Accidents happen. It’s why we have insurance.
Employee benefits—from health insurance to paid family leave—can provide life changing value for employees. They can also create a significant administrative burden for employers, compounded by ever-changing legal requirements, complex filing processes and mountains of paperwork. When administrative mistakes happen, the consequences can be shockingly costly.
That’s where employer insurance comes in.
Employee Benefits Liability (EBL) provides coverage for situations in which an employer makes a mistake in the administration of its benefits program.
Russell Berger, a labor and employment attorney with Offit Kurman tells us that
That’s why we reached out to Russell, as well as two other experts—Jason Lauter, VP at MBL Benefits Consulting, and John Beauregard, Senior Partner, Sylvia Group, an Alera Group Company. With their help, we put together the following guide to help you understand the ins and outs of EBL coverage, and how it can protect your business.
Our guide covers:
- Why is Employee Benefits Liability Insurance Important?
- What Does Employment Benefits Liability Insurance Cover?
- Employment Benefits Liability Coverage Limits
- Examples of Employee Benefits Liability in Action
- Employment Benefits Liability vs Employer Practices Liability
- Employment Benefits Liability vs Fiduciary Liability
- How to Use Niche Policies and Endorsements to Address Specific Business Risks
- Cost of Employee Benefits Liability Insurance
Why is Employee Benefits Insurance Important?
Protecting a business against different types of risk has always been important. But these days, says Jason Lauter, mitigating risks around benefits misadministration is paramount:
“We’re seeing […] an influx of additional kinds of claims against employers, both on the employee benefits side and the employee practices side. An employer really needs to be on top of so much these days with regards to the benefits that they’re offering. They need to make sure that they are not discriminating, that they understand the laws, whether it be federally or in each state.”
As legislation around benefits administration becomes more complex, and workplaces find themselves with remote teams distributed across states, it’s easier than ever to make a mistake in benefits administration. EBLI helps defend a company against those rising employee benefits claims Jason cites.
What Does Employment Benefits Liability Insurance Cover?
EBL offers protection to employers from the financial consequences of unintentional mistakes that occur during their administration of employee benefits programs. EBL can protect businesses from lawsuits and workers’ compensation claims due to clerical errors and omissions. As with most insurance policies, this excludes intentional acts.
Depending on the EBL policy, coverage may extend to employee benefits such as healthcare plans, retirement savings plans, social security, parental leave, disability or other voluntary and mandatory benefits.
Employment Benefits Liability Coverage Limits
The limit of coverage is the maximum amount that an insurance company will pay for a claim. The limit will likely include a per claim limit (for each employee that makes a claim) as well as an aggregate limit (for the total claims during a policy period from all employees).
To illustrate the difference between an employee limit and an aggregate limit, Russell Berger provides a helpful analogy to car insurance:
“A per employee limit is like a per accident or per claim limit. If you have $1M worth of insurance but you have $100k per incident, the most insurance you’ll have per incident is $100k, but you could have 20 smaller incidents adding up to $1M in a year. The per employee limit is the most that the insurance company will pay out to any one employee based on a claim whereas the aggregate limit is the most they’ll pay out in full during a given policy period.”
When evaluating the level of EBL coverage required for your company, consider that mistakes may happen with one individual (for example, one employee’s paperwork is not filed on time) or there could be systemic issues (for example, the same mistake is made in filing paperwork for all employees).
Additionally, it’s important to note that EBL policies do not cover all situations or types of benefits. For example, the following are not generally covered:
- Insufficiency of funds
- Inadequacy of performance of investments
- Taxes, fines or penalties, including those imposed under the Internal Revenue Code or any similar state or local law
While many benefits are regulated at the federal level, certain nuances, as well as additional benefits, may vary by state law, industry standard, or company policy. For example, in the state of Maryland, employers are soon going to be required to make a retirement savings plan available to employees, whether through an employer sponsored plan or through MarylandSaves, and in several states paid family leave is a requirement.
It is important to ask your policy provider whether requirements such as these are covered by your EBL policy, particularly for companies that have employees distributed across multiple locations.
One common type of error which may or may not be covered by EBL is misclassification, which occurs when someone is qualified as an independent contractor when they should legally be classified as an employee. If properly classified, these individuals would be eligible for company benefits and other components of total compensation provided to employees.
As with any contract, not all EBL policies are the same, so it is critical to understand what is and is not covered in your specific policy.
Examples of Employee Benefits Insurance in Action
To better understand the value of EBL, it’s helpful to explore scenarios in which an employer may need to use their coverage. Below are three examples of EBL in action:
An employer offers a cafeteria plan that allows employees to choose their own health insurance plans based on their health needs and budget. One employee chooses the most expensive plan with no deductible but ends up needing surgery due to complications from her pregnancy, resulting in high out-of-pocket costs for medical services related to her pregnancy. She later files a lawsuit against the company because she feels like they should have offered her better information about their health care plans before she selected one.
