Executive Summary
For a startup hedge fund, you may not need workers’ compensation insurance if the only “workers” are owners, partners, or officers. In New York, the rules for partnerships, LLCs, and corporations allow executive owners of a fund to be excluded or to opt-out of workers compensation. Other states can vary from this, but generally speaking it’s pretty standard.
Before your first hire, make sure you have workers comp.
When Workers Compensation Becomes Mandatory
What you have to be really aware of is that when you make your first hire, you will need workers’ compensation to be in effect to comply with your state’s rules on coverage. According to the U.S. Department of Labor, workers’ compensation programs are established by state law and requirements vary by jurisdiction, but nearly all states mandate coverage once you hire employees.
Many new and smaller funds will often bundle their workers comp with payroll and/or benefits with a PEO or payroll provider, and this is fine. We work with a few firms like Trinet and ADP if that’s the route you’d like to go, and we’d be happy to make a referral to one or more of them to loop them into the conversation.
Bundled vs. Standalone Coverage: What Makes Sense?
Bundling workers comp into your payroll or your entire human capital management framework does make sense from an ease of doing business perspective. As a startup fund, a lot of decisions are driven by ease, and rightly so.
But what about larger, more established firms, or when you grow and have more employees? Does bundling still make sense?
It may.
But you need to know that ease of doing business does cost more in the form of the fees you pay to your provider. You’re also putting an insurance product in the hands of a company that isn’t solely in the insurance business. As a larger firm, having your insurance handled by an insurance expert makes more sense, in my opinion.
What 40+ Years Taught Me About This Risk
In four decades of working with financial services firms, I’ve consistently found that PEOs and payroll providers, while excellent at their core services, often make coverage errors that create costly gaps. These mistakes typically surface only after a claim is filed, when it’s too late to correct them without significant financial impact.
In many cases, we can do “pay as you go” type premium installments, but more importantly, we can make sure that your coverage is done right and kept up to date. Too often I have found errors made by PEOs and payroll providers which can have costly repercussions for the insured firm. By having an insurance expert handle this part of your insurance program, your hedge fund will be assured of having the right protection.
Should YouInclude or Exclude Executive Officers?
One of the most common questions I get from hedge fund managers is:“Should we include or exclude executive officers, partners, or members from our workers’ compensation policy?”
My answer is to include them.
The premium savings you get from excluding them is negligible in the whole scheme of things. Even very highly compensated individuals have executive payroll capped around $100,000 per year in workers comp, and the rate for executive officers is very low.
Real-World Example: The Hidden Cost of Exclusion
A managing partner at a mid-sized hedge fund excluded himself from workers’ comp to save approximately $200 annually. After developing severe carpal tunnel syndrome from years of intensive keyboard work, he required bilateral surgery costing $45,000. His health insurance denied the claim as work-related. The fund ultimately paid the entire amount out of pocket, a loss that took 225 years of “savings” to recoup.
Common Workplace Injuries in Hedge Funds
If you think that a work-related injury isn’t going to happen in your office, think again. We’ve seen plenty of claims for financial service professionals injured on the job. Some are simple first-aid type injuries; others can be complex and costly.
According to OSHA, ergonomic issues like carpal tunnel syndrome can be expensive to remediate, with treatment costs often exceeding $30,000 when surgery is required.
Why Health Insurance Won’t Cover You
And if you think, “We have a great health insurance plan, we don’t need workers’ compensation”, think again. Health plans exclude claims from work-related injuries. Sometimes small claims will slip by a health insurer, but a large claim, again, like carpal tunnel, will be caught by the health insurer’s screening and denied.
Then what? You’re paying for the claim out of pocket. And that’s not a great scenario.
The Bottom Line on Costs
Here’s the bottom line on workers compensation for hedge funds:
Workers comp will cost your firm about $250 per year for a high-earning executive in New York. In most other states, even less than that.
In my opinion, it’s not worth taking the risk and excluding these individuals from your workers’ compensation program and possibly ending up with a large out-of-pocket claim that could run into the tens if not hundreds of thousands of dollars.
Cost-Benefit Analysis
Scenario | Annual Premium | Potential Out-of-Pocket Risk | Risk-Reward Ratio |
|---|---|---|---|
Include Executives | $250-$500 | $0 (covered by policy) | Fully protected |
Exclude Executives | $0 | $30,000-$200,000+ | 60-400x downside risk |
Understanding what workers comp covers and how experience modification factors affect your premiums can help you make informed decisions about your coverage.
State-Specific Considerations
Workers’ compensation requirements vary significantly by state. According to the National Association of Insurance Commissioners (NAIC), each state operates its own workers’ compensation system with unique rules regarding:
For hedge funds operating across multiple states, understanding these differences is crucial. Learn more about how to prevent workers comp claims and reduce your overall risk exposure.
Comprehensive Protection Beyond Workers Comp
Workers’ compensation is just one part of a protection program we cover for hedge funds. Financial services firms face unique risks that require specialized coverage, including:
Understanding what is social engineering and how to protect against wire transfer fraud is increasingly critical for hedge funds managing substantial assets.
Next Steps
To find out more about how we can help your fund, whether you’re a startup or an established fund with all your business insurance needs, please contact me for a conversation.
Author’s Experience
This article was written by Gordon B. Coyle, CPCU, ARM, AMIM, PWCA, CEO of The Coyle Group, who has over 40 years of experience working with business owners of all sizes and industries across the US, solving their insurance challenges. Gordon specializes in helping hedge funds and investment advisors develop comprehensive protection programs that address the unique risks in financial services.
