A ghost policy is a workers compensation policy written for a business with no employees, where the owner has excluded themselves from coverage. Because nobody is covered, the carrier charges a minimum premium. The business gets a real policy number and a certificate of insurance, which is usually why it was bought.
Why they exist
General contractors often require every subcontractor to show proof of workers comp. If a sub can’t, the GC’s own carrier may charge the GC premium for the sub’s payroll at audit. A one-person roofer or electrician with no employees can buy a ghost policy to satisfy the contract.
How it shows up in an agency
A sole-proprietor painter needs a WC certificate to start a job Monday. The agency checks whether its state allows a sole proprietor to exclude themselves, whether any carrier in its appetite list writes owner-only minimum premium policies for that class, and that the client truly has no employees or uninsured subcontractors.
The risks
- State rules vary. Some states don’t allow owners to exclude themselves in certain classes (often construction), and some don’t offer ghost policies at all. A North Carolina legislative study, for example, discussed problems with ghost policies held by workers who were really employees of a subcontractor.
- Audit exposure. If the business hires a helper or pays an uninsured sub, the carrier will charge premium at audit for that payroll, sometimes a lot more than the minimum.
- No coverage for the owner. An owner hurt on the job has no WC benefits. Make sure they have health and disability coverage and understand the gap in writing.
- It doesn’t protect against misclassified workers. “1099 contractors” who are really employees under state law may be owed benefits the policy wasn’t priced for.
See carrier appetites on our workers comp page.