Workers' Compensation Insurance

(May 2006)

Introduction

Workers´ Compensation in Texas is regulated by the Texas Department of Insurance (TDI). TDI´s Division of Workers´ Compensation administers the claims process, handles Workers´ Compensation disputes, and provides workplace safety services and enforcement. The Workers´ Compensation Classification, Premium Calculation, and Research Division is responsible for determining the correct employer classifications, determining compliance with rules concerning premium calculation, responding to Workers´ Compensation inquiries, and resolving Workers´ Compensation complaints that pertain to premium and policy issues. In addition, the Classification, Premium Calculation, and Research Division is responsible for research projects on issues such as medical costs, utilization and care trends in Texas, return-to-work outcomes for injured Texas workers, and employer participation in the Texas Workers´ Compensation system.

Workers´ Compensation Basics

The Texas Workers´ Compensation system is the method by which covered workers are compensated for work-related injuries or illnesses. An employer´s insurance company, self-insurance group with a certificate of approval, or an individual employer with a certificate of authority to self-insure pays benefits for work-related injuries, even if the injured worker´s negligence contributed to the accident. However, neither the insurance company nor the employer is liable for injuries that

• are intentional or self-inflicted
• result from the employee´s horseplay or voluntary intoxication (either alcohol or drug-induced)
• arise from voluntary participation in off-duty recreational, social, or sports events
• result from "acts of God," unless a person´s job exposes him or her to a greater than ordinary risk of injury from such acts
• are inflicted by someone else for personal reasons unrelated to employment.

The Texas Workers´ Compensation Act limits a covered employer´s liability to a specific schedule of benefits based on the type and severity of the worker´s injury. Benefits include

• lifetime medical benefits for necessary treatment of compensable injuries and illnesses
• disability income benefits for a specified period of time and up to dollar limits set by law
• limited funeral expenses for workers killed on the job
• death benefits for surviving dependents of workers killed on the job.

Who belongs to the system?

Texas law does not require most private employers to carry Workers´ Compensation insurance. However, private employers that 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. The following employers are considered part of the state´s Workers´ Compensation system:

• employers covered by Workers´ Compensation policies issued by insurance companies licensed to write this type of coverage in Texas
• employers certified by the Division of Workers´ Compensation to self-insure their Workers´ Compensation claims
• employers that are part of a self-insurance group that has received a certificate of approval from TDI
• political subdivisions, which may self-insure, buy coverage from insurance companies, or enter into inter-local agreements with other political subdivisions providing for self-insurance.

Employers without Workers´ Compensation face unlimited liability, including possible punitive damages, if they lose lawsuits arising from workplace accidents. They also lose certain common-law defenses if they are sued over on-the-job injuries. They may not defend themselves by arguing that

• the injured worker´s negligence caused the injury
• the negligence of fellow employees caused the injury
• the injured worker knew of the danger and voluntarily accepted it.

Employee injury cases are more likely to become lawsuits if an employer does not carry Workers´ Compensation insurance. If an employer carries Workers´ Compensation, a case may go to court only after the Division of Workers´ Compensation´s administrative dispute process has been exhausted. If the claim goes to court, the division´s recommendations must be presented, and evidence is limited to the issues in dispute. Resolved issues cannot be reintroduced. The employer´s insurance company is responsible for attorneys" fees and other defense costs.

Be Aware!

So-called "alternative" policies and coverage bought from unlicensed insurers do not count as Workers´ Compensation under Texas law.

Alternative accident and health policies covering employees both on and off the job provide some medical coverage, but they are not considered an equivalent to Workers´ Compensation coverage.

• Alternative accident and health policies contain dollar limits and time limits. If expenses exceed the limit, the employer may be responsible for the excess. Workers´ Compensation policies cover all related medical expenses even if an expense occurs years after the accident.
• Alternative health and accident policies contain limits on lost-income benefits. Again, if the employee´s expenses exceed policy limits, the employer may be responsible.
• The injured worker may still be able to sue the employer for damages even if a claim is covered under an alternative health and accident policy.

Shopping for Workers´ Compensation Insurance

With a broad range of rates available, plus the use of competitive rating tools such as deductibles, schedule rating plans, retrospective rating plans, downward negotiation of experience modifiers, and group purchase of Workers´ Compensation as potential money savers, it is important for employers to shop around before buying coverage. (Schedule rating plans tell what discounts – or penalties – an insurer may give, based on its analysis of your workplace.)

