Is Your PEO EPLI Coverage sufficient or enough?
A lot of startups and even established firms are enrolled in or will enroll in a PEO a Professional Employer Organization. In very simple terms, the PEO is a “co-employer” or administrative employer along with the owner of the firm who is known as the worksite employe
There are many benefits of deploying a PEO –many of the HR-related headaches that an employer experiences are mostly delegated to the PEO, you get “big company” rates for employee benefits and a variety of plans that small companies can’t offer, and it’s a matter of convenience for many firms. All the payroll, taxes, workers compensation, benefits, HR are wrapped into one monthly bill which saves you, the employer time.
One area that I’ve counseled my clients on that is in a PEO or considering a PEO is with regard to the Employment Practice Liability or EPLI insurance that comes with most PEOs. And that’s the focus of today’s video: Will your PEO EPLI Coverage be sufficient if there’s a claim.
Your PEO’s EPLI coverage is a good benefit because there are going to be disputes and disruptions with employees and as a co-employer, with the PEO you do need a policy to protect you both from those potential disputes, especially if they lead to employment lawsuits. But is the PEO’s EPLI Coverage enough? Is it sufficient? Does it fully protect you?
Here’s my take on those questions. My answers are broadly stated and not directed at any one particular PEO, but general thoughts on this issue:
The retention is the amount of money you will pay when a claim is filed before the insurance company starts paying. Every EPLI policy will have a retention to assure that the employer knows that they have skin in the game with every claim they file. It’s not necessarily there to discourage claims, but rather to promote good loss control to prevent claims in the first place.
The rub with PEOs is that their retentions can be high. The average retention is $35,000 based on what we’ve seen and can be as high as $75,000.
Now for many small businesses, paying out a retention that high can be devastatingly expensive. The normal retention on your own EPLI policy would likely be in the $5,000 to $10,000 ballpark, so if your PEO has a high retention, you’ve got to question whether the PEO’s policy is worth it or not?
- Limits of Coverage
Most PEO’s EPLI policies are written to cover all the employees and co-employers they manage. What does that mean in English?
It means that you are sharing limits with potentially hundreds of other employers, and this is a problem because most EPLI policies will have an aggregate limit of liability. But what an aggregate does is cap the most the policy will payout for all claims in any one policy year. If that cap is $1,000,000 or $10,000,000 or even $25,000,000 that can be a problem if multiple high dollar claims are presented to the PEO’s insurer in a year.
The bottom line is that the PEO’s policy may be exhausted, or basically run out of limit before the end of a policy year, and your claim may not be covered by insurance!
This is the biggest reason why an employer should consider their own EPLI policy in addition to the PEO’s policy.
- Customization– PEO EPLI policies are pretty generic. You need a tailored policy.
I’ve discussed in many posts how management liability policies, including EPLI need to be tailored to the specific needs of an employer. In many cases the PEO’s policy is generic – it has to be. It’s covering a variety of employers with a variety of exposures so it really can’t be tailored to any one employer’s needs.
Take for example Wage and Hour coverage – Wage and Hour claims are difficult, expensive, and prevalent claims. Most PEOs do not have coverage for these types of claims because insurers are reluctant to offer it to a broad spectrum of clients. If you have your own EPLI policy you can likely obtain a $250,000 sublimit for defense costs only for these types of claims. Again, customization is the key to really protecting your firm, and there are other issues beyond just wage and hour that need to be addressed in your protection.
- Control– For your security now and in the future, you need to control your coverage
I have a strong belief that every business owner needs to control their own protection, and this applies to EPLI protection. There are two issues to cover here under the topic of control.
The first is that when you purchase your EPLI coverage through your PEO you are tied to that policy but you don’t control that policy. If you leave that PEO at some point down the road, you leave that EPLI policy as well and as a result you “break the chain of continuity”, which is not a good thing. Continuity is a complex issue which I can explain with you separately, but suffice it to say that when you break continuity you put yourself and your future policies in a bad position which can be a problem with existing open claims, potential claims which haven’t been “made” prior to terminating the PEO relationship, and future coverage negotiations.
The second issue regarding control is this. You always want a clear cut line to your defense strategy when a claim occurs. Meaning you want to know that when the insurance company assigns you defense counsel, that the attorney is working for you and only you. There should be no dual loyalties.
Unfortunately, by its very nature there is this duality with a PEO since you’re co-employers of your employees.
You don’t have a lot of leverage since it’s not your policy, and the PEO has a superior position in negotiating the settlement of a claim and that may not include your priorities or desired outcomes.
Here’s the bottom line.
PEOs provide a lot of conveniences and may provide cost savings as well. But, it’s not always a perfect union, and when it comes to protecting you, your firm, and your bottom line, it may make sense to have your own Employment Practice Liability policy for the reasons I stated above. In my opinion, the control issue and the tailoring a policy to your specific issues is what’s most important.
Is there added cost? – yes, for sure there is. But you’re buying added protection for what can be very expensive lawsuits. At the end of the day the added costs over several years may be a drop in the bucket compared to a potential claim that’s not covered, only partially covered, or you are paying a huge portion of through your retention.
Need help? Not sure the best course of action? Speak to an expert – give me a call, or drop me an email and let’s get a conversation started. Or you can click the button below to get started. Thanks!