Texas Workers' Compensation Insurance

Why Opting Out of Texas Workers’ Comp Insurance Is a Risky Move

In April 2007, an employee of West Star Transportation in Lubbock, TX was covering an unusually large load on a flatbed trailer. To complete this work, he was lifted to the top of the load using a forklift borrowed from another business and from there, he worked to manipulate the 150-pound tarp over it. Unfortunately, the uneven load was unstable and the worker fell, suffering a traumatic brain injury. West Star Transportation did not carry a Texas workers’ compensation insurance policy and the injured employee and his wife sued for negligence. They were awarded a judgement of $5.3 million, which covered pain and suffering, lost wages, medical care, and loss of consortium.

In November 2012, an employee at Tyson Foods, Inc. in Marshall, TX was operating an electronic floor jack when an overhead door that had been opened by another worker struck him on the neck and shoulder. The same employee was injured again in the same way in May 2013; this time, the impact was hard enough to knock him to the floor. The combination of these two injuries caused him to suffer from severe neck, shoulder, and lower back pain. Because the company did not carry workers’ compensation insurance, he sued for damages and a jury awarded him $2.2 million.

In each of these cases, the companies on the losing end of these lawsuits had taken advantage of Texas law, which allows employers to opt out of workmans' comp coverage. This was to their peril, as the cost of coverage would have been far less than what they were ultimately required to pay out for their workers’ injuries.

What Are Texas Workers' Compensation Laws?

Texas is the only U.S. state that does not require any employers to carry workers’ compensation insurance. Approximately 30% of all businesses in this state take advantage of this rule and forego coverage.

Those who opt out of coverage are referred to as “nonsubscribers.” Texas workers’ compensation laws mandate that nonsubscribers must:

  • File an annual notice with the Department of Workers’ Compensation,
  • Post notices of the lack of coverage in their workplace, and
  • Inform their employees in writing that they are not covered by workers’ compensation.

Furthermore, if you are a non-subscriber business and an injured employee sues, you cannot argue that the injury was caused by the employee’s negligence or that the injured employee was aware of the danger and voluntarily accepted it.

Although some business owners may feel that they are saving a lot of money by not providing this insurance coverage, in doing so, they are opening themselves up to large liability lawsuits related to worker injuries. The decision to opt out of coverage, therefore, is not one that should be made lightly.

The Basics of Texas Workers’ Compensation

What Is Covered?

Workers' compensation insurance, which is often simply referred to as “workmans' comp,” is a state-regulated insurance program that is designed to cover work-related illnesses and injuries. It can provide benefits for the coverage of medical treatments, lost wages, and death benefits to family members if an injury is fatal.

A workers’ compensation insurance company can deny coverage for certain claims, such as wilfully self-inflicted injuries, injuries that occur when the injured employee is under the influence of drugs or alcohol, injuries that occur during voluntary events outside of work, and injuries that occur while the injured employee is in the act of committing a felony.

Who Is Covered?

Texas workmans' comp insurance policies absolutely benefit the employees who are covered under its protection. However, the companies that carry it can also greatly benefit. This is because when workers are injured on the job, they can sue their employers for negligence unless they have accepted benefits from a workers’ compensation claim. In that case, they forfeit their right to sue.

Had West Star Transportation and Tyson Foods carried Texas workers’ compensation insurance policies, their employees could have had their medical treatments and lost wages covered, and the companies would not have lost millions of dollars as a result of liability lawsuits.

Where Can You Buy Coverage? 

The state of Texas has a private market for worker’s compensation coverage. This means that you can buy this insurance from any private insurance carrier that is licensed to write a policy in this state. Policies provided by unlicensed insurers are not considered workers’ compensation policies and do not afford your business all the protections an actual policy can provide. An independent agent can help match you up with a licensed carrier who is well-suited to your business. Your agent can also help you find policy discounts when they are available.

How Much Does Texas Workmans' Comp Cost?

