Insurance Journal


Who Wants Workers' Comp?

By Constance Parten

Employees covered under traditional worker' comp waive their right to sue for on-the-job injuries. Two Amarillo court cases extend the waiver to non-subscriber companies. Could this change the worker' comp system in Texas?

Insurers are watching with interest a pair of cases in Amarillo’s Seventh Court of Appeals in which the judge determined that employers who don’t provide workers’ comp coverage can still require employees to waive their right to sue over on-the-job injuries.

Labor advocates say the decisions could lead to employers pulling out of the workers’ comp system, resulting in a decrease in protections for Texas workers. Insurance officials say it could also result in a shrinking market for Texas workers’ comp insurers. Both cases are being appealed to the Texas Supreme Court.

“I think, certainly, it’s a dangerous precedent for the workers’ comp system,” said Terry Frakes, spokesman for the Texas Workers’ Comp Insurance Fund. “If business owners can secure waivers from employees en lieu of workers’ comp, I’m not sure why anyone would want to carry it. I think there’s potential for large shrinkage [in the market], but I don’t think we need to look at that just yet.”

Frakes and others refer to another recent state appeals court ruling in San Antonio in which the judge determined that allowing workers outside the comp system to waive their rights to sue “would signal the end of workers’ compensation.” Such waivers, according to the court’s decision, would be acceptable only if employers could guarantee benefits equal to or better than those provided in the state system.

“I think we’ll see all three cases go up together,” Frakes said.

Employer options

Texas is the only state without mandatory workers’ comp coverage. As a result, 39 percent, or 140,000 Texas employers, do not carry workers’ comp insurance, with roughly 13 percent—made up of mostly small employers—going completely bare, according to the most recent figures compiled by the Texas Research and Oversight Council on Workers’ Compensation (ROC).

Most larger employers choose to carry workers’ comp, however, meaning roughly 80 percent of Texas workers are covered by the system. And, as evidenced by ROC figures, the majority of employers have some sort of coverage for their employees. That is viewed by many, including ROC officials, as a system that is working as it was intended.

“We do think this is significant,” said Jerry Hagins, a public information specialist with the ROC. “We’re watching it, but we do need to wait and see whether the Supreme Court takes it up.”

“It’s always been an important part of our system to give employers the choice. To move away from that would be a huge step.”

A huge step the Legislature will likely not take.

Sen. Robert Duncan, R-Lubbock, is hesitant to speak on the issue too soon, saying it is still an issue for the courts, though he has some concerns should the Supreme Court uphold the Amarillo rulings.

“I’ve read the opinions and I think the judges did a good job,” he said. “If they are right, I have a concern that we have a potential for employers to rely more on self-subscription plans than legitimate plans under the Workers’ Comp Act.”

Key to Duncan’s concerns is the economic impact the cases could have. Should employers be able to opt out and also require employees to sign waivers, the state’s workers’ comp premium base would shrink, driving up coverage costs for employers.

“What we’ve tried to seek is a balanced plan,” Duncan said. If upheld, the Amarillo decisions would jeopardize that balance which, Duncan said, could ultimately require legislative action, though he does not foresee Texas mandating workers’ comp coverage.

“I believe that we would need to clarify the law that employers cannot use this type of system if they opt out of workers’ comp,” he said. “I think, quite frankly, the system’s working quite well. ... I don’t want to tell employer’s they have to use the workers’ comp system. I prefer to encourage them to have it.”

“I want employers to carry workers’ comp coverages because I believe it’s the best coverage they can have, and it’s the best coverage employees can have.”

Current state of affairs

In the early and mid 1990s, workers’ comp loss ratios were steadily decreasing in Texas, dropping from 94.9 percent in 1990 to a mere 38.7 percent by 1994.

