Many businesses find it convenient to partner with a Professional Employer Organization (PEO) because they can handle various services such as human resources, payroll, and employee benefits. PEOs, who act as a co-employer, may additionally offer the option to purchase Employment Practice Liability (EPLI) coverage to protect their client’s companies against employee claims of wrongful termination, retaliation, harassment, discrimination, and other workplace claims. According to the National Association of Professional Employer Organizations, over 500 PEOs in the U.S. provide services to more than 200,000 small and mid-sized businesses. Having a PEO can be advantageous to a company; however, there can be some risks involved when it comes to purchasing your EPLI through a PEO. EPLI coverage is usually structured to protect the PEO, not their client. Let’s review why a PEO's EPLI coverage may fall short.
Limited Coverage
While it may be cost-effective to be a part of your PEO’s EPLI insurance policy, PEO EPLI coverage is usually generic and covers all of the PEO’s clients. PEO clients cannot negotiate specific coverage(s) needed for their unique risks. Here are some additional limitations that may exist when utilizing your PEO’s EPLI coverage:
- Policy limits are shared with other unrelated companies, so there is a real possibility that the policy's aggregate limit could be depleted. If that happens, you will not have any coverage in the event of a claim.
- Coverage for subsidiaries may not be available. This can be problematic if your company is going through a merger or acquisition and needs to add coverage for an additional entity.
- Third-party claims are usually covered for the PEO only and not your business; if there is coverage, it may be limited to defense only.
- Wage & Hour Claims may not be covered by your PEO’s EPLI policy.
High Retention Costs
Retention or deductible costs for a PEO EPLI policy are usually much higher than retention for a stand-alone EPLI policy. The average retention amount for a PEO EPLI policy can range from $35,000 to $75,000. The Insurance Journal reports that small to medium sized companies have a 12% chance of dealing with an EPLI claim and the average claim amount (including defense) is approximately $50,000. This is a considerable sum for small to mid-sized businesses to fund out of pocket. Companies can obtain their own stand-alone EPLI policy with a much lower retention rate.
No Control Over Claims
If your EPLI claim requires an attorney, you should know that you will be assigned the same attorney as the PEO. Since it is the PEO’s policy, they are in the driver’s seat of negotiating the settlement that benefits their priorities, not yours. To avoid such a situation, having your own EPLI policy will ensure that when the insurance company assigns defense counsel, that attorney is only working for you.
Termination of the PEO relationship = Cancellation of Your EPLI Policy
Relying solely on a third-party for insurance coverage can be problematic. If you decide to end your PEO relationship, your EPLI coverage will also be terminated. Having a gap in coverage may result in claim handling issues and may also limit the coverage options from future insurers. Therefore, to ensure continuity of coverage, obtaining another insurance policy from a different insurer (or at least getting a bindable quote) is essential before terminating your PEO agreement.
In conclusion, while using a PEO can be convenient and cost-effective for small and mid-sized businesses, it is important to understand the limitations of the PEO's EPLI coverage. It is imperative for companies to review their insurance exposures, assess their insurance needs, and consider obtaining their own EPLI coverage. By doing so, they can avoid potential gaps in coverage and protect themselves from potential exposures. Please contact us if you would like to review your EPLI exposures and insurance needs.
