Gaining Wisdom Through Non-Subscription’s Choices and Challenges

Non-subscription. It’s been around for over 90 years, and has come into its own since the late 1980’s. We’ve seen that non-subscription provides Texas businesses with a choice that saved many employers from closing their doors when the workers’ compensation crisis hit in the early 1990s. We’ve seen that non-subscription reduced the epidemic of fraudulent claims that had plagued the Texas workers’ compensation system. We’ve also seen that non-subscription encourages greater workplace safety, lowering injury costs and allowing
employers to better compensate productive employees.

But what wisdom have we gained about non-subscription in the past
15 years that we can use to guide agents and insureds in today’s market?

• Read the policy carefully. All non-subscription policies are not created equal, and in fact have many differences in terms, conditions, and limits that can provide traps for the unwary that may result in uncovered (or only partially covered) claims. Be on the lookout for insurance companies that include ERISA plans with medical coverage limits below what might be expected for a serious injury, and then restrict coverage to what is in the ERISA plan. Check to see whether the policy includes or excludes executive officers, paying particular attention to how “executive officer” is defined. Be sure seasonal workers are properly defined and covered, so unexpected negligence from this work group is included in the policy form. For added flexibility in establishing an appropriate wage replacement benefit levels, be sure the disability period has the ability to go up to a full 401 weeks. Take the time to understand the differences in policy forms, particularly in regard to sub-limits on certain types of claims and new exclusions that have been added from previous policy forms.

• Make sure policy limits are adequate. The limits that were readily available five years ago are now the exception rather than the rule. Many non-subscribers have made the decision that they can live without the $25,000,000 per occurrence limits, since few claims ever penetrated the $1,000,000 level.

However, employers must still weigh the assets of the business and its owners, and should carefully consider the risk of a multiple-employee disaster. When additional limits are available, most employers should at least consider $5,000,000 per occurrence. When you can provide adequate protection for contingencies and still cut costs by almost fifty percent, it is simply prudent business practice to reduce the risk of an unusually severe loss.

• ERISA plans are mandatory. Even if your insurer does not require an ERISA plan, federal law requires one if you pay benefits to injured workers. While the non-subscriber insurance policy is the agreement between the employer and the insurance company, the ERISA plan is the agreement between the employer and its employees. Insurance policies that do not include ERISA plans customized to the individual employer contain a “hidden cost” in the form of legal fees for preparation of this complicated legal document. ERISA plans should be reviewed and update every year, as ERISA law changes constantly. An employer that tries to save money by using an outdated plan risks costly gaps between its ERISA plan and its current non-subscriber policy, as well as being in violation of federal regulations.

• An ERISA plan that merely sits on the shelf is useless. Many employers spend a significant amount of time and/or money to have an attorney prepare or customize an ERISA plan, only to stop short of their legal responsibilities by failing to implement the program. Employers must provide a “Summary Plan Description” to each employee that fully explains the eligibility requirements and benefits provided under the plan. Employers should conduct a “rollout” meeting each year to explain changes to the plan and any new laws that affect employee rights, responsibilities and eligibility. An annual rollout meeting can be useful in keeping both employers and employees focused on safety, including an emphasis on how lower claim costs can provide more available funds to pay salary increases and bonuses to employees. The employer’s ERISA attorney and/or a knowledgeable representative of its insurance carrier should be used to assist in holding a meeting for employees that is both upbeat and informative, and should provide videos and other tools to help communicate the ERISA and non-subscriber information to newly hired employees.

• Safety and loss control efforts are crucial to a successful program. Successful non-subscribers know that decreasing the frequency and severity of injuries saves money not only through direct claim payments, but also by reducing those indirect costs such as lost productivity, lower morale and employee turnover. A written safety program is essential to documenting an employer’s efforts to provide a safe workplace, but like the ERISA plan it can do no good if it is not implemented (and in fact it can provide damning evidence in an employee negligence action if the employer fails to follow its own documented safety rules). Some insurance companies provide professional safety and loss control assistance as part of the insurance program in the form of on-site inspections, telephone support, and written safety and loss control plans. This can save the employer considerable time and expense, since there are not many consultants who are both knowledgeable in non-subscriber loss control and reasonably priced.

