To manage the liability risk inherent in administering employee benefit programs, an organization must first identify the scope of that risk. In this regard, it must assess the people, plans and processes involved. It must consider the nature and extent of any past liability claims against the organization that relate to program administration. Following this, it should, to the extent commercially practicable, attempt to correct the operational problems and other deficiencies identified on such risk assessment. Finally, it must consider whether purchasing EBL insurance makes sense in its particular circumstances.
Identifying Your Organization’s Risk Level
A prerequisite to managing risk in relation to such liability is to determine your organization’s own risk level. In this regard, it is fairly safe to say that liability claims involving employee benefits administration will tend to be higher in an organization that:
- has high turnover among its HR benefits administrators,
- has inadequately qualified, skilled, trained and experienced HR benefits administrators,
- has an insufficient number of HR benefits administrators relative to their workload,
- has multiple and/or complex benefit plans,
- does not have ‘finger-tip access’ for each of its applicable administrators to the current text of each plan, together with a matching and detailed interpretation guide, so that those administrators can advise members on an accurate and consistent basis concerning key and recurring issues involving the plan (especially coverage issues, both what is in-scope and what is out-of-scope through various limitations, exclusions and restrictions),
- does not have a comprehensive, up-to-date, written procedure (together with necessary legal or operational forms), to properly initiate and terminate employee, spousal and dependent participation in the benefit plan, to offer employees accurate and full advice regarding those plans, to regularly update employee, spousal and dependent information pertaining to the plans, and to efficiently and effectively handle plan records,
- related to the foregoing point, does not have a clearly defined process and procedure for adding new employees, spouses and qualifying dependents to a plan, for eliciting and updating information from such individuals, and for obtaining appropriate waivers of benefits,
- has inadequate procedures to store and retrieve critical employee records, including benefit elections, beneficiary designations, and waivers,
- does not have a policy to make, and does not in fact make, plan participation a mandatory condition of initial and ongoing employment,
- does not restrict waivers of benefits to dental and other group health coverage, and in such case, does not restrict such waiver to both dental and other group health coverage (i.e., if an employee wishes to waive, then he or she must waive benefits in respect of both dental and other group health to simplify the waiver process and thereby reduce the risk of error), and
- does not have a legal advisor, with relevant expertise, who is routinely consulted in respect of the administration of such programs, including in connection with establishing and implementing the policies and procedures for such programs.
Managing the Risk
Once an organization has determined its own risk level, at least in relative terms, it can then manage or mitigate such risk in one or both of two principal ways—either by correcting the operational problems or other deficiencies comprising the risk factors noted, or by purchasing relevant insurance to indemnify the organization in the event that it suffers damages arising from such risk. If correcting such deficiencies would be economically impractical or operationally imperfect, and recognizing that anything approaching operational perfection will never be achieved, then the organization may wish to consider purchasing employee benefits liability (EBL) insurance or fiduciary liability insurance that may, at least to a certain extent, contain overlapping coverage to that provided by typical EBL insurance.
EBL Insurance
Mode of Provision: EBL coverage can be purchased as a stand-alone insurance policy, but more often it appears as an add-on to a commercial general liability (CGL) or directors and officers (D&O) policy, or as a component of a fiduciary liability policy. It is sometimes added as an endorsement to a group health insurance policy, but where this is done, its scope may be restricted to the benefits offered under such policy. For the purpose of this article, however, it is assumed that the EBL coverage is an endorsement to and forms a part of the insured’s CGL policy of insurance.
Scope of Coverage: No decision to purchase EBL coverage can rationally be made without considering the scope of coverage afforded by such insurance, and the scope of such coverage is dependent on the particular wording of the document and on the jurisprudence of the jurisdiction where any lawsuit may be heard. As far as the wording goes, the insurer often agrees to pay on behalf of the insured, all amounts that the insured becomes legally obligated to pay on account of a claim made against the insured by one of its employees, former employees or their beneficiaries or legal representatives and “caused by any negligent act, error or omission of the insured, or any other person for whose acts the insured is legally liable, in the administration of the insured’s employee benefit programs” [italics added]. “Administration” is commonly defined in the EBL endorsement to the following effect:
“. . . a) giving counsel to employees with respect to the employee benefit programs; b) interpreting the employee benefit programs; c) handling of records in connection with employee benefit programs; d) effecting enrollment, termination or cancellation of employees under the employee benefit programs provided all such acts are authorized by the named insured.”
The term “employee benefit programs” is ordinarily defined under the endorsement and may be limited to group life insurance, group accident or health insurance, profit sharing plans, pension plans, employee stock subscription plans, workers compensation, unemployment insurance, social security and disability benefits.
Notable exclusions from coverage often include, among others, the following:
- any claim for failure or performance of contract by any person, including the insured, obligated to afford the benefits; and
- any claim based upon
- failure of stock, bonds, or other securities to perform as represented by an insured including, but not limited to, their failure to produce financial gain, profit or growth; and
- advice given by an insured to an employee to participate or not to participate in stock subscription plans.
