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The Texas Civil Justice League opposes SB 346 in its current form. We are, however, grateful to Senator Duncan and his staff for listening to our concerns and are currently working constructively with them in an effort to address them.
The Texas Civil Justice League believes that indemnification and additional insurance provisions in constructions contracts must be considered in the larger framework of Texas workers’ compensation law. Our research indicates that virtually every state recognizes the statutory employer doctrine in some form. Texas does not recognize the statutory employer doctrine, except in limited situations under a recent Houston Court of Appeals decision, Etie vs. Walsh. While other states have enacted anti-indemnity statutes, they accompany robust statutory employer doctrines that do not exist in Texas. This lack of statutory employer protection in Texas substantially explains why indemnity and additional insured provisions have become a necessary adjunct to construction contracts in Texas.
The First Court of Appeals held that an injured employee’s sole remedy against other employers in the event of a worksite injury is workers’ compensation if all employers on the site are required to carry workers’ compensation coverage.
The Etie decision did not expressly hold that an “employer” includes the premises owner. Another case, Entergy Gulf States v. Summers, presents that issue and is currently pending before the Texas Supreme Court. The Supreme Court heard arguments in the Entergy case in January and a decision is pending. Obviously, the outcome of the Entergy case will have a major impact on the issues involved in SB 346, but that outcome is not likely to be known until after the legislative session.
The Etie decision is currently the law in the First Court of Appeals District in the Houston area. Although the decision was appealed to the Texas Supreme Court, the Court declined to hear the case, thus affirming the decision without comment.
The statutory employer doctrine holds that workers’ compensation insurance is the exclusive remedy of an employee injured on a worksite, regardless of fault, if all employers on the site are provided with or required to be covered by workers’ compensation insurance. Ordinarily, in order to make the doctrine effective, the general contractor or premises owner is considered to be secondarily liable for the workers’ compensation coverage. Virtually all states recognize this doctrine.
In the First Court of Appeals District, Texas law tracks the national norm very closely. Outside of this area, Texas law is uncertain with respect to whether general contractors and premises owners receive the protection of the exclusive remedy when all other conditions regarding workers’ compensation coverage on the site have been met. The Summers case, currently pending before the Texas Supreme Court, has the potential to resolve this uncertainty.
The uncertainty of Texas law has for many years resulted in a significant amount of third party liability litigation in Texas courts. In response to a member survey conducted this year by the Texas Civil Justice League, premises owners with comparable operations in Texas and other states report that a substantial majority of their third party claims arising out of worksite injuries where workers’ compensation coverage was in effect occur in Texas (upwards of 80-90 percent). It is important to note that if an injured worker succeeds in a third party claim, it does not necessarily mean that the worker receives more than his or her workers’ compensation benefits. In many cases, the workers’ compensation carrier files a subrogation action to recover the benefits paid, thus reducing the value of the worker’s claim. It is thus not at all clear that the current system of third party litigation benefits workers significantly in some cases.
A larger anomaly in Texas law involves the structure of the workers’ compensation system itself. Texas is the only state that does not require an employer to subscribe to workers’ compensation insurance. This is significant and helps explain why Texas has developed a panoply of risk management strategies to contain liability costs from worksite injuries.
In many instances Texas employers who subscribe to workers’ compensation insurance coverage face the worst of both worlds. On one hand, they pay for a partial workers’ comp system in which only 50% of the state’s employers participate (thus vastly reducing the pool of available premium to pay benefits) and which in some cases may not adequately compensate workers for certain injuries. On the other, they may still be subject to liability exposure for third party claims to which the exclusive remedy of workers’ compensation insurance—which they have already allegedly paid for in their insurance premiums—does not extend. In our view, until hard decisions are made about the kind of workers’ compensation system we want in Texas, it will be difficult to evaluate the impact of other related issues that have grown up around the voluntary subscription policy. We simply are not comparing apples to apples here.