• An experienced third party administrator is an invaluable member of the team. Non-subscription is not workers’ comp, where all you usually need to know is whether the injury occurred in the course and scope of employment. Non-subscription may look like workers’ comp, but it more closely resembles a cross between group medical and third party liability coverages. The complexities and nuances of ERISA compliance make it infeasible for most employers to pay claims using in-house employees, unless the employer is large enough to hire experienced claims professionals. There are few adjustors who have the experience necessary to handle both the medical and indemnity portion of an employee injury claim as well as managing potential tort liability issues of the employer, and true non-subscription adjustors are a rare species. However, claims must be managed rather than simply paid. Competent medical providers must be located to treat employee injuries, using appropriate care standards that allow for the most favorable outcome to the employee at a reasonable cost to the employer.

A word of caution—be aware of all costs charged by the TPA, as some include hidden “gotcha” charges such as $600 to process each denial letter.

• Pre-injury negligence waivers are out, but post-injury negligence waivers remain viable. In the late 1990’s, a large number of non-subscriber ERISA plans included pre-injury negligence waivers. Employees were strongly urged to execute a waiver of liability in favor of the employer as part of the election to participate in the non-subscriber ERISA plan, severely limiting benefits for those who refused to do so (and in some cases making employees ineligible to participate in the plan unless they executed the waiver). Texas courts could not reach a consensus as to whether these pre-injury waivers were enforceable as legitimate contractual agreements between employers and employees, or whether they were unenforceable as being against public policy.

The Texas Supreme Court finally heard a case directly on this issue and held that pre-injury waivers could be enforceable; however, it turned into a pyrrhic victory when the 2001 Texas Legislature passed new legislation prohibiting the use of pre-injury negligence waivers. Although pre-injury waivers were thereafter banned, employers began building provisions into their ERISA plans that require an employee to execute a release in favor of the employer after an injury but prior to the receipt of benefits. The new post-injury negligence waivers have so far withstood judicial
challenges, but there are no guarantees for the future.

• Binding arbitration is an important risk reduction tool. Both state and federal courts (including the United States Supreme Court) have unanimously agreed that an employer may unilaterally adopt an arbitration program that is binding on all employees. The benefit of arbitration for employers is that it substantially reduces the risk of a “rogue” jury verdict based solely on sympathy for the employee. The rights of the employee do not change in arbitration (other than the right to trial by jury); the only difference is the forum for the dispute. In addition, binding arbitration programs can apply to all types of employment disputes, such as sexual harassment, discrimination, and wrongful termination.

• Tort reform mitigates lawsuit settlements through attorney fee recoveries. Texas House Bill 4 passed in 2003 changes attorney fee rules whereby defendants can recover part of their attorney fees if a qualifying settlement offer is made. If a defendant makes a qualifying offer, the plaintiff rejects and the judgment is “significantly less favorable” (less than 80 percent of the offer), then certain defendant attorney fees (post-rejection fees/cost only) are recoverable. This applies to lawsuits filed in Texas courts after Jan. 1, 2004. This sharply increases the incentive to make and accept initial settlement offers and mitigates awards against employers.

Even non-subscribers are subject to certain provisions of the Texas Workers’ Compensation Act. Non-subscribers are not totally free of all rules that apply to employers who choose to purchase workers’ comp insurance. For example, both subscribers and non-subscribers must provide notice to employees regarding whether an employee is covered under workers’ comp insurance, and notices must be posted in one or more conspicuous areas of the workplace, and they must be in appropriate languages for that employer’s employee population. Further, both subscribers and non-subscribers with five or more employees must file a monthly TWCC-7 report for any month in which there is an employee fatality, a reported occupational disease, or any injury that results in more than one day’s lost time.

Making a commitment
So of all the non-subscriber wisdom we have gained, what are the most important lessons? First, non-subscription is not for everyone. Only those employers who are willing to make the commitment to safety, loss control and claims management should consider leaving the system. Second, if an employer is willing to make the commitment, the savings can be considerable with total program costs of fifty percent or less as compared to workers’ comp. Finally, non-subscription may not always be the right choice, but when the going gets tough it’s one choice many Texas employers are still glad to have.

Blake Y. Stock is CEO of The Combined Group in Carrollton, Texas.

Topics Texas Legislation Claims Workers' Compensation