What is workers’ compensation?

Workers’ compensation insurance (also referred to as workers’ comp or workers’ compensation) helps protect you and your employees in cases of workplace injuries and illnesses. These insurance policies, purchased by an employer on behalf of their employees, help ensure that employees that become ill or injured as a result of their work still receive medical benefits and some wages while they are in recovery. For private employers in Texas, a workers’ compensation policy can both help limit your liability in case of an injured employee pursuing litigation and also serve as an integral part of your employee benefit package.

What does workers’ compensation insurance cover?

Sections 408.081-408.187 of the Texas Labor Code (TLC) specify four key employee benefits of workers’ compensation insurance.

Benefit TypeBenefit Details
MedicalPays for the required medical care to treat an employee’s injury or illness.
Disability income

Covers four classes of income benefits:

  • Temporary income benefits
  • Impairment income benefits
  • Supplemental income benefits
  • Lifetime income benefits
DeathIn the event that an employee dies as a result of their work, their eligible family members may receive a portion of the employee’s income.
BurialIn the event that an employee dies as a result of their work, reimburses a portion of the burial feeds to the individual who paid for the funeral services.

Income benefits for workers’ compensation are all based first on the Texas state average weekly wage, which is equivalent to 88% of an average weekly wage, as determined by the Texas Workforce Commission.

Buying workers' compensation insurance in Texas

In Texas, employers may purchase workers’ compensation insurance from any company that is licensed by the Texas Department of Insurance. To purchase a workers’ compensation policy, an employer first selects an insurance company to work with and then begins the application process to identify the best policy for their line of business.

The Texas Department of Insurance uses a class code system for categorizing different professions in the state. A class code, made up of a combination of 4-7 numbers and letters, is a standardized set of codes applied to different lines of business. Insurers use these class codes to classify risk and to help set the base price of a workers’ compensation policy. (These class codes are specific to the state of Texas and other states likely use different codes for various professions.)

When a company applies for a workers’ compensation insurance policy for its employees, the insurance company identifies the class code that best matches the company’s primary line of work. For example, software engineering companies are assigned a different class code than those companies that perform commercial construction. When you first apply for workers’ compensation insurance, the insurer will help you identify the appropriate class code for your business.

Note: A company may have multiple class codes assigned to it in cases where there are very different lines of work for one company. For example, office workers for a roofing company have a lower degree of risk of injury that the roofers themselves. For those cases, different insurance policies may apply to those two groups of employees, each using the relevant class codes for the associated work.

What you should know about workers’ comp in Texas

While workers’ compensation insurance isn’t required in Texas, there are some key things for you to consider before foregoing coverage.

Is your business required to carry workers’ compensation insurance?

Texas does not mandate that private employers purchase workers’ compensation insurance. However, not obtaining an insurance policy does not free you of Texas government reporting requirements.

Per the requirements specified in the Texas Workers’ Compensation Act, all private employers must comply with state-mandated requirements to notify their employees and the Division of Workers’ Compensation (DWC) about the state of their workers’ compensation coverage and any changes to that coverage. If your business has 5 or more employees and chooses to not obtain workers’ compensation coverage, you must still comply with Texas law and notify the DWC by April 30th of each year that you are not subscribed to workers’ compensation insurance.

Note: The Texas Department of Insurance and its workers’ compensation documentation refer to employers that do not carry workers’ compensation insurance as non-subscribers and those that do have coverage as subscribers.

In addition, both workers’ compensation insurance subscribers and non-subscribers with more than 5 employees must regularly report workplace injuries, deaths, and illnesses to the Division of Workers’ Compensation.

Where can you buy workers’ compensation insurance?

There are two key things you must be aware of before you purchase workers’ compensation insurance in Texas.

  • Licensing:

    You must purchase your policy from an insurer that has been vetted and licensed by the Texas Department of Insurance. If your provider is not licensed to operate in the state of Texas, the policy will not meet the legal requirements stipulated in Texas.

  • Policy type:

    Some employers choose to purchase supplemental or alternative policies for disability and medical coverage. However, Texas does not permit these policies to replace workers’ compensation insurance coverage. While these policies will provide some employee benefits at a lower cost than an official workers’ compensation policy, they most often do not meet the state-mandated minimums for medical and disability benefits.