It is the same as for the workers’ compensation system: to create a system that provides medical and lost-wage benefits for injured employees without resort to the expense and vagaries involved in the litigation system. The workers’ compensation system is also designed to improve worksite safety by giving employers positive incentives to protect workers from injuries. As we have seen, Texas law may well frustrate these public policy objectives because of its voluntary nature and its consequent gaps in liability exposure. There is a further, more basic rationale for statutory employer: if an employer pays for workers’ compensation coverage, the employer should get the benefit of the exclusive remedy provided by the system. This is the way insurance is designed to work. It makes no sense for a system to charge the employer for the cost of the insurance and then deny coverage.
The most common strategies are contractual agreements between employers (premises owners, general contractors, and subcontractors) that require one or more parties to indemnify the other parties for injuries and property damage occurring on the worksite (regardless of fault) and/or to provide additional insurance covering those parties for such injuries. Such agreements seek to affect a no-fault insurance system on a worksite by designating which party will tender the defense of a claim.
It should be emphasized that indemnity and additional insurance agreements are just that: insurance contracts. The party requiring an indemnity or additional insured endorsement must pay for that additional insurance in the contract rates. Despite arguments that indemnity agreements are unfair because they may require a party to indemnify another party for the second party’s fault (this is not true in all cases), the second party has paid for this no-fault coverage. Moreover, indemnity agreements are frequently reciprocal or otherwise modified in accordance with market conditions, just as other insurance contracts are.
In response to concerns that insurance may not be available to cover indemnity and additional insurance agreements, the League surveyed its members to determine if any were experiencing such “hardening” in the market. The answer was quite the contrary. Not only does adequate insurance appear to be available, at least in the type of construction contracts ordinarily entered into by League members, but there appears to be a healthy seller’s market in place that is having demonstrable effects on the types of indemnity agreements currently being executed. It is simply not the case that such agreements are “contracts of adhesion” or boilerplate provisions that cannot be negotiated. Indeed, indemnity agreements are like any other insurance contract in their responsiveness to the market and the relative positions of the parties.
Clearly, it is difficult to get a full picture of the insurance market without an extensive, detailed investigation. Admittedly, the League’s survey is somewhat anecdotal and should not be interpreted as a definitive study. Consequently, the League stands ready to assist the Committee in any way in conducting a more comprehensive study of the state of the market in this area.
Although indemnity and additional insurance agreements are helpful in managing risks in situations involving multiple employers on a worksite, they do not prevent third party lawsuits nor assure that injured workers are adequately compensated for injuries. To the extent that any changes in the current system are contemplated, they should only be made if they achieve the goal of compensating an injured employee with the absolute minimum of transaction and legal costs.
A consolidated insurance program (CIP) is a cost-saving tool utilized by premises owners to reduce the overall expense of providing workers’ compensation and general liability insurance coverage for their construction projects. Like indemnity and additional insurance provisions, they are designed to provide adequate coverage for worksite injuries, while avoiding the cost, expense, and diversion of resources associated with third party litigation.
The premises owner purchases an insurance policy for workers’ compensation and general liability that covers all operations on a particular worksite. The owner then adds contractors on the site to the policy as additional insureds. Typically, the contractors added to the policy are those doing a significant amount of work on the premises. In exchange for being added to the owner’s policy, the contractors agree to exclude from their project bids any costs of insurance. This lowers the overall cost of the project to the owner. If an employee of a contractor is injured on site, the employee files a workers’ compensation claim under the owner’s policy. Essentially, the owner uses its purchasing power under a CIP to drive economies of scale in the overall cost of insurance.
In summary, the Texas Civil Justice League supports the Etie decision and the use of risk management strategies described in this statement. The Texas Supreme Court has the opportunity further to clarify the law in this area in the Entergy v. Summers case, and we encourage the committee to consider the potential implications of this litigation in its deliberations. We also urge the committee to consider the larger context of the Texas workers’ compensation and insurance market in its review of this important collection of issues.
Copyright 2007 Texas Civil Justice League
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