Workers' Comp Ghost Policy: What It Is, What It Costs, the Risks

A workers’ comp ghost policy is an ordinary workers’ compensation policy bought by a business owner who has no employees and is not covered under it, so on the day it starts it covers no one. Owners buy one mainly to get a certificate of insurance that a general contractor will accept. It does nothing for the owner if they get hurt, and some states do not allow it.

The short version:

• A ghost policy exists to produce proof of coverage, usually for a subcontractor who has no staff.
• It does not cover you, the owner. If you get hurt on the job, it pays nothing.
• If you hire anyone, the policy generally covers them, and you pay for that payroll when the insurer audits the policy after it ends.
• Colorado’s state-chartered insurer, Pinnacol, says Colorado bans ghost policies, and some states, such as Tennessee for construction, require owners to be covered unless they hold a state exemption.
• The honest alternatives are to include yourself on the policy or to use your state’s exemption process, where one exists.

This is general information, not legal or insurance advice. Workers’ comp rules are set state by state, so confirm yours with your state workers’ compensation agency or a licensed agent.

What a ghost policy is

A North Carolina legislative committee heard the clearest definition in 2012: ghost policies “are ordinary workers’ compensation insurance policies that are issued to individuals who purport to be sole proprietors with no employees, and who are not themselves covered under the policy” (North Carolina General Assembly report, January 2013). The head of the N.C. Rate Bureau told the same committee he preferred the term “minimum coverage policies.”

Colorado insurer Pinnacol Assurance puts it more bluntly: a ghost policy is “an attempt to show proof of workers’ comp coverage when bidding on a job” without giving anyone access to benefits (Pinnacol).

The policy is cheap because there is almost no payroll to charge for. You pay the insurer’s minimum premium: under the standard policy form, the final premium “will not be less than the highest minimum premium for the classifications covered by this policy” (NCCI standard policy, WC 00 00 00 A).

Why general contractors demand one

In many states, a general contractor is on the hook when an uninsured subcontractor’s worker is hurt. The law treats the general contractor as a “statutory employer.” Virginia’s statute, for example, makes a contractor liable to pay compensation to a subcontractor’s worker as if that worker “had been immediately employed by him” (Va. Code § 65.2-302). South Carolina’s commission says the same in plain terms: a subcontractor’s employees are statutory employees of the general contractor (SC Workers’ Compensation Commission).

The general contractor’s insurer also charges for that risk. Missouri’s labor department explains that if a sole-proprietor subcontractor has no policy, “the insurance company for the general contractor may be required to pay claims, and, as a result, will charge premium for that uninsured subcontractor.” The fix is proof of the sub’s own coverage, so a general contractor can require it even when the law does not require the sub to carry any (Missouri Department of Labor). That certificate is what a ghost policy is bought to produce. General contractors check liability certificates for the same reason.

What it does not cover

You. The owner is excluded, so if you fall off a ladder the policy pays nothing toward your medical bills or lost income. Pinnacol warns that buying one is a bet that your personal health insurance will make you whole after a work injury (Pinnacol). North Carolina’s Industrial Commission told legislators that some policyholders “do not realize that they are not covered” (NC General Assembly report).

A helper you hire is different. The standard policy promises to pay “the benefits required of you by the workers compensation law” (NCCI standard policy), and North Carolina witnesses described the policy as one that “will cover any employees they may hire.” The catch is the bill, which arrives at the audit.

How the audit works

The premium you pay up front is an estimate. After the policy ends, the insurer works out the final premium from your actual payroll; if it is higher, “you must pay us the balance.” The insurer can audit your records during the policy and for three years after it ends (NCCI standard policy).

Auditors look past payroll. Oregon’s SAIF says state rules require insurers to investigate “payments to uninsured contract employment,” and lists subcontractors’ certificates of insurance among the records it may review (SAIF). California’s State Compensation Insurance Fund says 1099 payments to uninsured workers “may be included in the audit as payroll” (State Fund).