The Texas Department of Insurance website includes a list of licensed insurance providers. These providers maintain workers’ compensation insurance policies and classification codes that align to requirements specified by the state of Texas.

Employers may also choose to self-insure a workers’ compensation policy as an individual business entity or by working with other employers in a self-insuring pool. In both cases, the employer must have the self-insured policies and coverage reviewed and approved by the Texas Department of Insurance. The same reporting requirements required by the Workers’ Compensation Act also apply to those employers that choose to self-insure.

How much does workers’ compensation insurance cost?

Insurers operating in Texas use two core pieces of information to set the base price for a workers’ compensation policy. The first part of the base price is set by referencing the class code for the business, and the second part uses a price adjustment method.

The class codes used to categorize a business are also referenced to determine the amount of risk that an insurance company could be taking on when insuring a business.

For example, an employee working at a software engineering company is at inherently less risk of injury, illness, or death as a result of their work than a person working for a commercial construction company. Therefore, insurance companies use this level of risk to adjust the base price of a company’s workers’ compensation policy.

Licensed companies offering workers’ compensation insurance in Texas use one of the three adjustment methods below to modify the base prices for a policy (defined from the company’s class code).

Adjustment MethodAbbreviationDescription
RelativitiesRThe Texas workers’ compensation classification relativities, established by the Texas Commissioner of Insurance.
Company relativitiesCRRelativities specified by the insurance company itself and filed with the Commissioner.
Loss costLCLoss cost value estimates created and maintained by the National Council on Compensation Insurance.

The list of licensed insurance providers on the Texas Department of Insurance website specifies whether an insurer uses relativities or loss cost modifiers to set premiums for workers’ compensation policies. These methods are referred to as the Rate Filing Rate Basis on the Workers’ Compensation Rates web page.

All licensed workers’ compensation policies in Texas, regardless of whether the insurer applies relativities or loss cost modifiers, use the following information to determine the cost for a company’s policy:

  • Relativity or loss cost value that corresponds to an employer’s class code
  • Insurer’s relativity deviation or loss cost multiplier value

These values are then used in a mathematical formula to calculate a base cost for every $100 of an employee’s payroll.

Relativity value or loss cost value * Relativity deviation or loss cost multiplier

You may use the table on the Texas workers’ compensation site to see how various insurers have set their deviation and modifier values.

Insurers that use relativities to set their insurance prices use the relativities values that are set by the Texas Department of Insurance. Insurers may also opt to use their own defined relativity values, but these must be filed with the state of Texas for approval.

Example - Relativity-Based Pricing

  • Business profession: Roofing
  • Class code: 5551
  • Class code relativity value: 12.95
  • Example insurer relativity deviation: -20%
  • 12.95 * -20% = $10.36 for every $100 of an employee’s payroll

Insurers using the loss cost-based pricing method must use the loss cost rates specified by the Texas Department of Insurance.

Example - Loss Cost-Based Pricing

  • Business profession: Roofing
  • Class code: 5551X
  • Class code loss cost value: 5.66
  • Example insurer loss cost modifier: 1.570
  • 5.66 * 1.570 = $8.89 for every $100 of an employee’s payroll

What if you don’t get workers’ compensation coverage?

In Texas, business owners that carry valid and current workers’ compensation insurance are protected from unlimited damages that could result if an employee were to take legal action as a result of a workplace injury. (Employers that are found to be responsible for gross negligence that results in an employee’s death, however, are not protected by this limited liability clause.)

If you opt to not obtain workers’ compensation insurance, however, you will have no protection from damages that may be awarded to an injured employee as a result of litigation. You will also be responsible for covering an injured or ill employee’s medical and costs and to cover any lost income as a result of the injury or illness. In short, without workers’ compensation insurance coverage, you will have open-ended liability for employee workplace-caused injuries and illnesses.

Many prospective employees, especially in high-risk professions, seek out Texas employers that choose to carry workers’ compensation insurance. Ensuring that your employees can easily get the quality medical care that they need to recover and get back to work quickly can be mutually beneficial for you and your employees.

References:

  • http://www.statutes.legis.state.tx.us/Docs/LA/htm/LA.406.htm#406.004

  • http://www.tdi.texas.gov/wc/regulation/wcrates2011.html