To Subscribe or Not Subscribe … That is the Workers’ Comp Question

By J. Howard Kucher | May 23, 2005

As Texans, we pride ourselves on our rugged independence and our determination to forge our own path. That is certainly what Texas has done in the area of workers’ compensation, the state-regulated insurance program that pays medical bills and replaces certain lost wages for employees who are injured on-the-job or contract work-related diseases.

Currently Texas is the only state that does not mandate that private employers maintain workers’ compensation insurance. Instead employer companies can choose to assume the risks associated with a potential lawsuit should an employee be injured at work.

A brief history lesson
Before workers’ compensation insurance, employees injured in the workplace had no recourse but to sue their employer. Their suit hinged on an employer’s common law obligations: To provide a safe workplace with competent fellow employees and safe tools and equipment; to enforce safety rules; and to warn employees of inherent work related dangers.

In turn, employers came to rely on three common law defenses: The employee knew of the inherent dangers and assumed the risk; the employee contributed to their own injury or illness (any negligence on the employee’s part, however small, prevents the employee from collecting for injuries); or a fellow employee’s negligence caused the injury.

While these helped employers defend themselves against lawsuits, the bigger issue of injured workers being destitute and employers having acrimonious relationships with employees remained unaddressed.

Enter workers’ compensation
Workers’ compensation changed the status quo by creating a no fault system. In return for paying premiums toward workers’ compensation insurance, workers are guaranteed to be compensated for their injuries and lost wages in the event they suffer a work-related injury or illness, regardless of fault.

Texas employers who choose to maintain workers’ compensation insurance can elect to purchase an insurance policy from a private insurance company, or self-insure. To self-insure, an employer must meet the requirements of the Texas Workers’ Compensation Act and become certified by the Texas Workers’ Compensation Commis-sion. Self-insured employers have the same rights and responsibilities as employers who buy policies from private insurance companies.

Opting out
Texas employers can also choose to “opt out” from subscribing to workers’ compensation. Those that do so, however, face unlimited liability, including possible punitive damages, if they lose lawsuits arising from workplace accidents. And in the event of a lawsuit, they forfeit their right to claim one of the three common law defenses outlined above.

Regardless, it is currently estimated that between 100,000 and 125,000 Texas employers opt out of providing workers’ compensation insurance. These employers range from “Mom and Pop” operations to some of the largest employers in the state. The retail and service industry comprise the largest number of non-subscribers.

The primary reason employers elect not to subscribe is cost. With the cost of workers’ compensation coverage rising, many employers prefer to take their chances with a lawsuit or select an alternative program.

Occupational accident insurance
Perceived by many as a worthy alternative to workers’ compensation, occupational accident insurance is a growing insurance option that provides employers and their employees a degree of protection should a work injury or accident occur.

Occupational accident insurance provides coverage for medical costs associated with the injury, disability payments for the injured worker while he or she is recovering from their injury, and a scheduled benefit for accidental death and dismemberment. The employer chooses a benefit period, usually two or three years, as well as a deductible that is applied to each accident.

Despite the potential savings, occupational accident insurance does have drawbacks for employers. For instance, because occupational accident policies contain dollar and time limits, employers may be responsible for any additional expense outside the original limits. Workers’ compensation policies, in contrast, cover all related medical expenses even if an expense occurs years after the accident. In addition, an injured worker may still be able to sue the employer for damages even if a claim is covered under occupational accident insurance.

Perhaps the key drawback, however, is that occupational accident insurance is not considered an equivalent to workers’ compensation under Texas law. Employers who wish to contract with governmental entities are required to provide workers’ compensation coverage for each employee working on the public project. In addition, some clients may require their contractors to have workers’ compensation insurance.

Workers’ comp revisited
Private companies must weigh for themselves the advantages and disadvantages of subscribing to workers’ compensation. Those that want to subscribe to workers’ compensation but find the cost or paperwork to be daunting may want to consider engaging a Professional Employer Organization. Because many PEOs manage human resources, benefits, payroll, accounting and risk management for their clients, they can cover their clients under their workers’ compensation policy.

Enlisting the services of a PEO to assist in the area of workers’ compensation can be a great advantage for Texas companies. Because the PEO maintains an existing workers’ compensation policy, companies can avoid paying an initial deposit and instead pay-as-they-go. In addition, most PEOs conduct for their clients the necessary audits required annually by the state-regulated workers’ compensation system.

Texas law gives employers the right to choose whether to subscribe to workers’ compensation. Companies owe it to themselves to investigate both paths before they forge ahead.

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Insurance Journal West May 23, 2005
May 23, 2005
Insurance Journal West Magazine

2005 Program Directory, Vol. I