What Is Employee Benefits Liability Insurance?

Employee benefits liability (EBL) is an employer’s liability for errors or omissions in administering employee benefits. Managing employee benefits is a critical human resources (HR) function. Mistakes happen with employee benefits, especially when administered manually. Benefits administration software or HR software can help employers prevent some errors. Employee benefits liability insurance is optional coverage employers can purchase to cover claims arising from errors in benefits administration. 

What Is Employee Benefits Liability Insurance (EBLI)?

Employee benefits liability insurance (EBLI) is insurance that an employer can purchase that covers claims of mismanagement of employee benefit plans. For example, a human resources professional in a short-staffed HR department may forget to enroll a new employee in a health insurance plan, despite the employee signing up for it. When employees get sick or injured and discover they were not enrolled in the chosen health plan, the employer will be liable for this mistake. Human errors happen regularly in business, even when steps are taken to mitigate them. 

What Does EBLI Cover?

EBLI covers errors, omissions, and miscommunications for many types of benefits plans, including health insurance, dental insurance, disability insurance, life insurance, retirement plans, workers’ compensation, parental leave, and PTO. Coverage areas include errors, omissions, delays, failure to notify, miscommunication, misleading or inaccurate information, and breach of duty. This may apply to enrollment, providing accurate information, inadequate communication, processing of claims and paperwork, and informing employees about changes, deadlines, and eligibility. 

What Are the Limits of EBLI?

EBLI does not cover fraud or intentional misconduct, fiduciary liability, or claims covered by employment practices liability insurance. Policies may have deductibles and/or a cap on the claim value. Policies may have a per-claim limit or an aggregate limit. While a per-claim limit is the maximum amount paid for one claim, an aggregate limit is the maximum amount that the policy will pay for all claims during a given period, usually annually. Even when companies use a professional employer organization (PEO), employers still have a legal responsibility for benefits and need coverage for employee benefits liability. 

How Much Does EBLI Cost?

Many factors influence the cost that a business will pay for EBLI: company size, number of employees, deductible amount, coverage limits, the complexity of benefits offered, and claims history. EBLI may be bundled with other business insurance, resulting in valuable savings. Tivly, an insurance company, estimates that the annual cost a small business will pay for EBLI ranges from $300 to $1,000. Larger businesses could pay $5,000 or more per year.  

What Is Employment Practices Liability Insurance (EPLI)? 

Employment practices liability insurance (EPLI) covers a wide variety of claims related to employment practices, including breach of contract, wrongful termination, sexual harassment, and discrimination. It protects employers from financial losses as a result of lawsuits. It covers legal costs, settlements, and judgments. However, some areas are not covered, including wage and hour disputes, criminal acts, and items covered under your general liability policy, workers’ compensation policy, or EBLI. 

What Is Fiduciary Liability Coverage (FLC)?

According to Horton, “fiduciary liability insurance gives financial protection to fiduciaries of employee benefit plans against legal liability arising out of their role as fiduciaries, including the cost of defending those claims that seek to establish such liability.” While the Employee Retirement Income Security Act of 1974 (ERISA) does not mandate fiduciary liability insurance, it does set strict standards for fiduciaries, which can result in penalties and lawsuits if breached. Employee benefits liability insurance (EBLI) does not cover most fiduciary responsibilities, so FLC coverage is also needed. EBLI would only cover administrative errors, not most fiduciary situations. 

What Types of Insurance Do Small Business Owners Need?

Insurance needs will vary depending on the type of company and the scope of work. The Hartford recommends that, at minimum, small business owners should have general liability coverage, workers’ compensation coverage, and commercial auto coverage. A business owner’s policy (BOP) combines business property and business liability insurance. 

General business liability is especially important for small businesses with a location that customers visit. Businesses that provide professional services and advice need professional liability insurance. Depending on the specifics of your business, you may also need business income insurance, commercial property insurance, and/or data breach insurance.

While employee benefit liability insurance (EBLI) and employment practices liability insurance (EPLI) are not legally required, they are both highly recommended. EBLI is necessary for any size company that offers employee benefits. Fiduciary liability insurance (FLC) is not mandated, but also highly recommended due to strict standards for fiduciaries.  

How To Mitigate the Risks of Employee Benefits Liability

Employers can take steps to mitigate the risks of employee benefits liability. In addition to purchasing employee benefits liability insurance, employers can implement procedures to enhance accurate communication and decrease mistakes. By properly training human resources professionals, hiring ample HR staff, and utilizing software, some mistakes and omissions can be prevented. 

With effective internal communication tools, employers can provide accurate and ongoing information about benefits. Effective communication during open enrollment should utilize a multi-channel approach that includes multiple live sessions, distributing physical materials, and vast digital resources, to ensure that all employees have the information they need to make informed choices. Employers should seek feedback about benefits and the open enrollment process. By regularly reviewing your benefits, keeping thorough documentation, and optimizing your communication process, some risks, but not all, can be reduced.