A federal appeals court has ruled that an insurer must pay damages to an injured employee who had sued his or her employer because the workers’ compensation law limits on defenses available to employers that opted out of workers’ compensation did not mean that the policy exclusion on coverage of injuries covered by workers’ compensation applied.

What happened. “Gruden” was injured while working for Rentech Steel in Abilene, Texas. Gruden sued Rentech for negligence and was awarded over $10 million.

Rentech’s insurer, the American International Specialty Lines Insurance Co. (AISLIC), went to federal court claiming that it did not have to cover the damages because the policy excluded coverage of any obligation under any workers’ compensation law. AISLIC argued that even though Rentech was a nonsubscribing employer under the Texas Workers’ Compensation Act (TWCA), a negligence claim filed against Rentech was an uncovered obligation under the TWCA. The district court rejected this argument and AISLIC appealed.

What the court said. AISLIC contended that TWCA Sec. 406.033 supplanted the Texas common-law negligence claim with a statutory claim. AISLIC argued that the TWCA created the cause of action under which Gruden sued Rentech and, thus, imposed an obligation on Rentech to pay the judgment. AISLIC premised its theory on the fact that Sec. 406.033 deprives nonsubscribing employers of certain common-law defenses. Gruden countered that the TWCA neither creates the right to sue a nonsubscriber for negligence nor the obligation to pay negligence damages.

The court concluded that Sec. 406.033 leaves the common law generally intact and merely provides an incentive to participate in the workers’ compensation program. The provision does not create a new basis for employees to sue employers, said the court. The court based its decision on the text of the law that did not impose a new legal obligation on nonsubscribers and the language and decisions from the Texas Supreme Court suggesting that the court would come to the same conclusion. American International Specialty Lines Insurance Co. v. Rentech Steel LLC, U.S. Court of Appeals for the 5th Circuit, No. 08-11052 (9/21/10).

Point to remember: While nonsubscribing employers avoid the pitfalls of the no-fault workers’ compensation system, if sued, they may not claim that the employee was contributively negligent or assumed the risk of injury or that the injury was another employee’s fault. An employer may claim that the employee intentionally caused the injury or was intoxicated. These limits make it difficult for employers to defend themselves and make subscribing to workers’ compensation an attractive alternative.