The Texas Workers´ Compensation Rate Guide shows the latest relativities, each insurance company´s filed rate level, schedule rating information, and telephone numbers for contacting the companies. You may view the rate guide on TDI´s website

www.tdi.state.tx.us

It´s also important to buy from licensed companies. Licensed companies are covered by the Texas Property and Casualty Guaranty Association, which pays claims for insurers who become insolvent and are unable to pay their claims. Claims against unlicensed insurers could go unpaid if the insurer becomes insolvent. You can learn whether a company is licensed by calling TDI´s Consumer Help Line

1-800-252-3439

Most companies generally will not write a policy unless you have at least one part-time employee or anticipate having an uninsured contractor do work for you while the policy is in effect. Some companies, however, may write a policy to cover executive officers of a corporation that has no other employees.

Volunteers of organizations may be covered by a Workers´ Compensation policy only in certain circumstances:

• Volunteers of a political subdivision, such as volunteer firefighters, police officers, and emergency medical personnel may be covered if the policy contract includes a special endorsement.
• Emergency service organizations separate from a political subdivision may cover their volunteer members who participate in the normal functions of the organization if the policy contract includes a special endorsement.

Volunteers who are not employed by a political subdivision or an emergency service organization may not be covered under a Workers´ Compensation policy.

If you"re unable to find Workers´ Compensation insurance through the voluntary market, Texas Mutual Insurance Company is the insurer of last resort in Texas. Texas Mutual has a special program called START for employers who cannot buy Workers´ Compensation coverage in the voluntary market.

Employers who obtain coverage through the START program generally pay higher premiums than those who buy Workers´ Compensation coverage in the voluntary market.

Workers´ Compensation Rates

Rates are based on the employer´s type of business. Employers are assigned one or more classifications based on the type of business the employer is engaged in. Each employer´s payroll is assigned to the appropriate classification. The total payroll for each classification is then multiplied by the insurance company´s filed rate for that classification (rate per $100 payroll) to determine the estimated annual premium for the classification. This amount may be further adjusted to reflect an employer´s specific risk profile – for example, through the use of experience and schedule rating and any deductible that the employer might have purchased. An "expense constant," which is comparable to an issuance fee, is then added to this premium. Insurance companies charge different rates for each of the approximately 400 industry classifications.

If an employer is not certain that the proper classification is shown on the Workers´ Compensation policy, the employer can submit a detailed description of work operations to TDI´s Workers´ Compensation Classification Section.

Texas law forbids employers to collect from employees, directly or indirectly, any fee for obtaining Workers´ Compensation coverage. The Texas Workers´ Compensation Act, however, provides some exceptions for independent contractors and certain building and construction workers, provided the appropriate form is completed and filed with the Division of Workers´ Compensation.

Saving Money

Deductibles offer lower premiums to employers willing to reimburse the insurance company for part of their Workers´ Compensation claim costs out of their own pockets. Only employers with estimated annual premium of more than $5,000 are eligible for deductible plans.

The standard deductible plans are:

• Per Accident Deductible Option. It offers deductibles of $1,000, $2,000, $5,000, $10,000, and $25,000 per accident, not to exceed 50 percent of the employer´s estimated annual premium.
• Aggregate Deductible Option for all accident claims covered during the policy period. Deductibles range from $2,000 to 100 percent of the employer´s estimated annual premium, up to a maximum of $100,000.
• Per Accident/Aggregate Deductible Option, which is a combination of the two options listed above.

Employers having either estimated annual premium in excess of $100,000 or desiring higher deductibles than offered in the standard deductible plan may negotiate their deductible with their insurance company.

For all deductible options, when a claim occurs, the insurance company pays it, and the policyholder reimburses the insurer up to the amount of the deductible. An insurer may require a policyholder to provide security for the deductible amount, in addition to requiring a deposit premium for the policy.

Certified/Approved Self-Insurance

Some private employers may self-insure their Workers´ Compensation claims, provided they are certified by the Division of Workers´ Compensation as a qualified self-insurer. To qualify, an employer must

• provide information to the division on profitability, previous Workers´ Compensation losses, and number of workers to be covered
• have division-certified safety programs at all job sites
• provide a minimum security deposit of $300,000 or 125 percent of the employer´s existing Workers´ Compensation liabilities, whichever is greater
• have a minimum of $5 million of excess insurance coverage
• have a total unmodified Texas premium of at least $500,000 or nationwide premiums of $10 million
• pay fees and taxes necessary to support the administration of the program, including establishment of a guaranty fund for self-insured employers.

