What Is Employee Benefits Liability Coverage?
Employment benefits liability, or EBL for short, is a type of insurance designed to cover employers from errors and omissions that may occur during the administration of employee benefit plans.
The coverage applies to life insurance, health benefits, retirement plans, disability insurance, and lots more.
While benefits administration software can help mitigate errors, EBL is there as a backup.
This article explores everything you need to know about EBL, how it works, and why it’s important for your company.
How Employee Benefits Liability Coverage Works
Suppose a new employee joins your company and the HR manager accidentally fails to enroll them into the company health plan.
A few weeks go by, and the new staffer gets involved in a car accident only to find out they do not have health insurance.
In such a scenario, having an EBL cover could reduce your business’ exposure from failing to enroll the employee in the company medical benefit plan.
Additionally, Employee Benefits Liability coverage also protects employers from certain Affordable Care Act (ACA) and worker’s compensation claims.
For instance, suppose you have a freelancer working at your firm. The individual in question then files a lawsuit against your company, claiming they were wrongfully classified as an independent contractor, arguing that your company should consider them a full-time employee.
Under the provisions of ACA, this would, in effect, make them eligible for health insurance and several other employee benefit plan programs.
EBL coverage would protect your business from such a suit in such a scenario.
(Note: If you're planning on hiring international freelancers, using an Employer of Record service can help you mitigate misclassification issues too).
Types Of Benefits Covered By Employee Benefits Liability Insurance
Keep in mind that although EBL coverage can help minimize your company’s exposure resulting from mistakes made in the course of benefits administration, it is in no way a substitute for risk management.
With that in mind, here’s a list of some of the benefits covered by employee benefits liability insurance.
- Dental insurance
- Disability insurance
- Health insurance
- Unemployment insurance
- Life insurance and other voluntary benefits
- Maternity leave
- Retirement plan benefits
- Social Security benefits
- Vacation benefits as computed by payroll software
- Workers’ compensation policy
EBL vs. FLC
While EBL insurance may sound like fiduciary liability coverage (FLC), they are not the same thing (although they share some similarities).
EBL coverage is specially designed to protect employers from errors and omissions in several different types of benefit plans.
Fiduciary liability insurance is designed to shield employers from wrongful acts against the provisions of the Employee Retirement Income Security Act (ERISA).
As such, fiduciary liability coverage is much wider than that of an EBL policy.
It covers administrative errors, omissions, and negligent acts performed in breach of fiduciary duty during the administration of employee benefit plans.
EBL policies specifically exclude all claims that result directly from violating the provisions of ERISA. These are covered by fiduciary insurance.
The term “fiduciary," as used in a fiduciary liability policy, is defined by the Act as – any person or entity responsible for the administration of benefits plans.
According to the statute, an individual’s personal assets can be used to recoup fiduciary losses.
EBL vs. EPL
EBL is also different from EPL – short for Employment Practices Liability insurance.
The latter is used to shield businesses against exposure that may come from employment-related claims. These may include discrimination, wrongful termination, and sexual harassment.
Although Employee Benefits Liability exists to reduce employers' liability stemming from any gaps that Commercial General Liability policies may not cover, it does not duplicate general liability coverage.
It means that even though EBL may cover errors and omissions committed by HR departments in benefits administration, there are instances where certain ill-advised actions are excluded from coverage. Below are a few examples of common exclusions.
- Fraudulent, dishonest, malicious, or criminal acts committed on the employer’s liability insurance (this usually falls under fidelity bond coverage)
- Insufficient funds to pay premiums or fund an employee benefit program
- Poor financial advice and HR policies that impact an employee benefits program
- Property damage, bodily injury that may result in a workers’ compensation claim, advertising injury, personal injury, and any other type of employer’s liability covered under the general liability policy
- Lawsuits, claims, or allegations against a federal employee
- ERISA violations and qualifying workers’ comp claims under the Act
- EPL-rated practices covered under employer’s liability insurance.
Limits Of Employee Benefits Liability Insurance
EBL insurance usually has two separate limits: an employee limit and an aggregate limit.
Employee limit
The employee limit refers to the maximum amount of money an insurer would be willing to pay for liabilities incurred by any individual employee, their next of kin, or their beneficiaries.
Some policies include clauses that put a cap on the claim value rather than an individual employee.
Other liability policies include a deductible representing the maximum out-of-pocket expense an employer would incur for each employee who files a claim.
Aggregate limit
The aggregate limit refers to the maximum amount of money an insurer would be willing to pay for liabilities that arise from administrative errors and omissions. A good EBL coverage should shield your company in the following administrative scenarios:
- The erroneous description of employee benefit plans and their respective eligibility rules
- Missing records or files in HR information systems related to employee benefits
- The failure to terminate, enroll, or manage employee beneficiaries.
The more comprehensive the policy is in terms of the scope of coverage, the better protected your company will be in the event of a claim.
