stores, restaurants and health care providers, the industries where lifting, equipment, driving and customer contact create steady claim activity.

South Dakota vs. Minnesota Workers’ Compensation Benefits

The same injury pays differently on either side of the state line. The table compares the main benefit rules from each state’s own sources.

Sources: SD DLR rates, SDCL Title 62, Minnesota DLI benefit rates, Minn. Stat. ch. 176. Minnesota rates change every October 1 and South Dakota rates every July 1.

South Dakota’s maximum weekly benefit is about 28% lower than Minnesota’s, but its survivor benefits have no fixed end date. Neither state is simply more generous; an employer with workers in both states should expect claims to be handled differently.

How Much Does Workers’ Compensation Insurance Cost?

Workers’ comp insurance costs about 1% of payroll on average, but your premium depends on the work your employees do, your payroll and your claims history. The same formula drives workers’ compensation insurance costs for retail businesses, where lower class rates apply.

What Does Workers’ Comp Cost as a Share of Payroll?

Three independent sources land in the same place:

• BLS: workers’ comp costs private employers $0.43 per hour worked, 0.9% of total compensation, in June 2026 (BLS Employer Costs for Employee Compensation).
• NASI: employers paid $0.98 per $100 of covered payroll nationally in 2023 (National Academy of Social Insurance).
• Minnesota: the state’s system cost $0.83 per $100 of payroll in 2024, and the average 2023 claim cost $13,780 for medical and wage benefits combined (Minnesota DLI System Report).

One change to note for future reference: BLS will remove workers’ compensation costs from that employer cost series starting with its December 2026 data (BLS).

How Is Workers’ Comp Premium Calculated?

Premium is built from payroll. Each job is assigned a classification code with its own rate per $100 of payroll, and the insurer multiplies the payroll in each class by that rate, then applies adjustments (Texas Department of Insurance rate guide):

(Payroll ÷ 100) × class rate × experience modification factor ± schedule credits or debits = premium

A clerical class carries a far lower rate than roofing or trucking, so the same payroll produces very different premiums. Because premium is based on estimated payroll, most policies are audited at the end of the term and adjusted to actual payroll.

What Is an Experience Modification Factor?

The experience modification factor, or mod, compares your own claims history with the average for businesses of your size and class. A mod of 1.00 is average, below 1.00 lowers your premium, and above 1.00 raises it. The rating generally uses three years of payroll and loss data, leaving out the most recent year so claims can develop (NCCI, ABCs of Experience Rating).

The detail most owners miss: the formula weighs how often you have claims more heavily than how large they are. NCCI splits each loss into a primary portion that measures frequency and an excess portion that measures severity, and it limits the effect of any single large loss. Several small claims usually move your mod more than one serious claim, which is why reporting and preventing minor injuries matters.

What Is a Workers’ Comp Assigned Risk Plan?

An assigned risk plan is the insurer of last resort for businesses that can’t find coverage in the regular market, often because of losses or a hazardous class. It costs more. Minnesota’s assigned risk plan applies a multiplier of 2.15 to base rates effective January 1, 2026 (MWCIA Circular 25-1867). Minnesota has no state workers’ comp fund; it is a competitive private market with this supervised plan behind it. South Dakota’s assigned risk market is administered through NCCI.

Are Workers’ Comp Rates Going Down in Minnesota and South Dakota?

Yes. Minnesota’s 2026 pure premium base rates dropped 4.6%, and its average pure premium rate is 44% lower than in 2004 (Minnesota DLI). NCCI filed a 5.1% decrease in South Dakota’s voluntary market loss costs and a 4.9% decrease in assigned risk rates effective July 1, 2026 (NCCI South Dakota filing). Nationally, workers’ comp was one of the most profitable commercial lines in 2024, with a 44.5% loss ratio (NAIC), which is why insurers are competing on price. If your premium rose at renewal, your payroll, class or mod is the likely reason, not the market.