Private employers may also self-insure by joining with four or more private employers to establish a Workers´ Compensation self-insurance group and obtaining a certificate of approval from TDI. The employers in the group must

• be engaged in the same or a similar type of business
• be members of a bona fide trade or professional association that has been in existence in Texas for purposes other than insurance for at least five years before the establishment of the group
• enter into agreements to pool their liabilities for Workers´ Compensation benefits and employers" liability in Texas
• provide required information to TDI, such as financial information about the members of the group, the governing classification code of the group or a description of operations for each member of the group showing that the members of the group are engaged in similar operations, and evidence of the required performance bonds
• provide a minimum security deposit of $300,000 or 25 percent of the group´s total incurred liabilities for Workers´ Compensation
• have an estimated annual premium subject to an experience modifier of at least $250,000 during the group´s first year of operation and an annual standard premium of at least $500,000 thereafter
• have a minimum of $5 million per occurrence of excess insurance
• pay fees and taxes necessary to support the administration of the program.

Group Purchase

With TDI approval, employers in similar lines of business may form groups to purchase Workers´ Compensation insurance. An insurer willing to provide coverage for the group will use its filed rates. Each member of the group buys its own individual policy and retains its own experience modifier. However, premium discounts are based on the total premium for the group. In addition, specialized safety programs and dividends paid by the insurance company may result in added benefits or savings.

Retrospective Rating

Retrospective rating is an optional plan that offers employers potential savings as an incentive for workplace safety. Retrospective rating must be elected within the first 60 days of the policy period. An employer´s premium is adjusted six months after the end of the policy period, based on the actual claims. Further adjustments occur each year thereafter until all claims for the period are closed or the premium reaches a pre-selected maximum. Premium adjustments reward employers when claims are low. If claims are high, however, the employer may pay more than the standard premium, subject to the pre-selected maximum.

There are several retrospectively rated plans available to employers with a minimum standard annual Workers´ Compensation premium of at least $15,000. "Option Five" is the most frequently used retrospective rating plan and is available to employers with minimum standard annual premiums of $25,000. It allows employers to negotiate for both a minimum and maximum premium. In addition, an employer may negotiate a plan that includes other lines of insurance such as automobile and general liability.

The Large Risk Alternative Rating Option is for employers with at least $100,000 in estimated Texas standard annual premiums (or $350,000 for all states where they operate). Policyholders and insurance companies may negotiate retro factors under this plan. This plan cannot be negotiated to include other lines of insurance.

Experience Rating

Experience rating is mandatory for employers with either

• annual Workers´ Compensation premiums of at least $10,000 and a one-year experience history
• an average premium of $5,000 and at least two years of experience.

Experience rating rewards employers with losses that are less than expected and penalizes those with losses that are greater than expected. Insurance companies calculate experience modifiers based on claim information for the past four policy years, excluding the most recent policy year. An employer´s actual losses are compared with the expected losses for businesses with similar job classifications and payrolls. If losses are less than expected, the employer gets a credit modifier that reduces the employer´s premium. If losses are higher than expected, a debit modifier increases the employer´s premium.

Employers with premium too low to qualify for experience rating also can benefit from a premium incentive plan. Businesses with an estimated annual premium of less than $5,000 are eligible for a 10 percent discount if they had no compensable lost-time injuries during the most recent one-year period. The discount increases to 15 percent if there were no compensable lost-time injuries during the most recent two-year period. However, if an employer had one lost-time injury during the previous one-year period, no discount is allowed. If there were two or more lost-time injuries, a 10 percent surcharge is applied.

Insurance companies are required to calculate experience modifiers. Most insurance companies contract with third parties, such as the National Council on Compensation Insurance (NCCI), to calculate experience modifiers on their behalf.

Your insurance company must send you a free copy of the experience modifier calculation and a plain-language letter explaining the calculation. This letter also explains your right of appeal and offer you a free copy of the statistical data used in calculating your modifier.

If your experience modifier is calculated during the policy period, your premium will be affected in the following ways:

• Any decrease in premium due to the application of the experience modifier is applicable retroactive to the effective date of the policy or to the anniversary rating date, if different than the effective date of the policy.
• Any increase in premium due to the application of an experience modifier shall be implemented as follows:
  • For modifiers that are issued and endorsed onto the policy within the first 60 days of the effective date of the policy or within the first 60 days after the anniversary rating date, the increase in premium due to the application of the experience modifier is applicable retroactive to the effective date of the policy or to the anniversary rating date, if different than the effective date of the policy.
  • For modifiers that are issued within the first 60 days of the effective date of the policy or within the first 60 days after the anniversary date rating date, but are not endorsed onto the policy within the first 60 days after the anniversary rating date, the increase in premium due to the application of the experience modifier is computed pro rata from the date the modifier is endorsed onto the policy.
  • For experience modifiers that are issued after the first 60 days of the effective date of the policy or after the first 60 days after the anniversary rating date, any increase in premium due to the application of the experience modifier is computed pro rata from the date the modifier is endorsed onto the policy.

