Alternatives to traditional workers' compensation coverage

Rise of Workers’ Compensation

The state of Wisconsin is credited with enacting the first workers’ compensation insurance statute in the United States back in 1911.  In 1917, the United States Supreme Court made a ruling that states could legally require employers to provide workers’ compensation coverage to their employees on a mandatory basis.  By 1948, all of the remaining states had some form of workers’ compensation insurance law on the books.  While nearly all of the states made coverage mandatory for employers, the state of Texas retained the option of voluntary participation.

The primary purpose of workers’ compensation insurance is to provide financial protection to employees injured in the course of their employment, while at the same time limiting tort liability against the employer.  However, the general consensus of the business community is that the entire system is weighed down by bureaucracy and inefficiency resulting in excessive costs and fraud.


Movement Toward “Opting-Out”

The state of Texas gives employers three options when it comes to workers’ compensation coverage:

  1. they can join the traditional system and be subject to the regulations and requirements, while receiving the protection offered to employers against tort liability;
  2. they can opt-out of the statutory system and implement their own protection plan, thus giving up the protection of limited tort liability; or
  3. they can simply go without any insurance and face and unlimited risk. 

According to a 2014 report released by the Texas Department of Insurance, 33% of Texas employers were “non-subscribers” to the traditional state coverage, and only 5% went without insurance of any kind.  The industry refers to the second alternative as the “Option Program”.  Because Texas has a long track record with the Option Program, numerous studies have been and are being conducted to compare the effectiveness and costs of an Option Program  to that of traditional state programs.  Studies have shown the Option Program be better than traditional workers’ compensation programs as measured by employee satisfaction and in other areas.   In 2013, Oklahoma adopted its own opt-out program and several other states are considering the same, including: Tennessee, South Carolina, and Florida. 


Advocating for Change

In 2013, the trade group “Association for Responsible Alternatives to Workers’ Compensation” or “ARAWC” was created to promote the Option Program.  Major founders and members include Wal-Mart, Best Buy, Nordstrom, Macy’s, Safeway and Sedgwick. The association promotes responsible alternatives to traditional workers’ compensation that promotes fairness to both employers and employees, while focusing on efficient and cost-effective management of workers’ compensation claims and benefits.

This all points to momentum for positive change in the workers’ compensation industry but like any well entrenched system, change can be slow and resistance can be great.  However, given the purported pro-business stance of the current administration, this could influence change in the industry.



Information provided in this article was obtained from the Risk and Insurance Management Society, Inc. and the Association for Responsible Alternatives to Workers’ Compensation.

Written by Paul McFarling - Legal Counsel

Updated on May 8, 2017 11:50