Given certain judicial decisions, however, that found either in favor or against a narrow interpretation of the scope of coverage, and add to this subsequent policy wording tightening made by some insurers, it is sometimes difficult to assess the value of such insurance without considering, in very practical terms, what would be covered and what would not, taking account of the policy wording provided above and the jurisprudence.
Examples of Claims Covered: The following are examples of claims or events that would likely be within the scope of the typical EBL coverage described here:
- Pension plan – a claim alleging that the company erroneously calculated the amount of a particular member’s pension entitlement contrary to the express wording of the plan. (As an more particular example, an employee elects early retirement based on advice received from the company’s own retirement benefits administrator, but the employee subsequently discovers upon first payment that the proper amount to which he or she is entitled is less than what was reported and relied upon in making that retirement decision);
- Employee profit sharing plan – a claim alleging erroneous calculation of a particular member’s contribution to the plan contrary to the express wording of the plan;
- Group life, accident or health insurance, or disability plan – the plan sponsor inadvertently fails to enroll altogether, or misses a deadline to enroll, a new employee, spouse or qualifying dependent under the plan. (In the case of life insurance, the life insured may have either died before the error is discovered or become uninsurable in the interim resulting in the insurer declining to provide coverage. In the case of disability coverage, the insured may have become wholly or partially disabled in the interim.);
- Group health insurance – an employee waives health and/or dental coverage (for example, on the basis that the employee is already insured through his or her spouse’s plan), and then there is no follow up to complete the benefits enrollment form indicating that the employee waived such benefits. When a claim is made by the employee under the spouse’s plan, the insurer under such plan denies coverage on the basis that the waiver was never signed and the employee continues to be covered under his or her own plan;
- Travel benefits under a group health insurance plan – in response to a request for information, the plan sponsor wrongly or inadequately advises that the certificate holder, or a spouse or qualifying dependent of the certificate holder, will be covered under the plan during a vacation, when that is not the case due to pregnancy, pre-existing condition, or other cause or exclusion;
- Group life insurance or other benefit plan where a beneficiary designation is required – the sponsor loses the beneficiary designation form. (As a more particular example, such a form is lost in connection with a group life plan. The insurer pays the proceeds to the estate because no record exists of a designation in favour of a named beneficiary. However, the creditor’s of the estate claim the proceeds because life insurance proceeds payable to an estate are not creditor-protected, whereas such proceeds payable to a named beneficiary would be so protected. The next-of-kin of the deceased certificate holder/life insured initiate a legal action against the plan sponsor);
- Employee benefit plans generally –
- a claim for benefits lost as a result of inadequate instruction by the plan sponsor to an employee,
- where investment funds are involved, a claim alleging that the plan sponsor lost or otherwise mishandled an investment election or change form such that the member’s investment choice was either thwarted or delayed resulting in an investment loss to such member,
- a claim alleging any other negligent handling of a change form by the plan sponsor, and
- a claim alleging incorrect or inadequate information being given to an employee as a result of the insured’s negligence, except as may be specifically excluded from the EBL coverage.
Examples of Claims Not Covered: The following are examples of claims or events that, in certain jurisdictions, would likely not be within the scope of the typical EBL coverage described above:
- Pension plan –
- a decision by the plan sponsor to take a contribution holiday or suspend funding of a pension plan for a time resulting from an erroneous interpretation of the plan wording, some other document and/or the law,
- a claim alleging that the plan sponsor/trustees breached its/their fiduciary and statutory duties to the plan (e.g., by investing too large a percentage of the pension plan in the company’s own securities or by otherwise investing in some improper or impermissible investment(s)), and
- generally, any actions taken in the decision-making and monitoring functions involved in managing the plan’s investments, as opposed to relatively routine, ministerial acts;
- Employee stock purchase plan – a claim by an employee or former employee member alleging that the employer failed to redeem the employee’s shares/stock in accordance with the stock purchase plan. (this being essentially a breach of contract claim and not a claim rooted in negligence as is required under the EBL coverage);
- Employee profit-sharing plan – a claim by members alleging failure to properly fund the plan pursuant to its terms (arising, for example, from a claim that the company improperly determined what constitutes ‘profits’ or ‘distributable profits’, being a discretionary action of a decision making nature and not merely administrative (such a claim is essentially not one of negligence, but rather, one of a breach of contract by the insured);
- Employee health (including dental) benefit plan – a claim alleging a failure to properly calculate contribution levels necessary to fund the plan (which involves an exercise of discretion and is not, therefore, merely administrative);
- Employee benefit plans generally –
- a claim alleging discrimination in the management of a plan,
- a claim alleging that the termination of a plan was contrary to its provisions, the member’s employment contract with the company, or statute,
- a claim based on a conflict of interest involving a plan,
- a claim based on the breach of a fiduciary duty,
- where investments are involved, a claim alleging negligent investment practices, including the choice of an imprudent investment or a failure to diversify investments in accordance with plan rules or proper investment practice,
- a claim alleging a failure to adequately fund a plan (as specifically indicated above),
- a claim alleging negligence in the choice of a third-party trustee, manager or administrator of a plan, in the choice of a person providing accounting, tax, actuarial, legal or other professional services for a plan, or in the choice of the plan provider itself (e.g., a particular insurance company), and
- a claim for benefits lost as a result of a wrongful dismissal.