What You Need to Know about Employee Benefits Liability Insurance

Employees want to get paid fairly for their work. But in today’s marketplace, money isn’t the only thing job seekers care about. They also want to know the perks included with the position. Your employee benefit plan can entice potential hires to join your team.

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While your employees value benefits, they open you up to potential lawsuits. If there’s a mistake made when it comes to enrolling your new hires in a health plan or getting their retirement plan started, you could be liable.

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That’s why it’s so important to protect your business with employee benefits liability (EBL) insurance. Learn more below about what it covers and where you’ll find it.

What Is Employee Benefits Liability Insurance?

This type of commercial insurance helps with risk management. EBL insurance kicks in if you get sued for errors or omissions in managing your employee benefits.

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For instance, let’s say you increase the hours of one of your part-time employees, making them eligible to join your group health plan. You let the employee know and send an email off to Human Resources to take care of the details.

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Unfortunately, after your HR manager met with this employee, the new enrollment paperwork got stuck to a stack of paperwork from another employee—and filed away. It was never sent to the group health plan.

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A few months later, your employee gets in a car accident and is injured. They’re shocked to learn at the hospital that they don’t have health insurance through your company. So they sue you for their medical bills.

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If you don’t have employee benefits liability insurance, this lawsuit could devastate your business financially.

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Here are a few other scenarios when EBL might come into play:

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• Your company forgot to tell a terminated employee about COBRA coverage. This employee sues because you didn’t follow the federal law concerning this type of coverage.
• A clerical error accidentally deleted an employee from enrollment in your employee benefits, so they were not receiving them.
• You forgot to offer coverage for dependents in your medical plan.
• You classify an employee as an independent contractor, but they believe they meet the definition of an employee and should be eligible for your benefits program.

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EBL insurance can help financially protect you and your business if situations like these arise.

What Does Employee Benefits Liability Insurance Cover?

An employee benefits liability insurance policy covers your business from errors and omissions in the administration of employee benefit plans. This includes when your company:

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• Enrolls new employees in the benefit plan
• Terminates employees from the benefit plan
• Explains benefit options to employees
• Explains plan eligibility
• Offers benefit advice to employees
• Creates and maintains records related to the employee benefit program

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This type of business insurance covers a wide range of plans, including:

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• Health insurance
• Dental insurance
• Life insurance
• Workers’ compensation
• Employee stock plans
• Retirement plans
• Pension plans
• Disability insurance
• Profit-sharing plans

How Does EBL Insurance Work?

This type of insurance is on a claims-made basis. That means the events leading to the claim have to occur during the policy period. But these policies usually also have a retroactive date, such as two years before the policy start date. 

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The insurer would still cover any error or omission events occurring from the start of the retroactive date until the policy’s effective date.

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The specific terms of your policy spell out your coverage limits. The limits are typically per employee and in the aggregate. This means your policy has two separate limits. The first is how much the insurer pays per employee. The second is how much the insurer pays for all mistakes during a specified period. Your policy provides details about these limits, so make sure you read it carefully and understand how much coverage you have.

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A deductible is common with this type of insurance policy. Depending on your terms, you may have a deductible for each employee who files a claim.

Is EBL Coverage Included in General Liability Insurance?

A commercial general liability policy protects you from claims such as bodily injury, property damage, and personal injury. This type of policy doesn’t usually include errors and omissions in your employee benefits plan.  

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This means you’ll need to speak to your insurance broker to add an employee benefits liability coverage. Some insurance companies provide an endorsement for this protection, and others sell EBL as a standalone policy.

Employee Benefits Liability Insurance vs. Other Commercial Insurances

There are many types of commercial insurance available. Some of these policies sound similar to employee benefits liability insurance, but their coverage is different. To ensure your business is fully protected, here are some other policies you might need.

Errors and Omissions Insurance (E&O Insurance)

Since employee benefits liability insurance covers mistakes, it might be confused with errors and omissions insurance. E&O policies help protect you from mistakes made in your professional services. It’s also known as malpractice insurance.

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With this type of insurance policy, your clients are the ones bringing the claim against you. They’re stating that they were harmed by a mistake that you made in your service.

EBLI coverage is applicable when your employees are the ones suing you. This policy only covers mistakes or omissions made in the administration of benefits, not from the professional services your company offers.

Employee Dishonesty Insurance with an ERISA Fidelity Bond

If you offer a health plan as part of your benefits package, the Employee Retirement Income Security Act (ERISA) makes you responsible for many things, including: 

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• Providing your employees with a summary plan description detailing the participant’s rights and benefits.
• Describing the insurance policy terms in a written plan document that you distribute to your employees.  
• Filing an annual Form 5500 with the government, unless a reporting exemption applies due to your plan’s size and funding.

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This act also requires you to maintain employee dishonesty insurance with an ERISA fidelity bond. On this Department of the Treasury site, you can find a list of approved sureties you can get this bond from.

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Though this type of bond deals with employee benefits, it’s not the same as EBL insurance. 

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An ERISA fidelity bond helps protect plan funds from losses due to employee fraud or dishonesty. It doesn’t protect businesses from mistakes made in the plan’s administration.

Fiduciary Liability Coverage

The terms fiduciary liability and employee benefits liability are often confused. But they are different types of insurance.

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To understand how they're different, we first need to know what a fiduciary is.

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A fiduciary is someone or an organization that acts on behalf of another person or multiple people. Fiduciaries usually manage other people's assets. Financial advisors and bankers are two types of fiduciaries.

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If a fiduciary doesn't follow the law correctly, fiduciary liability coverage kicks in. It covers wrongful acts such as:

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• Improper investment
• Insufficient funding for the plan
• Improper employee advice
• Failure to select a qualified service provider
• Negligent acts in the administration of employee benefits

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Since these acts are exclusions in most EBL insurance policies, adding fiduciary liability coverage might offer more comprehensive protection.

Employment Practices Liability Coverage

Employment practices liability coverage protects you from lawsuits arising from employer or employee behaviors, including:

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• Harassment
• Discrimination
• Wrongful termination
• Failure to promote
• Retaliation
• Defamation

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It’s another type of commercial insurance to consider discussing with your insurance broker to manage these risks.

What Employee Benefits Are Required by Law?

While you have some say over which employee benefits to offer your team, a few are legally required:

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• Social Security taxes. You pay at the same rate as your employees.
• Workers’ compensation insurance. Your insurance broker can let you know which policies best suit your business. Though in Texas, you aren’t required to have workers’ comp.
• Unemployment insurance. The required benefit here varies based on your state, so make sure you check out local laws.
• Leave benefits outlined in the Family and Medical Leave Act. You may also decide to add additional leave benefits to your employee benefit program.
• Disability insurance. This one is only required in a handful of locations: California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico.
• Medicare taxes. This benefit funds Medicare for retirees and persons with long-term disabilities. This tax is shared by both the employer and employee.
• COBRA. Companies with more than 20 employees that provide a health plan must provide the option for separated employees to continue on the plan. Premiums are paid for the separated employee.

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You must provide these legally required benefits to every single employee. Health insurance is technically optional, however businesses with more than 50 employees will incur fines if they don’t provide health insurance, up to $4,060 per employee annually.

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Meanwhile, some states and municipalities require companies to provide additional benefits like retirement plans and paid sick leave, so be sure to check your local laws when determining what benefits to offer your team.

Protect Your Small Business with Employee Benefits Liability Coverage

If you offer your employees benefits, consider protecting your business with employee benefits liability coverage. This insurance can give you peace of mind that you’re financially covered if your HR manager or benefits coordinator makes a mistake while administering employee benefits.