One of the biggest expenses affecting small businesses is workers' compensation insurance, which covers expenses associated with injuries to employees while on the job. One third of all small business owners identified workers' compensation as a critical problem in 2004, according to the National Federation of Independent Businesses (NFIB).

Workers' compensation includes medical bills, as well as payment for lost time and for any permanency of injuries. Coverage is required by all states and rates vary.

In 2004, rates ranged from 5 percent to 40 percent of payroll, depending on the state where coverage is provided. Average premiums continue to rise in most states – just behind labor costs and health insurance – while coverage availability decreases. In most cases, the rate is charged against all payroll, including double time. This is a fast-growing expense across industries, and one that cannot be ignored.

So what can a company do to protect itself? Keep your claims to a minimum and be diligent about your policy's coverage.

Make Safety a Priority

If you have not done so already, develop a written safety control program. Better workplace safety leads to fewer claims, and fewer claims directly affect your workers' compensation rate.

A disciplinary program also should be incorporated into the safety program, one that holds employees accountable for breaking the rules or rewards them for correctly following safety procedures.

A critical component to success is that the program needs to be endorsed by top management to ensure proper execution. Managers and lead workers should be assigned various responsibilities for safety enforcement in each work area.

Holding regularly scheduled safety meetings and/or discussions about specific issues related to the work environment will convey the importance of safety at the company and the expectations to comply.

Take Action When a Claim Occurs

When an employee experiences an injury on the job, complete an accident report with as much detail as possible. Take photographs of the scene and talk to any potential witnesses about what happened. The first report of injury should be sent within 24 hours to the insurance company to ensure prompt handling and to help fight fraudulent claims.

A drug test should be required of the employee. While a positive drug test will not allow you to deny a claim in most states, it will certainly help. (You also might consider conducting random drug testing for all employees. Be upfront about telling all potential employees that submitting to random drug tests is a requirement for employment, which should decrease any potentially drug-related claims.)

Be Aware of Possible Fraud

If you suspect fraud, immediately inform the insurance company. Review your policy for accuracy of the claim. Realize that sometimes it pays to investigate what you suspect is a fraudulent claim.

For example, a worker who filed a claim for a bad back was later photographed digging out a tree stump. It's unlikely the employer could have won the suit without the photographic evidence.