Limiting Third-Party Claims through Controlled Insurance Programs

All owners and general contractors are familiar with the scenario where the employee of a subcontractor is injured while working on a large construction project. The subcontractor is generally a workers’ compensation subscriber and, therefore, immune from any direct claims asserted by the injured employee.  In other words, the injured employee’s sole remedy against his employer is to seek workers’ compensation benefits – often referred to as the workers’ compensation bar.

The workers’ compensation bar would not, however, extend to claims against the owner, general contractor and other parties working on the project. As a result, the subcontractor employee often sues these parties in an effort to obtain additional funds beyond the workers’ compensation benefits, regardless of how attenuated the claims may be against these other parties.  In effect, the workers’ compensation bar may actually encourage litigation against parties beyond an injured employee’s employer in an effort to attempt to be made whole.  This process frequently shifts the risk of loss to parties on the project that bear little or no responsibility for the underlying incident, e.g., the owner or general contractor.

In an effort to address this issue, in 1983, the Texas Legislature enacted what is now Section 406.123 of the Texas Labor Code, which permits a general contractor and a subcontractor to enter into a written agreement under which the general contractor provides workers’ compensation insurance to the subcontractor and its employees. In return, the general contractor is treated as the “employer” of the subcontractor’s employees for purposes of the application of the workers’ compensation system and is entitled to protection under the workers’ compensation bar.  This means the employee is no longer permitted to pursue a third-party claim against the general contractor but, instead, is limited to receiving workers’ compensation benefits.

Section 406.123 protections unfortunately were not made specifically available by statute to other parties involved in the construction process, most notably project owners, which is why Controlled Insurance Programs, often referred to as “CIPs” or “Wraps,” were developed.  These are specific insurance programs modeled on the mechanism provided under Section 406.123 that allow an owner (in an Owner Control Insurance Program or “OCIP”) to purchase insurance (of all types, including workers’ compensation insurance) for all parties working on a given construction project.[1]  An OCIP provides a project owner several advantages, including: (i) cost savings in negotiating the purchase of insurance; (ii) uniformity of coverage for all claims; and (iii) less animosity between the parties on the construction project, in particular in reference to indemnity claims, which can generate significant legal expenses.  However, perhaps the most significant benefit afforded an owner under an OCIP is the potential extension of immunity under the workers’ compensation bar to the owner (and other contractors participating in the insurance program).

Although Section 406.123 applies by its terms only to general contractors, the Texas Supreme Court has recognized the Section 406.123 protections in the form of the workers’ compensation bar can be extended to project owners and other participants in an OCIP. In Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433 (Tex. 2009), the Texas Supreme Court held an owner that provides an OCIP to all contractors qualifies as a “general contractor” as defined under the Texas Labor Code.  A “general contractor” is defined as “person who undertakes to procure the performance of work or a service, either separately or through the use of subcontractors.” Tex. Labor Code § 406.121(1).  The Texas Supreme Court found that, so long as an owner hires a general contractor or subcontractors to perform work on the project, it constitutes a “general contractor” under this definition.  The Entergy Gulf States ruling means that a project owner can enter into a written agreement to provide workers’ compensation coverage (i.e., an OCIP) that meets the requirements of Section 406.123 and will therefore become entitled to immunity under the workers’ compensation bar in connection with any third-party claims asserted by any general contractor or subcontractor employees insured under the program.

Importantly, the extension of the workers’ compensation bar not only applies to the owner that has obtained the OCIP, but it also applies to bar direct claims asserted against a general contractor who is insured under the program. In HCBeck, Ltd. v. Rice, 284 S.W.3d 349 (Tex. 2009), the Texas Supreme Court held that even though the applicable general contractor did not specifically purchase workers’ compensation insurance on behalf of a subcontractor, so long as the subcontractor participated in an OCIP offered by the project owner, the general contractor was considered to have “provided” the workers’ compensation insurance coverage necessary to qualify for protection under the workers’ compensation bar of Section 406.123.  Indeed, at the appellate court level, this workers’ compensation bar has even been applied to claims made by a participating subcontractor's employee against another participating subcontractor. See e.g., Etie v. Walsh Albert Co., Ltd., 135 S.W.3d 764 (Tex. App.—Houston [1st Dist.] 2004, pet. denied).

The favorable treatment of OCIP programs was most recently endorsed on May 3, 2018, when the First Court of Appeals in Houston overturned a more than $17 million judgment obtained as a result of an accident that occurred during construction of the new Baylor University Football Stadium. Austin Bridge & Road LP v. Raquel Suarez et al., Case Number 01-16-00682-CV. Baylor implemented an OCIP on the project.  As part of the OCIP, Baylor required its general contractor and all subcontractors to participate in the program.  Baylor hired Austin Commercial LP as the general contractor on the project.  Austin Commercial then entered into a subcontract with its subsidiary Austin Bridge & Road LP (ABR).    ABR hired Derr & Isbell Construction, LLC (D&I) to perform certain work on the project.  An employee of D&I, Jose Dario Suarez, was killed in an on the job accident.  His family brought wrongful death claims against ABR and obtained a verdict in excess of $17 million.  ABR argued that this verdict was in error because ABR was entitled to protection under the workers’ compensation bar as a result of its participation in the OCIP.  Essentially, ABR claimed that Suarez’s remedy was limited to receiving workers’ compensation benefits and he (and his heirs) had no right to assert a direct claim against ABR.  The First Court of Appeals agreed and overturned the verdict.  This is an important illustration of how an OCIP program can help mitigate risk on large construction projects.

Texas courts have clearly favored a broad application of the Section 406.123 protections to all parties working on a construction project so long as the OCIP is properly structured. Accordingly, when owners are evaluating potential insurance programs and safeguards to put in place, in particular in reference to large commercial projects, they should closely examine the utility of obtaining an OCIP.  The program can result in significant cost savings and greatly reduce the administrative time and expense of the inevitable jobsite injury claim.

[1] General contractors also can purchase similar insurance and obtain the same broad protections applicable to owners.  These policies are referred to Contractor Controlled Insurance Programs or "CCIPs."  This article focuses on the application of OCIPs; however, the same general analysis applies to CCIPs.