Being a business owner is both challenging and rewarding. And if you add being an employer to the mix, the reward and the challenge of being an entrepreneur doubles.
Employee benefits packages are one of the ways you can attract new workers and retain your current employees. However, miscommunications can happen and employees may not receive their expected benefits. These errors in administering employee benefit plans can result in lawsuits against your business. Protect your business from unexpected costs and financial instability with employee benefits liability insurance.
Read on to find out if this type of insurance is right for your business.
What Is Employee Benefits Liability Coverage?
Employee Benefits Liability (EBL) insurance protects a business against lawsuits resulting from negligence, errors, or omissions made during the administration of employee benefits. The plan is also referred to as Employee Benefits Liability Coverage or Employee Liability Insurance. It covers grievances directly related to the management of benefits that a company contractually agreed to give and manage.
The employee liability insurance policy covers all areas of employee benefits, including:
- Life insurance, accident, health insurance plans, dental insurance, vision, and other types of insurance
- 401(k), retirement plans, pension, profit-sharing, stock ownership, savings, and other similar plans
- Social Security, workers' compensation benefits, disability insurance, and unemployment benefits
- Paid time off (PTO) and maternity or paternity leaves offered by the company
- Additional benefits like tuition assistance
Do You Need Employee Benefits Liability Insurance?
Employee benefits liability insurance is beneficial for your company if:
- You offer any employee benefits
- You manage the benefits programs you offer
- You offer different benefit plans to your employees
- You have a high employee turnover rate
Administering employee benefits programs is a complex process that involves presenting and interpreting the benefits package to employees. Managing employee benefits plans also includes handling and keeping accurate employee records. More work goes into the cancellation, termination, and enrollment of each new employee in the plans, and mistakes and omissions can happen at any stage of the process. Unfortunately, even minor errors can have grave consequences.
Some of the most common claims include:
- An employee is not added to the benefit plan
- An employee is added to the wrong plan
- An employee's coverage is removed accidentally
- Incorrect or inaccurate benefit interpretation was given to an employee
- Calculation errors in the contribution amounts
What Is Not Covered by Employee Liability Insurance?
The policy does protect against claims for breaches covered under the Employee Retirement Income Security Act (ERISA). It does not cover anything related to employment practice, such as hiring, firing, harassment, and discrimination. The following are also excluded:
- Employee complaints on salary or wages
- Bodily injury and property damage claims
- Claims that involve non-monetary benefits
- Lawsuits from fraudulent or criminal acts by the administration
Features of Employee Benefits Liability Coverage
The following sections will define and explain some terms related to employee benefits liability insurance.
Commercial General Liability Insurance
Commercial general liability insurance, also known as business liability insurance, protects companies against claims from normal business operations. It provides coverage from common business risks, such as bodily injury, personal injury, property damage, and advertising injury. For this reason, it's highly recommended if your company sells products, provides services, or works directly with the public in any capacity.
General liability insurance covers costs like legal fees and medical expenses for damages related to your services, products, or operations. You're also covered in case of personal injury claims, such as libel, slander, or copyright infringement. This policy is an excellent addition to a company's risk-management strategy.
Clerical errors causing monetary damages rather than bodily injury or property damage are not covered by general liability policies. On the other hand, an Employee Benefits Liability insurance is specifically designed to cover claims that your company is legally obligated to pay because of an error or omission made in the administration of employee benefits. It is an optional coverage often offered as an endorsement to a Commercial General Liability Insurance policy.
An insurance endorsement, also called a rider, is an amendment to an existing policy that modifies the original contract's terms. You can add endorsements to your policies at any time — during purchase, mid-term, or at renewal time. Note that riders may increase your insurance premiums.
Endorsements are generally used to include coverage or broaden the scope of an existing insurance policy. Although, there are times when they're used to exclude coverage for certain types of claims. The verbiage around endorsements can vary among insurance providers. Make sure you clarify what's being modified if you decide to add one to any insurance policy.
Insurance companies offer two types of liability coverage: a claims-made policy or an occurrence policy. It's important that you understand the difference between these two types of coverage because employee benefits insurance is a claims-made policy.
Each type of policy comes with its own set of limitations. The limits depend on two factors:
- When an incident occurs
- When a claim is filed
Occurrence policy: An occurrence policy provides lifetime coverage for incidents that occur during a policy period, regardless of when the claim is reported. For instance, let's say you bought an occurrence policy for a soap-making business you owned in 2015. In 2018, you closed that business and canceled the insurance. If you get sued for an incident in 2017 while the insurance was active, you are still covered by the original occurrence policy.
Claims-made policy: A claims-made policy only provides coverage for incidents that happen and are reported within the policy's specific time frame. The time frame and coverage can be extended by buying a tail — an addition to your coverage that allows you to file a claim against your policy after it expired or was canceled.
For example, let's say you bought a claims-made policy in 2015 and canceled the coverage when you sold your business in 2018. In 2019, you found out that you're being sued for an incident that happened in 2017. If you didn't buy tail coverage on your original claims-made policy, then it is no longer active and you will be liable for any damage or costs associated with the lawsuit.
Limits of an Employee Benefits Liability Policy
Employee Benefits Liability policies include two separate limits: an aggregate limit and an "each employee" limit.
- Aggregate limit: This represents the highest amount the insurance provider will pay out per policy for claims resulting from administrative errors.
- "Each employee" limit: This amount represents the most the insurer will pay for all damages sustained by an employee, his or her family members, and any beneficiaries. Sometimes, the policy would apply the limit amount to each claim rather than each employee.
Note that many EBL insurance policies have deductibles, which represent the company's maximum out-of-pocket expense for each claim.
Where Can You Buy Employee Benefits Liability Coverage?
Since EBL coverage is offered as endorsements to commercial general liability policies, contact your insurance agent if you're looking to get one. It will just be a matter of adding it to your existing contract and adjusting your premium. Note that the need for EBL coverage also depends on your employee headcount and the types of benefits you offer.
If you don't have insurance coverage for your small business yet, start your search by talking to insurance companies you already know or have a contract with either for home or auto. There's a very good chance that they also offer business insurance. You may also ask for recommendations for trustworthy insurance agents from other business owners.
How Much Does Employee Benefits Liability Insurance Cost?
Costs for each policy may vary from one insurance provider to another. The number of employees you need to cover is also factored into the price. Your premium will also increase or decrease depending on the amount of deductible you choose.
To make sure you are getting the correct explanation and advice, talk to a legal adviser or an insurance agent familiar with the specific risks related to your business type and industry.
Manage Your Business Finances With Skynova
Liability policies protect your company from unexpected costs. They provide peace of mind and a financial safety net in case of accidental mistakes. Lastly, it ensures that your business and personal assets are protected from costly claims against your business.
Do your own bookkeeping with Skynova's accounting software for small businesses effortlessly. Use it to organize and back up your receipts, keep accurate records of your income and expenses, and generate financial reports whenever you need them to compare your company's profits from one period to another.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a legal advisor or insurance agent to ensure that you're making the best decisions for your business.