What is Employee Benefits Liability Coverage?

Employee Benefits Liability Insurance protects a business against liability caused by errors, omissions, or negligence in employee benefits program administration. It can often be purchased as an endorsement to the commercial general liability policy. From healthcare to pensions to disability and other programs, employee benefits are an important part of the employee’s compensation package. They can help attract and retain talent to your company and typically become an important aspect of an employee’s long-term financial planning and financial health.

At the same time, employee benefits are complex programs that involve many processes, including enrolling employees, maintaining accurate records, and explaining the benefits accurately. If you think about how complicated employee benefit plans can be and how much paperwork or data entry is involved, it’s easy to see how mistakes can be made. A mistake or negligent action, such as not enrolling an employee in a benefit plan, can become a significant financial burden for the employee—who in turn can sue your company for compensation.

Example:

• A new employee is depending on the company’s group healthcare plan to pay for any medical expenses from an illness or injury. A few months after she starts working at the company, she needs to get an emergency appendectomy. The hospital bill for the surgery and hospital stay is $150,000, but the company’s Human Resources manager had forgotten to enroll her in the company’s healthcare plan. The employee sues the company for not enrolling her in the healthcare plan to recover the medical expenses that would have been paid for by the insurance plan.

What types of benefits are covered by Employee Benefits Liability Insurance?

Common benefits covered include:

• Health insurance
• Dental insurance
• Vision insurance
• Life insurance
• Disability insurance
• Pensions
• IRAs
• Stock ownership plans
• Profit sharing plans
• Savings plans
• Unemployment compensation
• Workers’ compensation
• Social Security benefits
• Maternity leave
• Tuition assistance
• Vacation plans

What kinds of mistakes does Employee Benefits Liability Insurance cover?

There is a wide range of errors, omissions, or negligent actions that an HR department can make in administering benefits. For Employee Benefits Liability Insurance, the types of mistakes covered depends on the meaning of “administration.” What types of activities fall under the category of benefits administration? Although the definition will vary among insurers, Employee Benefits Liability Insurance will generally cover administrative mistakes that involve failing to enroll or maintain employees in benefits programs, not providing accurate information about benefits and eligibility, and clerical errors resulting in financial consequences for employees.

Example:

• The benefits administrator accidentally fails to re-enroll an employee in the company-sponsored group dental plan because she loses the employee’s file. When the employee needs to get a root canal, he must pay for the procedure out-of-pocket.

Example:

• HR miscalculates the monthly income of an employee’s pension plan to be more than what it is. When an employee retires early thinking he would have a higher pension than he actually receives, he sues the company for the error.

Example:

• The HR manager fails to tell an employee that her husband would also be eligible for healthcare benefits with the company at the group rate. When her husband needs to have a surgery and incurs a $50,000 out-of-pocket medical bill, she files a lawsuit claiming she was misinformed about her benefits.

What is not covered by Employee Benefits Liability Insurance?

Employee Benefits Liability Insurance is meant to cover some of the gaps left by commercial general liability policies, so it will not duplicate CGL’s coverage. While it covers many types of mistakes made by HR departments in the administration of benefits, there are also certain scenarios and ill-advised actions that are not covered.

Common exclusions for Employee Benefits Liability Insurance include:

Liabilities covered by the commercial general liability policy

• Bodily injury
• Property damage
• Personal and advertising injury

Dishonest, fraudulent, criminal, or malicious acts

• Example: You direct your HR manager to secretly terminate the life insurance plans of all your employees to save money.

Insufficient funds

• Example: Your company is short on funds and you are no longer able to pay the premiums for most of the insurance plans your employees are enrolled in. Your employees lose their insurance and end up paying out-of-pocket for the expenses their group health, dental, vision, life, and disability insurance would have covered.

Poor financial advice related to employee benefits

• Example: Your HR director advises all your employees to participate in the employee stock option program, telling the employees that the value of the company’s stock will increase by at least 50% by the end of the year. At the year’s end, the stock price actually falls by 10%.

ERISA-related liabilities

Excludes liability imposed on a fiduciary by the Employee Retirement Income Security Act of 1974. Under ERISA, the persons who exercise authority over employee benefits plans have a legal responsibility to act in the interest of the plan’s beneficiaries. Breaches of duty under ERISA would be covered by fiduciary liability insurance and not by Employee Benefits Liability Insurance.

Employment-related Practices

Excludes employment-related wrongdoing by the company that an employee may sue for including wrongful termination, discrimination, harassment, and retaliation. These liabilities are covered by employment practices liability insurance.

What are the limits of Employee Benefits Liability Insurance?

For Employee Benefits Liability Insurance, there is typically a per employee limit and an aggregate limit. For example, there might be a $250,000 limit for an employee and a $1 million aggregate limit for lawsuits brought forth by all employees in a year.

Claims-Made Basis and Retroactive Date

Employee Benefits Liability Insurance is generally written on a claims-made basis, which means that coverage is triggered when the claim is made, unless the wrongful act took place before the retroactive date of the policy.

Example:

• An Employee Benefits Liability Insurance policy specifies a retroactive date of January 1, 2018. The HR manager of your company failed to enroll an employee in mandatory disability insurance when he started the job in 2017. The employee becomes disabled due to an injury in 2019 and finds out he is unable to collect disability insurance because of the HR manager’s negligence. He sues the company, but Employee Benefits Liability Insurance cannot cover the liability because the negligent act took place before the retroactive date of the policy.

Employee Benefits Liability Insurance vs. Fiduciary Liability Coverage

Under the Employee Retirement Income Security Act (ERISA), fiduciaries are the persons or organizations that exercise authority or control over the management of benefit plans. Fiduciaries must act in the interest of the plan’s participants and may be held personally liable for any mismanagement of benefit plans. If fiduciaries are sued for wrongdoing related to their role, fiduciary liability insurance will cover their legal defense, investigation costs, court costs, and any settlements or judgments.

Employee Benefits Liability Insurance generally only covers administrative errors and omissions made in the management of benefits. Fiduciary liability insurance policies cover the higher level and discretionary functions of a fiduciary, such as:

• Failing to procure benefits for a competitive price
• Intentional wrongdoing related to employee benefits
• Failure to select a competent investment manager for a retirement plan

Example of fiduciary liability:

• Your company’s HR director, one of the fiduciaries for the management of employee benefits, selects a pension fund manager that invests a significant portion of the company’s pension funds in a company that engages in illegal trafficking of labor. When the company in question goes bankrupt because it is fined $20 million by the U.S. government, the value of your employees’ pensions falls by 10%. The employees sue the HR director for mismanagement of their retirement plans.

Final Word

Employees can file a lawsuit against your business when your HR department makes a mistake in the benefits plan administration that costs employees money. Whether it is failing to enroll employees in company benefits, miscalculating benefits, or misinforming employees about the details of their benefit plans, Employee Benefits Liability Insurance will cover these types of scenarios if your employees sue. With Employee Benefits Liability Insurance, you will have financial protection from any liabilities arising from errors made during the complex task of benefits administration.