Texas is the only state that does not require employers to carry workers compensation coverage, but employers in the state have other options when it comes to protecting themselves from work injury liabilities and for providing benefits to injured workers.
The growing number of companies offering alternative coverage means that Texas employers that opt out of the comp system can provide comp benefits that are tailored for their employee base, experts say.
But despite potential cost savings, opting out is not the right move for all companies, they say.
Twenty-two percent of employers with more than 500 workers in Texas opted out of the workers compensation system in 2020, according to a report released in December by the Texas Department of Insurance, Division of Workers ‘ Compensation. (See related story.)
Citing expensive comp premiums at the time, Texas reformed its workers comp law in 1989, allowing employers to become so-called nonsubscribers. By 1993, when the state started creating reports on nonsubscribers, 44% of private Texas employers — the largest percentage ever — had opted to not carry comp coverage, according to state data.
Texas isn ‘t the only state that has a history with what is commonly referred to as “opt out.” Oklahoma ‘s three years of allowing it, following reforms in 2013, came to a halt when the state ‘s Supreme Court in 2016 ruled the option was unconstitutional for creating two classes of workers. Also in 2016, legislation to offer Tennessee employers the option was unsuccessful.
The recent Texas report also showed that 37% of nonsubscribers in 2020 opted to provide an alternative occupational benefit plan for their employees in case of a work-related injury, and that 59% of employees who work for the non-subscribing employers were covered by such a plan.
Texas law only requires employers to file forms annually with the Texas Division of Workers ‘ Compensation stating they are opting out of the system and to notify their employees that they are a nonsubscriber. The move opens the employer, which may or may not offer group health coverage for injuries, to litigation if a worker is injured and can prove negligence. Alternative products help fill the gap and manage the risk, experts say.
“Large employers are looking for ownership of their programs and (to) privatize their model,” said Jeremy Leonard, president of Providence Risk and Insurance Services Inc. in San Antonio, a third-party administrator for employers with alternative programs in place. “They want the benefits specifically for their employees, and to them it ‘s sometimes better than what workers comp can offer.”
For some, it ‘s a matter of being open to other options, said Blake Stock, CEO of brokerage Combined Group Insurance Services in Dallas.
“It ‘s a matter of the culture and the objective of the employer. Some feel like staying in workers comp is a satisfactory election, and there are other employers who feel like they can design a program that is more in alignment with the needs of their teammates,” he said.
A handful of major insurers write coverage in the specialty space providing such protections as employers liability, wage replacement, medical and accidental death coverage in the event of an occupational injury. Deductibles, limits and exclusions are subject to individual policies.
The market for alternative coverage is stable, brokers say.
Schaumburg, Illinois-based Zurich North America was among the latest insurers to unveil a product aimed at the Texas nonsubscriber market. In September 2020 it launched its occupational accident and employers work injury liability insurance policy for nonsubscribers in Texas.
The product was developed in collaboration with CPro Associates Inc., which provides specialty support services for Texas nonsubscribers, said Mike Saporito, Chicago-based senior vice president and head of occupational accident at Zurich North America.
“The main differences are benefits and control,” said Alan Hardin, CEO of CPro in Dallas. “The way workers compensation is set up in Texas is that the benefits are designed by the state, and it ‘s one size fits all.”
For example, the state ‘s workers comp law requires that wage replacement kick in at seven days following an injury. Alternative injury products, such as that offered by Zurich, could have benefits kick in immediately and could — depending on the individual employer ‘s policy — surpass the state ‘s mandated maximum indemnity of $1,009 a week by nearly double at $2,000, Mr. Hardin said.
Nonsubscriber products also can offer more control over treatments for injured workers needing medical benefits, Mr. Stock said.
Under traditional comp, employers must send workers to doctors who treat workers comp patients under state regulations, while nonsubscribing employers can create their own network of treating physicians, who are not subject to the “significant workers comp administration requirements imposed on physicians” under the state comp law, he said.
“Some doctors want to avoid all that. They would rather focus on treatment,” Mr. Stock said.
Meanwhile, most unions have been vocal about the need for employers to carry comp coverage, and opt out is not without its shortcomings.
Insurers have been critical, too. In 2016, the Property Casualty Insurers Association of America released a paper on opt out, stating that it was concerned with cost-shifting for lifelong injuries to other health plans, including public entities: “PCI research has failed to identify any Texas plan that provides ‘lifetime ‘ medical benefits.”
All nonsubscriber plans are governed by the federal Employee Retirement Income Security Act, which requires nonsubscribers to provide details on what federal regulators consider to be a benefit plan for workers. Nonsubscribers with five or more employees must also report each work-related fatality, occupational disease, and injury that results in more than one day of lost time to the Texas Division of Workers ‘ Compensation.
The alternative insurance products typically cost less than workers compensation, said Mark Moitoso, Atlanta-based risk practices leader for Lockton Cos., adding that costs are a main driver in why companies opt out of workers comp and seek alternatives.
Yet, the move can carry risk, he said. “You lose exclusive remedy when you take that option,” he said.
In losing immunity from lawsuits by injured workers, nonsubscribers could face hefty jury awards if an injured employee can prove in court that the employer was negligent.
“You see everything going on with the tort system and severity, and you have to be concerned about that risk,” Mr. Moitoso said.
How do nonsubscribing employers and their insurers manage these challenges? Insurers should be selective in employer clients, and employers should require arbitration agreements with employees and also review their safety programs, experts say.
“There are fewer and fewer nonsubscription carriers that will look at an employer that doesn ‘t have an arbitration agreement,” said Scott Foree, Dallas-based account executive with Marsh & McLennan Agency LLC. “Insurers would prefer to have a negligence lawsuit settled via arbitration than over a jury.”
Avoiding negligence claims, which often accompany severe injuries or death, is one area where the products mimic workers comp, experts say.
“We do some things similar to workers comp,” in that if a company ‘s safety track record “shows they are not a safety-focused organization, we are not interested,” Mr. Hardin said. High-risk industries are often not considered, he said.
“No roofers, no oil field” workers, he said. “(These industries) are fraught with opportunity for severity and long-term injuries. They do not fit in nonsubscription.”