An employer provides each employee with a cell phone as part of their compensation package; however, this offer is only valid if employees meet certain requirements (such as having no outstanding debts). An employee receives his cell phone in the mail but does not immediately activate it because he is waiting until after payday when he will be able to pay off any outstanding debts so that he can receive all benefits immediately without delay or penalty fees being applied against him.
An employee joins a company that provides healthcare benefits to all employees, but the benefits administrator does not submit the employee’s paperwork before the deadline. The employee gets sick and has to make a claim but finds that she does not have insurance coverage. She is forced to pay out of pocket and later files a claim against the company for the cost of her medical bills.
EBL vs EPL
EPL stands for Employer Practices Liability (EPL) insurance. While EBL and EPL may sound similar, they are two very different forms of employer insurance with separate coverage areas.
Unlike EBL, which protects against administrative mistakes, EPL provides coverage for employer defense costs and liabilities from employment related claims such as:
- Sexual harassment
- Failure to accommodate
- Wrongful termination
Berger advocates that employers consider EPL and EBL insurance separately, noting that many employers are unaware that EPL even exists. He explains, “
tThey’re different insurance products and one isn’t going to cover the other.”
When deciding which product is best for your business and team, consider all the areas of liability that you may face as an employer, and assess the costs and benefits of the different insurance products available to you.
EBL vs Fiduciary Liability
As we’ve discussed, EBL provides protection for claims arising out of errors or omissions in the administration of benefits. Fiduciary Liability (FL) provides protection for fiduciaries against legal liability for claims made against them for a wrongful act (defined as a breach of fiduciary duty imposed by law) in the administration of benefits.
With fiduciary liability, employers are protected against claims under the Employee Retirement Income Security Act (ERISA), which is typically excluded from EBL policies. Additionally, FL covers not just mistakes but negligence in benefits administration.
For employers seeking comprehensive benefits liability protection, fiduciary liability provides broader coverage than the limited administration coverage in a standard EBL policy.
Sylvia Group’s John Beauregard provided us with an example of a fiduciary liability claim, which contrasts nicely to the EBL scenarios we examined above:
“A company has a fiduciary responsibility for its employees, for example in their 401(k) plan. If that company makes an egregiously bad decision in how they administer that investment— say, if they took the entire 401(k) and put it into crypto—that can be the basis for a claim of the employees bringing a claim of fiduciary responsibility.”
John emphasizes that while it wouldn’t be easy for that kind of thing to happen in most companies, it’s possible. An instance of that kind doesn’t fall under misadministration of benefits packages, and therefore wouldn’t be covered by EBLI.
For employers who are looking for a benefits package that’s meaningful but also simple to administrate, Sunny Day Fund is a great option. Our emergency savings benefits fall outside of ERISA, and remove fiduciary liability from the employer, making it a relatively simple compliance decision.
What Kind of Companies Should Get Employee Benefits Liability Insurance?
Ultimately, says Jason Lauter, the decision on whether to invest in EBLI is relatively simple:
“Whether you have 100-person company in the tech space, or you have a 20-person company that makes products for shoes, if you’re offering benefits, you’re offering benefits, and there’s rules that need to be followed to do so. At MBL we recommend these days that EBL and EPL coverage be included with every single employer.”
Cost of Employee Benefits Insurance
Every company that provides benefits must assess their own risk profile and calculate the costs and benefits of an EBL policy.
Without EBL, you could open your business up to costly lawsuits. However, many of the risks may be minimized with a thorough administrative process including redundant checks and procedures to ensure mistakes don’t slip through the cracks. In some cases, the cost of EBL may be less than the cost of additional administrative resources.
“The good news on cost,” says John Beauregard, “is that 99.9% of the time, employee benefits liability is included under a general liability policy. The other important thing is that it’s really cheap, for example somewhere between $300-$500. It’s not an expensive coverage.”
To calculate the cost of EBL for your business, you’ll need to get a quote from an insurance provider. Costs will vary depending on factors including the size of your company and the extent of your employee benefits, as well as the employee limit, the aggregate limit and the extent of coverage areas in your EBL policy.
Because not all policies are created alike, you may be able to adjust your coverage to meet your needs and budget.
Ultimately, says Jason, the investment is usually nominal, and the risk mitigation is worthwhile:
“Employee benefits liability insurance is not typically very expensive, unless there’s a long history of high claims at a company. I don’t recall a situation where an employer has gotten a quote for including employee benefits liability in the general liability policy and said, ‘Wow, due to that cost, I’m not taking it.’ It’s usually either included, or it’s relatively speaking a nominal cost.”
Find out how much your company could save on operating and retention costs with Sunny Day Fund’s free calculator tool.
Protecting the Business Means Protecting Employee Benefits Too
As a company grows its employee base, it can be hard to keep up with the correct administration of employee benefits across states and roles. Having an insurance policy in place will help you save money and ensure that the right coverage is in place if something goes wrong.