For many design firms, the ability to offer and maintain competitive employee benefit programs continues to be one of the keys to attracting and retaining the best available talent. Yet, the regulatory and legal environment within which these benefit plans are being designed and administered is more complex than ever. Not only are there ERISA issues, but there is a literal alphabet soup of COBRA, FMLA, HIPAA, etc. With this greater complexity and heightened scrutiny comes risk: risk for the company itself, and the executives and administrators responsible for overseeing and administering the benefit plans.
The good news is that the risks are manageable and design firms with employee benefit programs can take advantage of a three-legged stool of insurance protection – Employee Benefits Liability Insurance, ERISA Bonds, and Fiduciary Liability Insurance. Many executives and administrators are confused about what each of these covers and whether or not they need them. This article will explain how each coverage evolved and what specific exposures they address. We also examine some risk scenarios based on actual litigation.
Employee Benefits Liability Insurance
Employee Benefits Liability insurance (EBL) very simply provides protection against claims arising from errors in the administration of employee benefit plans. This coverage was developed in the mid-1970s largely in response to exposures that arose from the 1962 court decision in Gediman v. Anheuser Busch. In this case, an employer was held accountable to the estate of a former employee for providing incorrect information to the health insurance company, which then in turn denied the employee’s claim. Thus, EBL insurance addresses claims arising out of errors or omissions in the administration of benefit plans. Three typical exposure scenarios covered by EBL insurance include:
- An employer failing to properly enroll an employee for health insurance coverage, resulting in a denial of coverage.
- An employer not providing an employee with the appropriate COBRA information after termination, resulting in the ex-employee being unable to continue participating in the health insurance plan as required by law.
- An employer incorrectly calculating the amount of an employee’s pension benefit so that the employee decides to retire early only to find that the amount is much less.
Typically, Employee Benefits Liability insurance is written as an endorsement to a Commercial General Liability (CGL) insurance policy. While the CGL policy is usually written on an occurrence basis, the EBL coverage is almost always claims-made. Therefore, in order for a claim to be covered the firm must continue to renew its CGL policy with the EBL coverage part intact.
Fortunately, there are very few significant claims. While administrative errors do happen, the impact is typically not severe and this coverage is not expensive. Minimum premium charges can be as low as $50 to $100 per year with a $1 million limit being typical. Deductibles are often $1,000 or there may even be no deductible.
EBL is not meant to cover critical discretional judgment exposure (see Fiduciary Liability section below). Instead, it is geared toward damages arising out of the administration of employee benefit plans. The coverage benefits beneficiaries, the firm, and plan administrators, alike. Beneficiaries are made whole for any lost benefits caused by administrative errors and the firm and its executives and administrators are protected from the costs of litigation and claims.
An ERISA bond (also known as a “fidelity” bond or employee dishonesty insurance) is required by federal law for every pension or 401(k) plan. The law states that the bond “shall be not less than 10% of the amount of funds handled” and that “in no case shall such bond be less than $1,000 nor more than $500,000.” (However, if the plan invests in employer securities, such as company shares, the maximum bond amount is $1 million.)
The ERISA bond protects participants in pension or 401(k) plans from embezzlement, theft, or loss of funds that trustees or administrators might undertake. Unlike Fiduciary Liability Insurance, which provides liability coverage, the purpose of the so-called bond is to put money back into an employee’s
retirement account. There is no coverage for any personal liability of a plan trustee or administrator (see Fiduciary Liability Insurance below).
ERISA bonds are not expensive; annual premiums average $200 or less. While not as comprehensive as insurance, ERISA bonds do provide important protection against fraud and theft. For many firms, the ERISA bond coverage will actually be a part of their Employee Dishonesty or Crime Insurance policy. These insurance policies, which provide broader theft protection, include either an endorsement or a separate insuring agreement extending coverage for the ERISA bond obligation.
To continue reading this newsletter, including sections on Additional ERISA Liabilities and Fiduciary Liability Insurance, download the full PDF copy of Managing Employee Benefits: A Three-Legged Stool of Protection from our website.
About the Authors:
Dan Knise is president and CEO and an equity partner of Ames & Gough, an insurance brokerage and risk management consulting firm that serves more than 1,000 engineering and architectural firms throughout the U.S. In addition to his management responsibilities, Mr. Knise devotes his time to working with the firm’s larger design-firm and law-firm clients, and advising project owners on risk and insurance issues. He is located in the Ames & Gough Washington, D.C., office.
Frances Railey is a senior vice president and an equity partner of Ames & Gough. Based in the Ames & Gough Washington, DC office, she oversees the firm’s service to numerous mid-size to large design-firm clients and is considered an expert at underwriting and service issues for these firms. Ms. Railey also coordinates many of Ames & Gough’s back-office administrative services and serves as the firm’s human resources director.