While policies from insurers that are not licensed to write policies in this state may cost less, the coverage they offer does not protect your business as well as a licensed policy. The costs for Texas workers’ compensation coverage are based on standard calculations that consider:

  • The kind of business you operate, as indicated by your company’s NCCI Industry Classification Code
  • Your company’s total annual payroll amount
  • Your company's assessed "Experience Mod" if your company qualifies for a rating

Therefore, because premiums are based largely on your overall payroll, a large company in a moderately hazardous industry is likely to pay higher premiums than a small company in a high-risk industry.

Texas Workers’ Compensation 2016 Base Rate Examples

In 2014, Texas became an NCCI state. That is to say, they now base their workers’ compensation rates on the classification codes and risk ratings as determined by the National Council of Compensation Insurance. Base rates in this state are generally higher than in most other states, and this is due in large part to the fact that so many businesses opt out of purchasing coverage. This leaves fewer, and more high-risk, businesses to make up the difference.

Listed below are some sample base rates (rate per $100 of employer payroll) as of July 1 2016. These rates are published annually by the Texas Department of Insurance and are subject to change each year.

  • 0042 Landscaping: $5.68
  • 5183 Plumbing: $5.01
  • 5551 Roofing: $14.41
  • 8017 Retail Store: $2.72
  • 8810 Clerical: $0.23
  • 9079 Restaurant: $2.25

Naturally, it costs far more to insure workers in the roofing industry, where serious injuries are more likely, than it does to insure clerical workers in office jobs.

What Is an Experience Rating and How Does It Affect Your Costs?

In Texas, some larger companies are assigned an experience modification factor, or experience mod. This factor can affect your Texas workers' comp premium.

Your experience mod provides an indication of how your safety record and workers’ compensation claims compare to other businesses of your size in your industry. A higher experience mod will translate to higher premium rates.

Not every business qualifies to be experience-rated, and eligibility requirements vary by state. In Texas, only the largest companies qualify for experience modification ratings. A workers’ compensation experience rating is mandatory for employers with either:

  • $250,000 in policy premium generated during the last year or last two years, or
  • $500,000 average policy premium generated for more than two years

If your workers' comp policy is experience-rated, your premiums are determined with the following formula:

  • Base Rate X Payroll X Mod = Premium

Your modification rating represents a debit or credit that will be applied to your workers’ compensation base premium accordingly.

  • A mod of 1.0: This is an average rating and is where all businesses start out when they are experience-rated. A mod of 1.0 will not affect your premium rates.
  • A mod greater than 1.0. This is referred to as a debit mod. It indicates that your company’s injury frequency and severity rate is worse than expected for a company of your size in your industry. Your premiums will increase according according to how high your experience mod is.
  • A mod less than 1.0.  This is referred to as a credit mod. It indicates that your company’s injury frequency and severity rate is better than expected for a company of your size in your industry. Your premiums will be discounted according to how low your experience mod is.

Accidents at your place of business can influence your experience modification rating for three years. Years without any worker’s compensation claims will cause your modification factor to drop. Below are some examples of how your experience rating can affect your Texas workers’ compensation premiums:

  • Premium: $100,000 
  • Mod: 0.95 (5% premium credit)
  • Premium with mod credit applied: $95,000
  • Premium: $100,000
  • Mod: 1.0 
  • Premium is not adjusted
  • Premium: $100,000 
  • Mod: 1.05 (5% premium surcharge/debit)
  • Premium with mod debit applied: $105,000

If you are interested in keeping your Texas workers’ compensation costs low, the best way to do so is by maintaining a low rate of worker injury. This can be done by instituting safe practices protocols and by keeping your employees educated about how they can avoid injuries while working. A good insurance company can assist you in this endeavor. 

Get Help Securing a Texas Workers’ Comp Policy

You can protect your company from the risk of hefty liability judgements like the ones faced by West Star Transportation and Tyson Foods by investing in a qualified Texas workers’ compensation insurance policy. Having this coverage may even make your business more attractive to talented personnel. You can learn more about your options and easily review rates by working with a local Trusted Choice® agent. These independent agents are available to answer your insurance-related questions and help you find the best companies to meet your coverage needs. Find an agent near you to get more information.

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