Appealing an Experience Modifier

Employers who disagree with their experience modifier should first try to resolve the dispute with their company. If the dispute cannot be resolved, you can file a written request for a ruling by TDI´s Deputy Commissioner of Workers´ Compensation Classification, Premium Calculation, and Research. The Deputy Commissioner will allow both sides to make informal arguments in person or by telephone. The Deputy Commissioner´s ruling will be in writing. Either party may appeal the Deputy Commissioner´s ruling to the Commissioner of Insurance. Any hearing will be conducted by the State Office of Administrative Hearings. If the parties consent, the Commissioner may issue a decision based on written arguments, without a hearing. Written requests for action by the Deputy Commissioner should be mailed to

Deputy Commissioner
WC Classification, Premium Calculation, and Research, MC 105-2A
Texas Department of Insurance
P.O. Box 149104
Austin, Texas 78714-9104

You may also try to negotiate your experience modifier downward with your company. Reasons for negotiating a lower modifier include, but are not limited to, improved loss ratios and improved safety programs. For a risk with operations in both Texas and other states, a negotiated modifier applies only to the Texas portion of the premium.

Employer Responsibilities

An employer must fully disclose to the insurance company

• the true ownership and payroll of the company
• information relating to operations
• any change in ownership or operations.

Employers who choose not to have Workers´ Compensation insurance also have certain responsibilities. These employers must

• file an annual notice of no coverage with the Division of Workers´ Compensation
• prominently display English and Spanish notices of non-coverage in the personnel office and throughout the workplace
• give a written statement of non-coverage to each new employee when hired
• report certain Workers´ Compensation claims to the Division of Workers´ Compensation.

Insurance Company Responsibilities

Insurance companies licensed to write Workers´ Compensation in Texas must provide the following accident prevention services at no charge to policyholders:

• safety surveys, recommendations, and training programs
• safety consultations, including analysis of accident causes, industrial hygiene information, and industrial health services.

Insurance companies are required to notify employers of claims against their Workers´ Compensation policies. Upon written request, the insurance company must tell the policyholder of any settlement proposal and any administrative or judicial proceeding to resolve the claim. An employer may waive this notice requirement. Employers may request further notifications relating to an individual claim.

If requested in writing, insurance companies must provide you with a list of all claims against your policy, payments made or reserves established for those claims, and a statement of their effect on the policy premium.

Canceling a Policy

An employer can cancel a policy before its expiration date by notifying the insurance company and the Division of Workers´ Compensation (by certified mail). The insurance company must refund any unused ("unearned") premium.

An insurance company may cancel or refuse to renew a policy. The company must provide advance notice to the policyholder and to the Division of Workers´ Compensation by certified mail. Ten days" notice is required if a policy is canceled or non-renewed for such reasons as delinquent premium payments or fraud. Cancellation or non-renewal for most other reasons requires 30 days" notice.

Although an insurance company may not charge a penalty if you choose to cancel your policy, there may be penalties involved if the policy is subject to retrospective rating or a deductible plan. Be sure to check about penalties before you cancel a policy.

For More Information and Assistance

For answers to general insurance questions of for information about filing an insurance-related complaint, visit our website or call the Consumer Help Line between 8 a.m. and 5 p.m., Central time, Monday-Friday

www.tdi.state.tx.us
1-800-252-3439
463-6515 in Austin

For printed copies of free consumer publications, call the 24-hour Publications Order Line

1-800-599-SHOP (7467)
305-7211 in Austin

For information about Workers´ Compensation claims, call the Injured Worker Hot Line or contact your local field office

1-800-252-7031

For information about Workers´ Compensation policies, call the Workers´ Compensation Classification, Premium Calculation, and Research Division

512-322-3495

You may file a complaint concerning Workers´ Compensation claims, benefits, and workplace safety by contacting any Division of Workers´ Compensation field office or the main office in Austin

1-800-372-7713
804-4000 in Austin

Help us prevent insurance fraud. To report suspected fraud, call our toll-free Fraud Hot Line

1-888-327-8818

To report suspected arson or suspicious activity involving fires, call the State Fire Marshal´s 24-hour Arson Hot Line

1-877-4FIRE45 (434-7345)

The information in this publication is current as of the revision date. Changes in laws and agency administrative rules made after the revision date may affect the content. View current information on our website. TDI distributes this publication for educational purposes only. This publication is not an endorsement by TDI of any service, product, or company.

For more information contact: ConsumerProtection@tdi.state.tx.us