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Good News for Texas Non-subscribers, Bad News for Excess Carrier

By Michael W. Fox, Esq.

Texas has its own little corner of the workers' compensation world, as I think it is now the only state that permits employers to opt out of the workers compensation system. It does not come without a penalty, because a non-subscriber employer loses the bar against being sued by its employees for negligence, and when it is sued, loses a number of its common law defenses to negligence such as assumption of the risk, contributory negligence etc.

Still, given the costs of workers compensation, particularly before the system underwent some radical changes a decade or more ago, many major employers opted out, and have come up with fairly sophisticated programs that give them more flexibility and that are backed at least in some respect by insurance.

One of those disputes played out in a case that was decided today by the 5th Circuit, which was required to make an "Erie guess" as to what the Texas Supreme Court would do. American International Specialty Lines Ins. Co., v. Rentech Steel LLC et al  (5th Cir. 9/21/10) [pdf].

The question is what would the Texas Supreme Court do  in interpreting an insurance policy  in this situation which excluded coverage:

under any workers? compensation, disability benefits or unemployment compensation law, or any similar law.

The excess carrier which was looking at a $10,000,000 judgment against for a negligence claim if it was unsuccessful, argued that since the Texas Workers Comp Law penalized the non-subscriber employer and insured by stripping it of some defenses, it should be excluded as being under a "workers' compensation" or at least "any similar law."  

Unfortunately for the insurer, the Court found not only did it believe that the statute does no more than modify the common law claim, and thus as it framed the question, the exclusion was not applicable; more importantly it found that is what the Texas Supreme Court would say as well.
 
Although the insurance carrier is on the short end of the stick of this opinion (and at $10 million it is a pretty big stick) it is not as if the employer fared all that well. The day before the initial trial was scheduled, the employer/insured tossed it wholly into the insurance company's lap by filing Chapter 7 bankruptcy.

Only in Texas. Literally.
 
 
 

Full post as published by Jottings By An Employer's Lawyer on September 21, 2010 (boomark / email).