Common Employee Benefits Liability Claims
Common Employee Benefits Liability (EBL) claims often revolve around the administration and handling of employee benefit programs.
These programs can include health insurance, retirement plans, life insurance, disability insurance, and more. Here are some typical scenarios where EBL claims might arise:
- Denial of benefits: Claims made by employees or former employees who believe they were unfairly denied benefits they were entitled to under an employer's benefit plan.
- Administrative errors: Mistakes in the administration of a benefits program, such as failing to enroll an employee in a plan despite their eligibility, incorrect handling of personal information leading to loss of benefits, or errors in benefit statements.
- Misrepresentation: Claims arising from allegations that an employer or the administrator of a benefit plan misrepresented the benefits, coverage, or eligibility requirements, leading to financial loss or lack of coverage for the employee.
- Improper advice or counseling: Situations where employees receive incorrect advice or counseling regarding their benefits options, leading to selections that do not meet their needs or expectations, or result in financial harm.
- Failure to comply with plan documents: Claims that occur when benefits are not administered in accordance with the plan documents or the employer's established policies, which can lead to disputes over eligibility and benefits.
- Discrimination: Claims related to discriminatory practices in the administration of employee benefits, such as providing different levels of benefits based on age, gender, race, or other protected characteristics.
- Breach of fiduciary duty: Under laws like the Employee Retirement Income Security Act (ERISA) in the United States, fiduciaries who manage employee benefit plans have a duty to act in the best interests of the participants. Claims may arise if fiduciaries fail to meet these obligations, such as by making imprudent investments or failing to monitor plan costs.
- Delayed or incorrect benefit payments: Issues that arise when benefit payments are delayed, incorrect, or not made in accordance with the terms of the plan, leading to financial distress for the beneficiaries.
- Failure to inform or update: Claims based on an employer's failure to properly inform employees of changes to benefits plans, options, or eligibility requirements, which can result in loss of coverage or benefits.
- COBRA violations: In the U.S., the Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose health benefits the right to choose to continue group health benefits under certain circumstances. Violations or mismanagement of these rights can lead to claims.
How to Mitigate the Risks and Responsibilities of Employee Benefits Liability
Mitigating the risks and responsibilities associated with Employee Benefits Liability (EBL) involves a combination of careful planning, adherence to legal standards, effective communication, and risk management strategies.
Here’s how you can tackle these challenges:
- Understand legal obligations. Familiarize yourself with all applicable laws and regulations, such as the Employee Retirement Income Security Act (ERISA) in the United States, which governs employee benefit plans. Ensuring compliance with these regulations is crucial.
- Implement robust administrative processes. Develop and maintain meticulous administrative processes to manage enrollments, terminations, and changes in employee benefits accurately. Automated systems can reduce errors, but they also require regular audits and updates.
- Educate employees. Provide clear, comprehensive information about the benefits programs to employees. Regular education sessions and easily accessible resources can help employees make informed decisions and reduce misunderstandings.
- Regularly review plan documents. Ensure that all plan documents are up to date and accurately reflect the terms and conditions of the benefits provided. Consistency between plan documents and actual practice is key to avoiding disputes.
- Obtain proper coverage. Consider purchasing Employee Benefits Liability insurance to protect against potential claims arising from administrative errors and omissions in the management of employee benefits programs.
- Appoint qualified personnel or partners. Ensure that those who are responsible for administering benefits plans are properly qualified and experienced. Consider partnering with reputable third-party administrators if in-house resources are insufficient.
- Adopt a transparent approach. Foster an environment of transparency and open communication regarding benefits policies and any changes to them. Employees should feel comfortable asking questions and raising concerns.
- Establish a review process for claims and appeals. Have a formal process in place for reviewing and addressing claims and appeals from employees regarding their benefits. This process should be fair, timely, and in accordance with legal requirements.
- Regular training and updating. Provide regular training for HR staff and anyone involved in the benefits administration process to keep them updated on the latest laws, best practices, and technologies.
- Monitor and audit: Conduct regular audits of the benefits administration process to proactively identify and correct errors. This can include both internal and external audits.
- Documentation and record-keeping: Keep detailed records of all benefits-related decisions, communications, and transactions. Good record-keeping practices can be crucial in defending against potential claims.
Seek professional advice: When uncertain, seek advice from legal or benefits administration professionals. External consultants can offer valuable insights into risk management strategies and compliance issues.
Cost of Employee Benefits Liability Insurance
EBL insurance policy costs vary widely. It ultimately depends on the number of employees the policy is supposed to cover.
You can also expect a deductible of approximately $1,000 for each claim filed. Nonetheless, this type of coverage remains one of the most affordable policies available to businesses.
To find an Employee Benefits Liability insurance policy within your business budget, you'll need to get in touch with a reputable insurance provider and request a customized quote based on your budget and coverage needs.
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