How Does Workers' Compensation Operate in My State?

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One question many business owners ask is whether workers compensation coverage is required in their state. In most cases, the answer is yes. A majority of states require employers to buy workers compensation insurance on behalf of their employees. Employers that comply with the law are generally immune from lawsuits by injured workers. In most states, workers compensation insurance is an employee's exclusive remedy for on-the-job injuries.

While workers compensation insurance is mandatory in most states, the manner in which the coverage is sold varies from state to state. Most states permit the sale of workers compensation insurance by private insurance companies as long as the insurers meet state financial requirements. However, a few states bar this practice.

Each state maintains its own workers' compensation regulatory agency, which is often referred to as a bureau. Yet, the specific functions the bureau performs vary from one state to another.

Monopolistic States

Five states in the U.S. prohibit the sale of workers compensation insurance by private insurers. Instead, workers compensation insurance must be purchased from a state fund. These five states are called monopolistic states. They include North Dakota, Ohio, Washington, and Wyoming. In the past, West Virginia and Nevada were also monopolistic states, but they are now open market states.

In the four monopolistic states, the state fund performs many of the same functions that bureaus or the NCCI perform in other states. Examples are experience rating and administering deductible programs.

NCCI States

About two-thirds of the states are called NCCI states because they subscribe to the National Council on Compensation Insurance.

The NCCI states allow private insurers to sell workers compensation insurance.

While each of the NCCI states operates its own workers' compensation bureau, the bureau relies on the NCCI to perform various administrative functions. The specific functions performed by the NCCI differ from state to state. In many states, the NCCI handles experience rating, including the calculation of experience modifiers. It also develops and maintains the classification and rating system used in NCCI states. In addition, the NCCI creates and publishes the forms and endorsements that insurers use to issue workers compensation policies.

Independent States

Eleven states and the District of Columbia are called the independent states because they do not subscribe to the NCCI. These states include California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin. The independent states permit private insurers to sell workers compensation insurance.

Each of the independent states utilizes its own classification and rating system. These systems often closely resemble those developed by the NCCI. The workers' compensation bureau in each state performs a wide variety functions.

For instance, the bureau typically calculates experience modifiers, collects premium and loss data from insurers, and develops the workers' compensation rates or loss costs used in that state.

Texas and Oklahoma

Texas and Oklahoma are the only states that not require all private employers to purchase workers compensation insurance. Texas has been an "opt-out state" for over a century. Note that Texas employers are required to purchase insurance if they contract with the government. Employers that do not purchase insurance lose some important defenses against lawsuits by injured employees. For instance, they cannot defend themselves on the basis that the employee's own negligence or the negligence of a co-worker caused the worker's injury. If they lose a lawsuit, uninsured employers may be liable for punitive damages.

Oklahoma passed a law in 2013 that allows employers to forego workers compensation insurance. The law permits employers to opt out if they provide benefits to injured workers under an alternate benefit plan. However, the law was declared unconstitutional in early 2016 by the Oklahoma Workers Compensation Commission. The Commission found that the benefits provided to workers under alternative plans were inferior to those afforded under the workers' compensation law. The future of Oklahoma's opt-out law is uncertain.

Edited by Marianne Bonner