How to Lower Your Workers’ Compensation Costs

You can’t change your state’s rates, but you control most of what moves your premium:

• Use your insurer’s risk control services. Research with NIOSH authorship found that insurer safety consultation visits cut workers’ comp costs per worker by 14% over two years, and up to 22% by some measures (Journal of Occupational and Environmental Medicine).
• Fix the hazards OSHA cites most. Fall protection, hazard communication, ladders, lockout/tagout and respiratory protection topped OSHA’s FY2025 list. Serious violations carry penalties up to $16,550 each and willful or repeated violations up to $165,514, for penalties assessed after January 15, 2026 (OSHA).
• Run a return-to-work program. Light-duty work shortens wage-loss claims.
• Report every injury promptly. Early reporting keeps medical-only claims from becoming lost-time claims.
• Classify employees correctly. A clerical worker coded as field staff pays the wrong rate.
• Collect subcontractor certificates. Uninsured subcontractors are added to your premium at audit.
• Furnish and document safety equipment. In South Dakota, it also supports the safety-appliance defense.

OSHA also reports that a randomized study of Cal/OSHA inspections found a 26% average savings on workers’ comp costs over four years (OSHA, Business Case for Safety and Health).

How to Get Workers’ Compensation Insurance

Most businesses buy workers’ comp through a licensed insurance agent, who quotes it with one or more insurers. To get an accurate quote, have this information ready:

• Annual payroll by job type, including owners if they elect coverage
• A description of what each group of employees does
• Headcount, including part-time and seasonal staff
• Use of subcontractors, and their certificates of insurance
• Loss runs for the past three years, if you had prior coverage
• Your current experience modification factor, if you have one

If the regular market declines your business, the agent can place it in the state’s assigned risk plan. Once coverage is in place, your insurer or agent issues certificates of insurance for customers, general contractors and licensing agencies.

Frequently Asked Questions

Can an Employee Sue If They Receive Workers’ Comp?

No, in most cases. Workers’ comp is the employee’s exclusive remedy against an insured employer. Exceptions include intentional torts in South Dakota and claims against uninsured employers, and employees may still sue a third party, such as an equipment manufacturer, that caused the injury.

Do Sole Proprietors Need Workers’ Comp in Minnesota?

No, sole proprietors and their spouse, parent and child are exempt in Minnesota, but they may elect coverage. A sole proprietor with even one part-time employee must cover that employee.

Does Workers’ Comp Cover Farm Workers?

Yes, in Minnesota for most farm operations, and no in South Dakota. South Dakota exempts farm and agricultural laborers outright, while Minnesota exempts family farm employees only below a payroll threshold.

What Happens If a South Dakota Employer Has No Workers’ Comp?

The injured employee may sue the employer for damages or claim workers’ compensation benefits in circuit court, where the award is medical benefits plus twice the other compensation normally payable. The employer pays either amount directly.

Does Workers’ Comp Cover Injuries While Driving for Work?

Yes, when the driving is part of the job, such as deliveries, sales calls or travel between job sites. Workers’ comp pays the employee’s own injuries, while commercial auto insurance covers injuries and damage to others and the vehicle. Ordinary commuting is generally not covered.

How First State Insurance Helps

First State Insurance helps employers across southwest Minnesota and South Dakota, from its offices in Worthington and Sioux Falls, set up workers’ compensation insurance that fits their operations. The team helps with classifying employees correctly, deciding whether owners should elect coverage, preparing for payroll audits, issuing certificates of insurance, adding endorsements and following claims through. To review your coverage or get a quote, contact our Worthington or Sioux Falls office.

Disclaimer

This article is for general information only and is not insurance, legal or tax advice. Coverage, eligibility and terms vary by state, insurer and underwriting, and are determined only by the issued policy and applicable law. Benefit rates and rules summarized here change regularly, including Minnesota rates each October 1 and South Dakota rates each July 1; confirm current figures with the Minnesota Department of Labor and Industry or the South Dakota Department of Labor and Regulation. Consult a licensed insurance agent about your operations and an attorney about legal questions.

Disclosure

First State Insurance is an independent insurance agency and may be compensated when policies are placed through it. Statistics and requirements are drawn from state and federal agencies, state statutes and rules, rating organizations and peer-reviewed research cited in the text, and reflect the most recent information available when this article was published or updated.