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It’s the middle of the month, and you have a bunch of new employees onboarding at the same time. Your people ops team has been working overtime to give new employees a great experience and get them up to speed quickly. They're also creating all the usual paperwork for new employees’ benefits, but a team member accidentally omits a file.
Mistakes like this happen. Even with processes and checklists and technology, mistakes happen. Errors are made in completing forms. Information, or entire forms, are omitted.
Although you can’t prevent them altogether, it’s possible to cover your bases so errors don’t cost companies more than they can handle. An employee benefits liability coverage can be in the best interest of your organization and your employees.
Read on to discover why your company might want to invest in this type of protection, whether you're a fast-growing start-up or large company back in hiring mode.
The basics: What is employee benefits liability insurance?
Employee benefits liability (EBL) insurance protects organizations if and when administrative errors or omissions occur when employee benefits are activated. Although EBL insurance is usually applied as a standalone policy, employers can add it to another policy, such as disability insurance.
Some examples of benefits covered by EBL insurance include:
- Life, accident, dental, vision, mental, and other health benefits
- Pension, profit-sharing, and stock ownership
- Additional benefits such as tuition assistance, vacation plans, maternity leave, and retirement plans
- Social security, workers compensation, disability, and unemployment benefits
Like other insurance policies, employee benefits liability coverage is offered on a claims-made basis, which means the provider will cover a claim if it’s made during the time the policy is in effect. If a claim is made retroactively, the policy needs to be retroactively dated and paid for as well.
This situation is a win-win. The employer can still rectify the error and pay for the insurance as soon as the oversight is identified, and the provider gets the company as a client as well.
How is EBL insurance different from general liability insurance?
Simply put, general commercial liability insurance doesn't cover financial injuries or clerical errors, but employee benefits liability coverage will have the organization's back in this case.
Say an employee suffers bodily harm or injury at work, but their medical bills aren't covered due to a clerical error. They may choose to sue the employer. A general liability insurance policy might cover the cost of medical bills if there are no mistakes on the company's side—an administrative error isn't covered under this. However, signing up for EBL insurance could protect the organization from getting hit with a bill of thousands of dollars. And with EBL insurance, the organization can rectify the clerical error by activating health benefits for the injured worker at a retroactive date.
What's the difference between EBL insurance and fiduciary liability?
Many organizations confuse EBL coverage with fiduciary liability insurance (FLI). While the two have some things in common, they’re not the same.
Employee benefits liability coverage protects the company from clerical errors in a wide range of insurance plans. However, EBL insurance doesn’t cover breaches in the Employee Retirement Income Security Act (ERISA), so it doesn’t completely mitigate risk.
On the other hand, fiduciary liability insurance protects businesses from ERISA responsibilities or exposures in customized plans for wrongful acts. There are various incidents that warrant a need for FLI, including a breach of fiduciary duty resulting from negligence in providing the employee benefit plan.
José Jara, a partner at CKR Law and an ERISA expert, says an organization can be fiducially responsible for a variety of reasons, including the following:
- The selection or retention of imprudent investments
- Engaging in transactions that present a conflict of interest
- Failing to pay a participant the benefit amount due under the plan
- Participating in an act of self-dealing
The above list isn’t comprehensive, but it offers examples of acts that fall within the company’s legal responsibilities. In some cases, FLI insurance can reduce the blowback or liability on the company.
When can you use employee benefits liability coverage?
One employee’s mistake with benefits administration can cost the business thousands of dollars or more. Employee benefits coverage will help protect the business in these circumstances.
When employee benefits are miscommunicated
Suppose you hire a new benefits manager, John Smith, who’s still wrapping his head around how things are done at your company. He mistakenly tells an employee that the company’s benefits plan can cover the employee’s aunt because they live in the same household. Later, Smith learns he was wrong, but his error makes the company financially liable.
This type of situation isn’t a rare occurrence. Research shows that “employees are confident about their benefits plans even though many don’t fully understand them,” and this includes people ops. When an employee comes to you with questions about their eligibility for the company’s benefits, it can be hard to explain a plan that you don’t fully understand either.
Cheryl Foy, university secretary and general counsel at Ontario Tech University, discusses a similar situation:
A colleague provided me an example: Employee benefits liability coverage was included in an organization’s suite of insurance policies, but the organization didn’t understand the policy well enough to know when it kicked in. The organization was sued for misrepresenting the nature and scope of the pre-existing condition clause in its long-term disability insurance coverage. As the organization wasn’t aware that this is exactly the kind of claim that was covered by the employee benefits liability insurance, the organization didn’t put its insurer on notice or file an insurance claim. The defence legal costs were over $100,000, and the damages more than triple that.
Foy also adds that if a claim is filed late and the insurer’s ability to defend the case is negatively impacted, the claim may be limited or denied altogether.
When HR accidentally loses an employee file
Alternately, say your new benefits manager John Smith accidentally loses or deletes an employee’s file. Employee benefits liability coverage protects the business from financial responsibility in both of these scenarios.
The Gediman v. Anheuser-Busch, Inc. case made the value of this insurance clear when Anheuser-Busch was sued by a former employee due to an administrative mistake in the retirement plan.
“The Gediman case made employers and their insurance buyers aware for the first time of a liability exposure in the area of the administration of employee benefits programs, and it created a demand for insurance protection against such liability,” says Roland J. Wendorff.
It’s hard to find a reason to argue against employee benefits liability coverage. It isn’t expensive, and it can save the company from significant losses if and when an error occurs (it’s likely to happen at one time or another). After all, even your best people ops employees are only human.
What isn’t covered by employee benefits liability insurance?
Sadly, employee benefits liability coverage isn’t limitless. Companies will have to pay a deductible for each occurrence or act, depending on the EBL insurance policy.
In general, there are two types of limits to EBL coverage:
- Aggregate limit: The highest monetary amount the insurer will pay for a particular business
- Each employee limit: The maximum amount an insurer will pay for a specific individual and their family
If your organization or one of your employees has maxed out on these limits, the insurance provider will no longer cover any EBL claims. Moreover, EBL insurance doesn’t protect the business against all claims. Depending on your specific policy, the exceptions could include:
- Claims regarding an employee’s 401k doing poorly
- Any lawsuits concerning employees’ salaries or wages not meeting expectations
- Physical injury and property damage claims
- Any benefit offered by the company that doesn’t have a financial value
- Deceitful or illegal acts by the organization
- Any breaches under the ERISA
If you’re not sure about the limitations of your EBL insurance policy, reach out to your provider.
Tailor employee benefits liability coverage to your business needs
Employee benefits liability coverage isn’t limited to the list in this article.
Some providers can also cover benefits such as therapy or coaching. Work with your insurance provider to find an employee benefits liability coverage plan that suits your business needs. Doing so will help you keep your employees happy and bring peace of mind to the HR and Legal teams.