What Is Employee Benefits Liability Insurance?

Employee benefits liability (EBL) is insurance that covers businesses from errors and omissions that occur when employee benefit plans are administered.

These errors and omissions may include failing to enroll, maintain or terminate employees in a plan, and failing to correctly describe benefit plans and eligibility rules to employees. 

EBL insurance covers a wide range of plans, including health, dental and life insurance, profit-sharing plans, workers’ compensation, and employee stock plans.

Employee Benefits Liability insurance is typically sold as a standalone policy.

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Employee Benefits Liability Insurance Claims Scenarios

One example of how EBL insurance could protect your company from financial losses is in the instance of an HR manager accidentally failing to enroll a new employee in the company-sponsored health plan.

The employee later gets into a car accident and is shocked to find out at the hospital that he or she does not have health insurance.

Employee benefits liability insurance could limit your business’s exposure because the failure to enroll was due to an error or omission in administering a health plan.

In addition, EBL insurance could protect employers from some Affordable Care Act (ACA)-related claims.

For instance, consider a situation where independent contractors at your company bring forth a lawsuit arguing they have been wrongfully misclassified as independent contractors.

They argue that they should be considered full-time employees and, therefore, eligible for health insurance under the Affordable Care Act (ACA). An EBL insurance policy could shield your business in such a case, assuming the misclassification was not done intentionally.

Another Example of Employee Benefits Liability Claim

Benefits administration is a complex job that involves many tasks. Benefits administrators must explain benefits to employees, enroll workers in plans, add or remove beneficiaries, and keep accurate records.

Mistakes are inevitable, and even small errors can have dire consequences for your business.

For example, suppose you operate a real estate management business. You have hired a new employee (Carl) to do maintenance work at an apartment building your firm manages.

Bob completes the necessary paperwork to enroll in the company-sponsored health plan. Unfortunately, Tina, your human resources manager, makes a clerical error that prevents Carl from being enrolled. Nobody notices the error.

Six months later, Carl is hospitalized with a serious illness and is shocked to discover he has no health insurance.

When his medical bills pile up, Carl files a lawsuit demanding reimbursement of his costs. His suit names both Tina and your firm.

Lawsuits like Carl’s aren’t covered under commercial general liability policies. An administrative error does not qualify as an “occurrence,” as that term is defined in the policy.

Moreover, clerical errors generally cause financial injury rather than bodily or property damage. General liability policies do not cover financial-related of this nature injuries.

You can insure your company against claims resulting from administrative errors by purchasing employee benefits liability (EBL) coverage. This coverage can also be added to your general liability policy via an endorsement.

Potential Employee Benefits Liability Exclusions

EBL insurance excludes any liability you may have as a fiduciary under the Employee Retirement Income Security Act (ERISA). A fiduciary has discretionary control over benefit plans and assets. EBL coverage also excludes claims stemming from poor financial advice or performance predictions.

For instance, suppose a benefits administrator tells an employee that the company’s 401K plan will generate a 400% return in one year. If the employee sues the benefits worker because his prediction did not pan out, the claim will not be covered.

You can insure your business against claims arising from mismanagement of benefit plans by purchasing fiduciary liability coverage.

Other exclusions in EBL endorsements include Fraud, Breach of Contract, Bodily Injury and Property Damage, Employment-Related Practices, and Insufficient Funds (to pay benefits).

An EBL endorsement may include additional exclusions not listed here.

Employee Benefits Liability vs. Fiduciary Liability

Many people confuse EBL insurance with fiduciary liability insurance. It’s important to note that employee benefits liability is not normally contained within a management liability insurance policy where fiduciary liability would be.

While there are some similarities between the two types of insurance, EBL insurance protects businesses from errors and omissions in many plans.

Fiduciary liability insurance, on the other hand, aims to protect businesses from the Employee Retirement Income Security Act (ERISA) exposures for specifically designated plans that result from a wrongful act.

Fiduciary liability insurance is broader than an EBL insurance policy because it covers not only administrative errors and omissions but also liability for a breach of fiduciary duty from negligent acts in the administration of employee benefit plans.

In addition, many EBL insurers specifically exclude any claims resulting from ERISA violations.

The Rub

EBL insurance can help protect your business from mistakes made during benefits administration.

This is particularly important for small businesses that want to offer employee benefits but do not have a staff member dedicated full-time to benefits administration. In this case, errors and omissions are easy to make and fairly common.

It’s also important to note that employee benefits liability insurance should not be used as a substitute for good risk management.

If your current insurance professional has never addressed coverages such as EBL with you before, I’d encourage you to reach out to us today.

I look forward to introducing you to a new way of viewing your insurance program.

Thank you,

Ryan Hanley

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