Employee benefits liability coverage: insuring HR administration errors

Employee benefits liability (EBL) coverage pays damages when an employer's negligent mistake in administering its benefit programs harms an employee. IRMI defines it as the liability of an employer for an error or omission in administering an employee benefit program, and gives the example of failing to inform employees about benefit programs. It is usually added to a general liability policy by endorsement, though it can also come with a fiduciary liability policy.

It is not fiduciary liability insurance, it is not an ERISA bond, and it does not pay the benefits themselves. It sits in a narrow gap: the clerical, record-keeping and advice errors that HR departments make every year and that a general liability policy would otherwise decline because they are not bodily injury or property damage.

What it covers

The standard ISO form of the endorsement, which many insurers adapt, covers damages from a negligent act, error or omission in the administration of your employee benefit program. In that wording, "administration" means things such as:

• giving counsel to employees about the program,
• interpreting the program,
• handling records connected with the program, and
• enrolling, continuing or terminating an employee's participation in a plan.

The program usually includes group life, health, dental and vision plans, disability plans, flexible spending accounts, HSAs, and retirement or profit-sharing plans, as listed in the endorsement. Forms differ, so read the definition on the policy you have.

Typical claims, all hypothetical in how they are described here:

• A new hire's enrollment form is never sent to the carrier, and the employee's accident bills are denied.
• A supervisor tells a departing worker that coverage continues through month-end, and it does not.
• Coverage for a spouse or newborn is not added when a qualifying event is reported.
• An HR representative misreads eligibility rules and tells an employee they do not qualify, so the employee does not enroll.
• A terminated employee's record is kept active and premiums continue to be taken, or are stopped too early.

How the coverage is structured

Three features surprise buyers.

1. It is generally claims-made. The claim must be first made during the policy period or an extended reporting period, and the error must have occurred after the retroactive date shown in the schedule. A policy that starts fresh with a new carrier may leave years of past errors uninsured, so the retroactive date matters as much as the limit. See occurrence vs claims-made policies and prior acts coverage and retroactive dates.
2. Limits are small and per employee. The schedule typically shows an each-employee limit and an aggregate, plus a deductible for each claim. A single employee's hospital bill can exceed the each-employee limit.
3. The insurer expects you to fix it first. The form excludes claims for benefits to the extent they are available, with reasonable effort and cooperation of the insured, from plan funds or other collectible insurance. In plain terms, if the carrier will retroactively enroll the employee, you are expected to ask. EBL is for the shortfall, not the first resort.

What it excludes

Exclusions in the ISO endorsement, in summary form, include:

• ERISA fiduciary liability. Damages for which an insured is liable because of liability imposed on a fiduciary by the Employee Retirement Income Security Act. This is the biggest gap; see below.
• Dishonest or criminal acts, which belong in a crime policy or an ERISA bond.
• Investment results and advice about whether to join a plan.
• Workers' compensation, unemployment, Social Security and disability law compliance.
• Insufficient funds to meet plan obligations, and failure of an insurer to perform its contract.
• Taxes, fines and penalties.
• Employment-related practices, such as discrimination or wrongful termination, which belong in Employment practices liability insurance (EPLI): what it covers.
• Bodily injury, property damage and personal and advertising injury, which belong to the CGL.

These exclusions are described from the standard form. Manuscript wording may be broader or narrower, so check each one against the actual policy.

EBL versus fiduciary liability

The two coverages are often confused and the difference is expensive.

Many claims by employees about plan errors are framed under ERISA, and ERISA can displace state-law negligence claims, which pushes the lawsuit toward fiduciary territory. Whether a given claim is an "administrative error" or a "fiduciary breach" can therefore be argued by both insurers, and an employer holding only EBL may find the fiduciary exclusion applied. If you sponsor a 401(k), a self-funded health plan, or any plan covered by ERISA, talk with your broker about fiduciary liability. The comparison with the legally required bond is in ERISA fidelity bonds vs fiduciary liability insurance, and the fiduciary policy itself is in fiduciary liability insurance for employee benefit plans.

Penalties are not the same as damages

COBRA is a common place for administrative errors. ERISA section 502(c)(1) allows a court to impose penalties on a plan administrator that fails to provide required notices, and a Department of Labor regulation, 29 CFR 2575.502c-1, sets the maximum daily amount at $110 for violations after July 29, 1997. Because EBL excludes fines and penalties, a missed notice can leave you paying the penalty while the policy responds only to the employee's actual loss, for example unreimbursed medical bills after coverage lapsed. See COBRA continuation coverage: what employers must do for the notice rules.

A worked example

Say a 40-employee manufacturer's HR coordinator forgets to submit a new hire's enrollment to the health carrier. Three weeks later the employee is hospitalized after a car accident, and the carrier denies the claim because the employee was never enrolled (hypothetical).

1. The employer asks the carrier to enroll the employee retroactively. The carrier refuses, because the plan requires timely enrollment.
2. The employee sues the employer for the unpaid bills, alleging negligence in administration.
3. The employer reports the claim to its CGL carrier within the policy period. Because the error happened after the retroactive date and the claim is first made during the policy period, EBL may respond, less the deductible and up to the each-employee limit.
4. If the employee instead frames the claim as an ERISA breach, the carrier may invoke the fiduciary exclusion, which is why having both coverages matters.

How to buy it

• Check what you have. Look in the CGL endorsement list for employee benefits liability, and note the limit, aggregate, deductible and retroactive date.
• Match the limit to a realistic claim. Estimate what a serious uncovered hospitalization could cost against the each-employee limit.
• Keep the retroactive date when you change carriers. Ask for the same date or earlier.
• Consider a package. Some insurers include EBL in management liability packages; see Management liability packages: D&O, EPLI, fiduciary and crime.
• Review outside administrators. If a PEO, broker or third-party administrator handles enrollment, the service contract should say who bears errors, and your coverage may be excess to theirs.
• Reduce the errors. Written enrollment checklists, carrier confirmations, and a documented COBRA process reduce both claims and underwriting friction.

Underwriters usually ask for employee counts, who administers benefits, HR staffing, and any past benefit disputes. The What business insurance do I need? helps place this coverage among your other liability needs.

Key takeaways

• Employee benefits liability covers an employer's negligent errors in administering benefit programs, such as enrollment, records and advice to employees.
• It is typically a claims-made endorsement to the CGL with small each-employee limits, so the retroactive date and extended reporting terms matter.
• It excludes ERISA fiduciary liability, dishonest acts, fines and penalties, investment results and employment-practices claims, which belong in other policies.
• Employers that sponsor ERISA plans usually need fiduciary liability as well, because the two coverages answer different claims.
• Try to fix the error with the carrier first, because the form expects available benefits to be pursued before it pays.