While the Texas nonsubscription system can help employers save money compared with purchasing traditional workers compensation insurance, experts say companies need to consider whether the risk of tort lawsuits from injured workers — and the possibility of significant jury awards resulting from such cases — outweighs the initial cost savings.
“One of the things you look at is the nature of your claims and do you have the potential to face greater exposure on the civil side than you would under workers compensation,” said Mark Walls, St. Louis-based senior vice president and workers compensation market research leader at Marsh Inc.
Employers are considering Texas nonsubscription more often as the national workers comp market hardens and rates have begun to increase in recent years, said Blake Stock, CEO of Dallas-based Combined Group Insurance Services Inc., a managing general agent that provides liability insurance and benefit programs for Texas nonsubscribers.
“In general, workers compensation is a deteriorating profitability line of business for” insurers, Mr. Stock said. “So as workers comp rates continue to rise and carriers' workers comp appetites continue to shrink, then employers are looking for alternatives such as our program.”
Texas and Oklahoma are the only two states that allow employers to opt out of the traditional workers compensation system. Large employers who opt-out in Texas typically set up benefit programs to cover their injured workers, similar to benefit programs that Oklahoma requires certain nonsubscribers to create.
Unlike Oklahoma, alternative benefit programs in Texas are not subject to exclusive remedy provisions, which can leave Texas nonsubscribers at risk for tort lawsuits from injured workers. Firms often purchase employer liability coverage to mitigate exposures from such lawsuits.
Nonsubscribing employers strive to create safety programs that mitigate the need for employer liability coverage, said Steve Bent, executive director of the Texas Association of Responsible Nonsubscribers, an Austin, Texas-based group that includes about 1,200 employer members.
“We hope that (nonsubscribers are) proactive and work to limit the scope of injuries in the first place, rather than looking to insurance, which should be a last resort,” Mr. Bent said.
Tort cases for nonsubscribers are typically rare, said Bill Minick, president of Dallas-based PartnerSource, a consultant on alternative workers comp plans and a unit of Arthur J. Gallagher Risk Management Services Inc., based in Itasca, Ill.
The firm sees attorney involvement in about 15 out of every 1,000 injury claims for nonsubscribers, and about one in those 15 typically proceeds to court or arbitration, Mr. Minick said in a statement to Business Insurance.
But unlike defined-benefit awards paid through traditional workers comp, tort cases for nonsubscribers have the potential to lead to uncapped damages in cases of gross negligence, sources say. In the case of Lawrence Rene Montoya v. Ben E. Keith Co. in 2012, a truck driver reportedly was awarded $8.59 million from a jury in Harris County, Texas, after he was dragged by a truck owned by his employer, a nonsubscriber.
That risk of large jury awards in nonsubscriber cases prompts many employers to continue purchasing traditional workers comp insurance in Texas, said Anthony DeFelice, managing director of Aon Risk Solutions' national casualty practice in New York.
“A lot of the higher hazard industry classes that are out there want to remain as a subscriber or covered under the workers comp act for fear of tort litigation,” Mr. DeFelice said. “So it's only the smaller, lighter hazard industry groupings that I see that ever opt out of workers compensation.”
Companies that are considering Texas nonsubscription need to weigh whether their workers comp claims involve injuries that could potentially result in liability suits if they opt out of the traditional market, sources say.
For instance, injuries that occur from material handling work, such as lifting boxes, typically are run-of-the-mill and wouldn't lead to significant tort cases, said Marsh Inc.'s Mr. Walls. But employers in industries that are more injury-prone, such as construction, might limit their risk exposure by purchasing traditional comp insurance.
“It's very much an individual evaluation,” Mr. Walls said. “Whenever somebody is interested in opting out, we work with them on the feasibility study.”
Eric Silverstein, Dallas-based senior vice president and risk management practice leader at Lockton Cos. L.L.C., said nonsubscribing employers should make sure they have an “ironclad arbitration clause” in their alternative benefit plan for injured workers in order to limit employer liability exposures.
“The big verdicts have come from companies who do not have that arbitration clause in place, or did not go to the trouble of doing it the proper way,” he said.