Employee Benefits Liability Coverage
Employee benefits liability insurance covers claims that result from errors in administering fringe benefits. This coverage protects employers against costly suits arising from administrative errors.
Errors in Benefits Administration
Like many companies, your firm may offer employee benefits like health insurance or vision care. A good benefits package can help you attract new workers and retain the ones you have.
Yet, benefits can be a source of lawsuits against your firm if they are not administered properly. Even small clerical errors can have major consequences.
For example, suppose your company owns several apartment buildings. Bob, a new maintenance employee, completes the necessary paperwork to enroll in the company-sponsored health plan. Unfortunately, Bob is not enrolled due to a clerical error committed by Kristin, your human resources manager. Six months later, Bob is hospitalized with a serious illness. He is shocked to discover that he has no health insurance. When his medical bills pile up, Bob files a lawsuit demanding reimbursement of his costs. His suit names both Kristin and your firm.
Not Covered by Liability Policies
You can insure your company against claims resulting from administrative errors by purchasing employee benefits liability (EBL) coverage. EBL coverage can be added to a general liability policy via an endorsement.
EBL endorsements typically cover damages the insured becomes legally obligated to pay because of an act, error or omission committed in the administration of employee benefits. EBL coverage is usually claims-made, although it is sometimes available on an occurrence basis.
Like many claims-made coverages, EBL insurance may include a retroactive date. This is usually the date your EBL coverage first began. For a claim or suit to be covered under your EBL endorsement, it must result from an act, error or omission that occurred on or after the specified retroactive date.
What types of errors are covered by an EBL endorsement? The answer usually depends on the meaning of the word administration. The definition of this term varies, but it generally means acts, errors or omissions in the activities described below.
- Describing benefit plans and eligibility rules to employees, other eligible family members, and beneficiaries For example, a benefits manager mistakenly tells an employee that her live-in boyfriend is eligible for the company-sponsored health insurance plan.
- Maintaining files and records related to employee benefits, whether the records are electronic or paper For instance, a benefits worker accidentally erases an employee’s electronic file or loses his or her paper file.
- Enrolling, maintaining and terminating employees, eligible family members or beneficiaries in benefit plans For example, a benefits worker fails to add an employee’s beneficiary to a life insurance plan provided by the employer.
When purchasing EBL insurance, make sure the endorsement covers the benefits plans your company offers. Most endorsements define the term employee benefit program. The definition typically includes the following:
- Insurance Life, accident, dental and medical and other types of insurance
- Plans Pension, profit sharing, stock ownership and savings, and other plans
- Benefits Social security, workers compensation, disability and unemployment benefits
- Other May include benefits such as tuition assistance and maternity leave
Employee Benefits Liability coverage usually includes two separate limits.
The Each Employee limit is the most the insurer will pay for any one employee, his or her family members and beneficiaries. The Aggregate limit is the most the insurer will pay for all acts, errors or omissions. Note that an EBL endorsement may include a deductible. The deductible amount is the employer’s maximum out-of-pocket expense for each employee who files a claim.
EBL insurance is not intended to cover your liability as a fiduciary. Thus, it excludes damages for which any insured is liable under the Employee Retirement Income Security Act. It also excludes claims stemming from poor financial advice or predictions of performance. For instance, suppose a benefits worker tells an employee that the company’s 401K plan will generate a 400% return in one year. If the employee subsequently sues the benefits worker because his prediction did not pan out, the claim will not be covered.
Other exclusions include Fraud, Breach of Contract, Bodily Injury and Property Damage, Employment-Related Practices, and Insufficient Funds (to pay benefits). Employment-related practices include acts like discrimination, sexual harassment, and wrongful termination. An EBL endorsement may include other exclusions besides those listed here.
Extended Reporting Period
Because most EBL endorsements are claims-made, they generally include the option to purchase an extended reporting period. Your insurer should offer you this option if it does any of the following:
- cancels or non-renews your EBL coverage
- renews or replaces your EBL insurance with claims-made coverage that has a later retroactive date than the one on your current policy
- renews or replaces your EBL insurance with EBL coverage that applies on an occurrence basis
Need for EBL
The need for EBL coverage depends on factors such as employee head count and the types of benefits offered. The coverage serves as a hedge against large claims by disgruntled employees or their dependents. It should not be used as a substitute for good risk management.
EBL coverage is not essential for every business. A firm that employs a small number of workers or that offers few or no benefits will not need this coverage. Your agent or broker can help you decide whether to purchase EBL coverage.