What is employee benefits liability coverage?

Offering employee benefits can give your small business a competitive advantage in hiring and retaining top-notch talent. But even good deeds can have a downside. You may need employee benefits liability coverage to protect your company from lawsuit repercussions.

Employee benefits liability insurance covers your business if you make a mistake handling or administering employee benefits and if an employee sues your business for that error. While this policy is not legally required, it can provide valuable protection. Let’s get a deeper understanding of how employee benefits liability coverage can add to your armor of commercial coverage.

Employee benefits liability insurance explained

As a small business owner, you may wear many hats including CEO, hiring manager, and HR, which can lead to mistakes. EBL insurance can apply to many different situations including:

• Enrolling an employee in the wrong insurance plan
• Incorrectly describing benefit plans to an employee
• Forgetting to cancel an employee’s insurance plan when they leave
• Failing to match an employee’s 401(k) contribution (if applicable)

In addition, this type of insurance can apply to lawsuits related to any of the employee benefits you offer. Here are a few for reference:

• Health and dental insurance
• Life insurance
• Disability insurance
• Retirement plans
• Employee stock options
• Unemployment insurance
• Vacation policies

What does employee benefits liability insurance cover?

Employee benefits liability coverage will pay for your legal defense if you face an employee lawsuit related to the mishandling of employee benefits.

Employee benefits liability coverage policies have two coverage limits:

1. Employee limit: The maximum coverage amount allowed for any one individual employee claim.
2. Aggregate limit: The maximum payout your insurance company will provide for all the claims paid during the policy period.

Who needs employee benefits liability insurance?

When you’re running a small business, administrative mistakes can happen. Even though employee benefits liability insurance isn’t a legal requirement, it provides a layer of financial protection if you make a mistake and it comes back to bite you in the form of a lawsuit from an unhappy employee.

Typically, employee benefits liability insurance is a standalone policy. However, some insurance carriers offer employee benefits liability coverage as an endorsement to add to your general liability insurance policy.

Examples of employee benefits liability claims

To put things into perspective, let’s look at some examples of how employee benefits liability coverage works.

Let’s imagine that you have an electrician business that offers short-term disability insurance as a benefit to all of your workers. An employee gets hurt on the job and needs some time to recover, so they contact your disability insurance provider to collect their benefits. But to their surprise, the insurance company can’t pull up the employee’s policy in their records.

It turns out you forgot to enroll the employee at hiring. They’re pretty peeved and decide to sue your company for the error (and their lost wages). In this case, your employee benefits liability policy would pay for your legal defense and, if required, a settlement with the worker.

Here’s another example of an employee benefits liability insurance claim. Let’s say that you run a software development company and offer two months’ paid family leave to all of your workers as an employee benefit. As one of your employees goes on maternity leave, her newly hired supervisor incorrectly tells her that she has four months of paid leave.

After two months of maternity leave, the employee asks why she stopped getting paychecks, thinking she has two more months of covered leave. You have to explain that she was misguided and can only get paid for two months.

In this situation, she might sue your business for mishandling paid family leave benefits. Your employee benefits liability insurance would cover your legal defense and other financial consequences of the lawsuit.

Employee benefits liability coverage vs. workers’ compensation

Employee benefits liability insurance and workers’ compensation insurance are different, even though they both relate to employee claims.

As we discussed, employee benefits liability insurance specifically applies to errors and omissions related to administering employee benefits. It provides your business’s legal defense and a settlement with the employee if you are responsible for the mistake.

On the other hand, workers’ comp applies to claims of employee bodily injury or illness that occur from the employee’s work environment or work-related duties. Workers’ comp will also pay for an employee’s medical expenses and lost wages.

However, workers’ comp insurance won’t pay for your business’ legal defense if you are sued. That’s because employees who have an eligible workers’ comp claim are not allowed to take legal action against your business after they accept a workers’ comp settlement.

The other major difference between these two policies is the legal requirement. In most states except for Texas, businesses with more than one employee are legally required to carry workers’ compensation. However, employee benefits liability insurance is optional in every state.

What is EBL insurance vs. fiduciary liability insurance?

If you look into employee benefits liability coverage, you might also come across a type of insurance called fiduciary liability insurance. These policies have some key differences.

If your business makes a mistake when administering employee benefits and an affected employee sues you, your employee benefits liability insurance can cover the claim. It usually applies to clerical errors, poor record-keeping, or forgetting to enroll or disenroll an employee from an insurance plan.

On the other hand, fiduciary liability insurance protects your business against claims of poor financial advice, bad investments and insufficient funding related to employee benefits. It also protects the entity that supplies your employee benefit plan if they are partially to blame.

For example, let’s say your marketing agency offers retirement benefits from a small financial firm that ultimately goes out of business. When your employees find out, they are understandably upset at the prospect of losing their money. Your employees sue your business for choosing to work with a financially unstable firm and also sue the firm for mishandling their money.

In this case, a fiduciary liability insurance policy would cover your business’ legal fees, as well as a settlement with affected employees.

Hardworking insurance — without the hard work

A robust employee benefits package is essential for small businesses that want to stay competitive. But honest mistakes can happen. An employee liability benefits insurance policy can help your business avoid an out-of-pocket expense in the event of an error or omission that occurs when administering employee benefits. And, if you don’t have EBL, workers’ compensation, it is a good way to protect yourself and your employees.

Through Thimble, you can purchase workers’ comp by the job, month or year. Just click “get a quote” or download the Thimble mobile app, then answer a few questions, see your rate, and purchase a policy. Yep, it’s that simple!