Securing workers’ compensation insurance poses a unique challenge for first-year franchisees in high-risk fields like roofing, framing, or high-rise window cleaning (above three stories). These industries face elevated injury risks, making them tough to insure—especially without a proven track record. This article explores why coverage is hard to obtain and offers practical solutions to help new franchisees stay compliant and operational while equipping franchisors to support their network’s success.
Why Workers’ Compensation is Difficult for High-Exposure Risks
Most insurance carriers are selective when offering workers’ compensation to experienced businesses in high-risk industries. For new businesses, the challenge is even greater. Workers’ compensation carriers assess risk based on a company’s track record, including loss history.
What is Loss History?
- Loss history is a record of past workers’ compensation claims that helps insurers evaluate how safe a business is.
- Businesses with a favorable loss history (i.e., minimal or well-managed claims) are more likely to secure coverage with competitive pricing.
- Without a loss history, insurers see new franchisees as a blank slate—too unpredictable to insure at standard rates.
New franchisees in industries like roofing or window cleaning lack this history, making it tough for insurers to assess their safety practices. Even with strong safety training or certifications (like OSHA compliance), they’re often denied coverage by preferred insurance carriers (private insurers offering competitive rates and comprehensive policies).
Limited Market Options for High-Risk Industries
Why Are Options So Limited?
Unlike lower-risk industries with many competing insurers, high-risk industries have only a handful of providers nationwide willing to take on the heightened risk. Availability varies by state, and only specialized insurers are willing to underwrite these businesses. These carriers are extremely selective and typically require at least one year of operational history, if not more.
For a first-year franchisee, this means that even a well-organized operation with safety measures in place may not qualify for private coverage. This often leaves them reliant on state-assigned risk pools, commonly known as the state fund.
The State Fund: What It Is and How It Works
When a business can’t secure workers’ compensation from private carriers, they may turn to a state fund.
What is the State Fund?
- The state fund is a last-resort insurance program run by state governments to ensure all businesses can meet legally required coverage.
- State funds do not deny coverage based on loss history or experience, making them a lifeline for high-risk or new businesses.
- Pros: Guaranteed coverage. Cons: Higher premiums and less flexibility compared to private insurers.
How to Access the State Fund?
- Each state has its own workers’ compensation governing body overseeing insurance placement, such as:
- NCCI (National Council on Compensation Insurance) – Governs many states.
- WCIRB (Workers’ Compensation Insurance Rating Bureau of California) – Oversees California.
- State-Specific Agencies – Examples include New York’s State Insurance Fund (NYSIF) or Ohio’s Bureau of Workers’ Compensation (BWC).
- Franchisees can apply through their state’s workers’ compensation bureau or work with an insurance broker.
- Applications can take weeks, so plan ahead to avoid coverage gaps.
Common Misconception: Subcontracting 1099 Workers Eliminates the Need for Workers’ Compensation
Some franchisees assume they can sidestep workers’ compensation challenges by outsourcing labor to 1099 independent contractors instead of hiring W-2 employees. This is a misconception—outsourcing doesn’t eliminate liability. Worse, some first-year franchisees secure a quote from a preferred carrier that only covers sales and clerical work, leaving out high-risk tasks like roofing. This misclassification is a red flag: if a subcontractor gets hurt on the job, the carrier is still liable—and will pay out—despite the policy not reflecting the true risk.
Why You’re Still Liable for 1099 Injuries
Statutory Employer Laws
- Many states enforce “statutory employer” laws, holding the hiring company liable if a contractor lacks coverage.
- If a 1099 contractor gets injured while working for you and does not carry their own workers’ compensation policy, they may file a claim against your business.
Insurance Misclassification Risks
- Insurers may reject your policy—or pay out unexpectedly—if it covers only clerical staff but you subcontract high-risk work, creating an unacceptable risk mismatch.
- Some franchisees have faced severe financial consequences when uninsured 1099 contractors filed claims.
How to Verify Subcontractor Insurance Properly
- Always request a Certificate of Insurance (COI) from subcontractors to verify their coverage.
- Ensure the business classification on your workers’ compensation policy accurately reflects your industry. If it’s not specific to your business (e.g., roofing), it was likely done incorrectly and could leave you exposed.
Preparing for Workers’ Compensation Challenges as a First-Year Franchisee
If you’re a franchisor, include workers’ compensation education in your training programs to set franchisees up for success. Many new franchisees underestimate how difficult and costly coverage can be, risking compliance issues or delays.
If you’re a first-year franchisee, you should:
- Understand your options – You may need the state fund, which costs more but ensures compliance.
- Budget accordingly – Higher premiums are common in high-risk industries, so plan for the expense.
- Verify subcontractors’ insurance – Require proof of workers’ compensation from 1099 labor to avoid liability.
- Work with Rikor – At Rikor we can help you navigate this to ensure your investment is protected correctly
- Build a safety culture early – Documented protocols can improve your insurability over time.
Understanding these challenges upfront helps franchisees avoid surprises and maintain business success in year one.
Need help navigating workers’ compensation? Consult with an experienced broker or reach out to our team for guidance on securing the right coverage.