Ghost policies are the cheapest type of workers' compensation policy around. A ghost policy is typically purchased as proof of insurance so that a hiring party can be assured they are not responsible, should something happen, and that they won't be charged for the sub's payroll on their own workers' comp policy.
It's called a ghost policy because the owner is excluded and there are no employees, subcontractors or day laborers. Because zero payroll is being charged on the ghost policy, it's like the policy is covering a ghost (no one).
Ghost policies work just like others workers' comp policies, except without the coverage. They are usually in-force for one year. They should only be purchased by self-employed business owners who have no employees, day laborers, or subcontractors, and will not hire any employees, day laborers, or subcontractors during the policy period. A ghost policy will be audited like any other workers' compensation policy, and if payroll is found (aside from the owner/s), the policyholder will be held responsible.
Basically, coverage costs more. A ghost policy is the absolute minimum premium workers' comp policy you can buy. To cover the owner, the insurance company would have to charge the minimum payroll denoted from the state corporation commission per $100 of the base workers comp rate. In plain English, the policy would be much more expensive if the owner were covered.
It's the least amount of premium for which an insurance company will write a business policy per state.
As a sole proprietor or one-person business, you may be required to have workers' compensation to get hired in your state, but might not want to pay extra for workers' compensation benefits. This is why a ghost policy can be great - you want to work, but you need to assure the hiring party that they aren't responsible for you. Because you elect to exclude yourself from coverage, this is the least expensive type of workers' comp.
A certificate of insurance (COI) is basically a piece of paper that proves you have insurance. Technically, it's an Acord form that insurance agencies and carriers give you as proof of coverage. It usually has information such as the name of the insurance company, the limits of coverage, and the policy start and end date.
Because most states require employers to obtain workers' comp coverage.
Many insurance companies don't want to give coverage to businesses with a long history of claims or insureds in dangerous industries, even though most states require every employer to have workers' compensation. The Assigned Risk Pool, or State Fund, has to provide coverage to these companies (at a higher cost, of course).
Workers' comp policies and ghost policies come with a coverage called "Employers Liability Insurance". It's a very small part of the premium. You'll see it listed as "Coverage B" or "Part 2" sometimes.
Although rare, Employers Liability insurance covers an injured employee from a negligent employer. Let's say you choose 100/500/100. That means $100,000 per accident, $500,000 per policy, and $100,000 per employee.
Example: A chicken factory locks the fire exits to keep its employees from taking cigarette breaks. A fire starts, and the locked doors cause the death of several employees. This is the type of negligence that ELL would cover.
Most people choose the smallest amount, as an employer liability claim is very unlikely. However, small business owners may increase their limits because of contractual requirements from a general contractor. And it doesn't cost much to increase the limits.
Not everyone needs workers' comp, and it can save you money if you don't need it. But many one-man business owners are subcontractors, and generally subcontractors need to provide proof of insurance along with the work bid. If you don't need workers' comp benefits, but need it to get a job, a ghost policy can help.Example: A company who hires an independent trucker says, "We'll hire you, but you need a workers' compensation policy before you start working for us." The trucker would then need to buy workers' comp insurance in order to get the job.
Subcontractors who need to provide a Certificate of Insurance to a hiring company or general contractor, but want to spend the least amount of money and don't need workers' compensation benefits, will obtain a ghost policy.
Insurance carriers typically audit ghost policies 30 days into the policy period to make sure the owner has not hired any employees and is paying the right price. Workers' comp policies are based on estimated payroll, so the audits make sure the payroll remains correct during the policy period, which, in the case of a ghost policy, should be zero. Most ghost policy audits are done in person, but some are done through phone and email, depending on what the carrier prefers.