Kansas). A total of 32 states had workers’ compensation laws by 1915, 42 by 1920. By 1935 only Arkansas and Mississippi had failed to adopt. 11
Even though the Supreme Court upheld the legality of compulsory laws in 1917, most states opted for an elective system.12 At a practical level, this meant that employers in most states did not have to buy accident insurance. They simply had to demonstrate to the state industrial or accident commission that they possessed the financial resources to compensate accident victims, and in some states the standard of proof was fairly low. In effect, employers could self-insure. The other, more prevalent option was to purchase accident insurance from a private or public entity.
The struggle over the establishment of new public compensation funds was at least as contentious as over workers’ compensation itself. Organized labor and left-wing politicians pushed for monopoly state funds, arguing that the reduction in operating expenses and lack of profit would free up monies to enhance coverage and benefits. They were strongly opposed by the insurance industry, which raised the twin specters of patronage politics and creeping socialism.13 Insurers claimed that the private sector would be better at ferreting out the “fraud, malingering, and simulation characteristic of [workers’ compensation] claimants” (cited in Lubove 1986: 62). In most states, private insurers prevailed. But not everywhere. By the mid-1930s, eleven states had created public funds to compete with private insurers. A handful of states (7) operated monopolistic funds, and these same states tended to have compulsory rather than elective laws. 14
Private insurance companies and self-insured employers thus dominated the market for workers’ compensation from the beginning. Even where competitive state funds existed, insurance companies were advantaged because they could deny coverage to the worst risks, which by law state-operated funds had to cover; they could better serve companies operating in more than one state; and they could offer employers discounts on other types of insurance if purchased in combination with a workers’ compensation policy. Private insurers paid about 50 percent of workers’ compensation benefits in the late 1930s, and self-insured companies accounted for another 20 percent. The rest were paid by public funds (Libman 1942).
The decision to allow the private sector to play a large role in operating workers’ compensation turned out to be one of those critical junctures, or branching points, that are characteristic of path dependence (Pierson 2000). The combination of elective coverage and a large role for private insurance meant that state compensation laws created a powerful set of stakeholders in addition to whatever state agencies were involved. Private insurers remained important for the rest of the 20th century. By the mid-1990s, six states had monopolistic state funds, 20 states had competitive state funds, and the rest were exclusively market-based. Private carriers paid out approximately 50 percent of all workers’ compensation benefits in 1996, and self-insured companies paid out another 25