Loss ratios are affected in part by premium volume. If premium collected does not keep pace with claim costs, the loss ratio will rise. According to a recent ROC report, direct earned premium in the Texas workers’ compensation insurance market has declined from $2.8 billion in 1992 to $1.7 billion in 1997, a 41 percent decrease. Claim costs, however, have increased from $743 million in 1994 to $1.2 billion in 1997, an increase of 64 percent. Declines in premium collected are due mostly to the introduction of deductible policies in 1992, as well as a reduction in the frequency and severity of workplace injuries, and increased competition among insurance companies.

A major factor in the overall growth of claim costs from 1994 to 1997 in Texas could be the growth in the medical costs of workers’ compensation insurance claims. Recent research shows that medical costs in Texas are 78 percent higher than the national average. Insurance companies surveyed agreed that medical expenses were increasing (64 percent). However, only 36 percent reported that their medical costs are higher on average in Texas than in their out-of-state operations, while slightly more (40 percent) felt that Texas costs were about the same as those in other states.

When asked to compare the rate of growth in medical costs between Texas and other states, most carriers (42 percent) felt that Texas costs were growing at the same rate as other states, compared to 23 percent who felt that costs were growing faster in Texas. It should be noted, however, that very few carriers felt that medical expenses were lower in Texas (12 percent) or that the growth of expenses was slower in Texas (8 percent).

Yet, the number of employers subscribing to the workers’ comp system in Texas has increased since 1995, particularly among smaller companies. The nonsubscription rate for this segment was estimated in ROC’s most current date to be 55 percent in 1995 compared to 44 percent in 1996.

Necessary for the future?

Still, employer groups are cheering the Amarillo rulings, saying they would like to see them applied statewide. And as long as employers provide benefits equal to or better than those required through workers’ comp, they should be able to avoid legal liability.

“It’s not as if these employees [in the lawsuits] were left high and dry,” Eric Glenn, government affairs manager of the Austin-based Texas Association of Business and Chambers of Commerce was quoted as saying in a Wall Street Journal report. “With workers’ comp system premiums inching upward, employers need to be able to opt out and contract with their employees to provide good benefits at a better cost without facing legal liability, too.”

In the Amarillo cases, the employers had opted out of the system, but provided supplemental medical and disability insurance including benefits for on-the-job injuries. But, in order to receive the benefits, workers were required to sign waivers agreeing not to sue if they were injured on the job.

Both cases were handled by attorneys practicing in the same law firm in which Rep. John Smithee, R-Amarillo, works. Because of that, Rep. Smithee declined to comment on the issue.

The court battles

In the first case, Gary Lawrence, a 55-year-old bulldozer operator whose legs were crushed when his machine toppled and pinned him underneath, was required by his employer, CDB Services, to sign a liability waiver if he wanted to receive medical and disability insurance at all.

The company provided him with $210,000 in benefits after the accident, but Lawrence sued, claiming company negligence contributed to his injury and was responsible for paying more than just medical bills and lost wages. The case was thrown out in 1998 by Judge Abe Lopez because of the waiver Lawrence had signed.

In the second case, Danny Lee Lambert sued Affiliated Foods Inc. after his foot was injured in a 1993 forklift accident. Like Lawrence, Lambert had also signed a waiver not to sue. He received $57,000 in benefits from Affiliated, but sued in 1997, also claiming company negligence. Randall County State District Judge Patrick Pirtle dismissed the case based upon the waiver.

The Amarillo appeals court upheld both decisions in January, ruling that the waivers do not conflict with public policy, expressed or implied, in the state Workers’ Compensation Act.

But in the San Antonio appeals court, the opposite ruling was rendered. As in the Amarillo cases, Judge Elizabeth Ray had dismissed the case when it was presented in the Harris County District Court in April. But Judge Sarah Duncan reversed the lower courts’ decision in which a forklift operator’s foot was severed, saying the public policy does not allow for an employer to reap the benefit of opting into the workers’ comp system without giving employees the benefit of being covered through the system. The case was appealed to the high court, which chose not to hear it.

But with opposing rulings now in place, Terry Frakes with TWCIF believes the high court may have no choice but to rule on the issue of whether employers can require employees to sign such waivers.

“Under the circumstances, I can’t imagine them not hearing it,” he said.