What the auditor finds, and what the standard policy says happens (NCCI standard policy):

Where they are banned or restricted

Sources online disagree about how many states ban ghost policies, and we could not find a regulator that publishes a list. These are the states we could verify:

• Colorado bans them, according to Pinnacol (Pinnacol, 2018). The state’s Division of Workers’ Compensation says a construction business, even a sole proprietorship, “must either have workers’ compensation insurance for yourself or reject that coverage” by filing a Rejection of Coverage. Going uninsured can bring fines of up to $500 a day (Colorado DOWC).
• Tennessee requires sole proprietors, partners, and LLC members providing construction services to be covered by their own policy “unless they are on the Bureau’s Exemption Registry” (Tennessee Bureau of Workers’ Compensation).
• Florida requires construction employers with one or more employees, counting owners who are corporate officers or LLC members, to carry coverage. Officers and members can apply for an exemption (Florida Division of Workers’ Compensation). Our Florida workers’ comp exemption guide covers the process.
• North Carolina’s rate bureau defended minimum coverage policies before a 2012 legislative committee, which also heard testimony that they are abused (NC General Assembly report).

How you get one

There is no product called a “ghost policy.” You ask an agent or an insurer for an ordinary workers’ compensation policy for your business, with yourself excluded as the owner, and you report no payroll. Because the final premium “will not be less than the highest minimum premium for the classifications covered by this policy” (NCCI standard policy), the quote is the minimum premium for your trade. The insurer issues a certificate of insurance that names your business, which is what the general contractor files. Whether an insurer will write one depends on the state and on the insurer’s own rules, which is why the same request gets a yes from one agent and a no from the next.

Ghost policy vs. state exemption

Contractors use the two interchangeably, but they are different documents that satisfy different people:

Florida is the clearest example of the second column; our Florida workers’ comp exemption guide walks through the filing.

The honest alternatives

1. Include yourself on the policy. In North Carolina, sole proprietors, partners, and LLC members “may elect to include coverage for themselves” (NC Industrial Commission). Tennessee uses Form I-4 for non-construction owners (Tennessee BWC). It costs more: in 2012 testimony, a North Carolina mason with no employees would pay $1,000 a year excluded and $2,827 included (NC General Assembly report).
2. Use your state’s exemption. Colorado’s Rejection of Coverage, Florida’s exemption for officers and LLC members, and Tennessee’s Exemption Registry are official records a contractor can check. Not every state has one: South Carolina’s commission says it has no exemption form (SC WCC).
3. Get covered under the general contractor’s policy. Tennessee lets a subcontractor do this with Form I-15, with the contractor withholding premium from the sub’s pay (Tennessee BWC).

Also check that you really are an independent business. Colorado notes that “paying someone with a 1099 does not make them a contractor” (Colorado DOWC). Our guide to workers’ comp for independent contractors explains the tests.

Frequently asked questions

Is a workers’ comp ghost policy legal?

It depends on the state. Colorado bans them, according to Pinnacol; Tennessee requires construction owners to be covered unless they are on its exemption registry; and in North Carolina they were still being sold when legislators studied them in 2012. Ask your state workers’ compensation agency.

How much does a ghost policy cost?

You pay the insurer’s minimum premium for your class of work, which varies by insurer, state, and trade. North Carolina testimony in 2012 put one example at $1,000 a year (NC General Assembly report).

Does a ghost policy cover me if I get hurt?

No. The owner is excluded, which is the whole point of the low price.

What happens if I hire someone while I have one?

The policy generally covers them, and the insurer charges for their payroll at the year-end audit.

Is a ghost policy the same as an exemption?

No. An exemption is a state record that you opted out of coverage for yourself. A ghost policy is an insurance contract that names your business but covers no one until you hire.

Where to go from here

If you work alone, price the policy with and without yourself included before you decide. Check first whether your state offers a cheaper route: Florida has an officer exemption, Tennessee an exemption registry for construction owners, and New York the CE-200 certificate for permits and licenses. Read our guide to workers’ compensation insurance for small business for how premiums are set, and what LLC insurance costs for the wider picture. Arhox is an independent publication, not an insurer, broker, or law firm; our editorial policy and disclaimer explain how these guides are prepared.