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Opting out of workers comp program demands careful consideration

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Employers considering opting out of workers compensation systems must ensure they understand the differences between traditional programs and requirements imposed on employers that forgo coverage through state systems, according to a report by the Risk & Insurance Management Society Inc.

Texas and Oklahoma already allow qualified employers to opt out of the states' workers comp programs, while Tennessee and South Carolina legislators introduced opt-out legislation this year, according to the report, Alternatives to Traditional Workers' Compensation Systems, that was released Tuesday.

Private-sector employers in Texas can choose to buy commercial workers comp insurance or self-insure, or they can opt not to buy workers comp coverage and become “nonsubscribers,” which means they potentially could be sued for negligence by injured employees.

Being a nonsubscriber could open firms to “catastrophic” liability claims, RIMS said in the report.

Firms buying commercial workers comp insurance or those that self-insure often purchase employer liability coverage to mitigate such exposures.

“It's interesting that Texas has been at this for decades, but it's a recent issue that's come across other states,” said John Burkholder, director of risk management of Broward County, Florida, and a co-author of the report. “It just started blossoming,” he said.

In February 2014, Oklahoma implemented legislation with more restrictions than the Texas system. Oklahoma does not give employers the option to completely forgo workers comp benefits, according to the report. However, in exchange for offering benefits similar to the state system, Oklahoma employers are granted exclusive remedy protection against negligence liability lawsuits.

Florida also is considering the opt-out option, but legislation has taken a backseat as the state Supreme Court considers whether to hear a case that challenges the constitutionality of the workers comp system. Even if the state ultimately passes opt-out legislation, Mr. Burkholder said the county is comfortable with its current workers comp program.

“We would have to look at it very carefully before we would move away from the workers comp system,” he said.

The report does not stake out an official RIMS position on whether an employer should opt out if given the chance, but aims to ensure that RIMS members have the information necessary to make informed decisions, Mr. Burkholder said.

“They need to make sure they fully understand the legislation,” including the fact that these laws are still subject to litigation, he said. “We wanted to provide that basic knowledge.”

Before making a decision, employers need to understand the differences between traditional systems and requirements created by the decision to opt out, according to the report. Once those differences are understood, employers must develop a benefits plan, which will differ based on the minimum requirements of each state.

Employers also must make plans to cover those benefits, including gathering quotes and submitting requests for proposals if they choose to procure insurance or establishing proof of financial viability if they plan to self-insure, the report said.

Communication with employees is a critical component of the strategy, with many of states that have enacted or proposed option plans requiring that notice be given to employees, although exceeding these minimum requirements may help improve employee compliance and increase employee satisfaction, according to the report.