5 reasons why your PEO’s EPL insurance isn’t enough
If you use a professional employer organization (PEO), you know the benefits. PEO’s provide convenience by allowing you to outsource your HR duties to them. Their teams guide you through laws and regulations that you don’t have time to study. The model itself provides less tangible (but no less real) benefits by allowing small businesses to grow faster and lose fewer employees.
Unsurprisingly, more and more entrepreneurs are turning to PEO’s to provide a much needed solution. One study showed that PEO’s are used by 14-16% of small businesses and that number is trending upward.
When you work with a PEO, your employees technically become employees of the PEO. Yes, this keeps prices low by capitalizing on price breaks given to larger companies. But it also adds complications because it requires the PEO to take on more risk than traditional businesses.
This is why you’ll find workers compensation (if required by your state) and employment practices liability (EPL) insurance coverages included in your package. It’s as much for their benefit as it is for yours. The PEO needs to be in compliance with state laws and protect itself from exposure to disputes between you and your employee.
Is your PEO’s focus on self-preservation a bad thing? Not necessarily.
Is the PEO’s employment practices insurance policy the right fit for your company? Same answer.
Let’s explore 5 great reasons why you should get your own EPL insurance policy on top of your PEO’s coverage.
You shouldn’t have to share your limit with a bunch of unrelated companies. When you use a PEO, that’s exactly what happens.
It’s like sharing your mobile data plan with everyone on your block. Sure, chances are your neighbors won’t burn through the whole 25GB in a month. But what happens if they do? Are you really prepared to risk the future of your fantasy table tennis team to save a couple bucks?
A PEO’s EPL insurance policy offers two limits: a per company limit and an aggregate limit. One limit (usually $1,000,000) represents the most the carrier will pay out for all claims against any one of the PEO’s clients. This is the per company limit. The other limit (the aggregate) represents the most the carrier will pay out during the policy period for all employees at each company on the policy.
Even with an aggregate limit of $25,000,000, companies that choose to lean on this policy are still taking unnecessary risks that go against the fundamental reason you get insurance: protecting yourself from worst-case scenarios.
If the aggregate limit is depleted, there’s no coverage left for you. You could be the poster child for sound employment practices but if you happen to get an EPL claim and the aggregate limit is already used up, that $1,000,000 limit you were relying on disappears.
In insurance terms, retention is the amount of money you have to pay per claim before the insurance company will start covering you.
High retentions have the potential to be a good thing. Policyholders are discouraged from over-reporting claims which lowers costs for everyone in the market. Your premiums go down when you raise your retentions. They’re also thought to promote personal responsibility (because what’s better than an insurance company giving you lessons on being responsible, amiright?).
In practice however, unless properly managed, a high retention can mean the difference between your policy being a valuable investment or a waste of money.
If the retention on your policy is too high, either you’ve made the decision to self-insure or something is broken. Insurance companies know the statistics. Don’t think for a second that they won’t use that info to make the policy more profitable for themselves. Increasing retentions is one way they do this.
We’ve seen PEO’s EPL insurance retentions as high as $75,000. More commonly, they’ll be in the vicinity of $35,000. It’s no accident that this also happens to be the average retention for companies with under 500 employees.
But companies with just 10, 50 or even 100 employees present very different risk profiles than those with 200-500 employees. As a result, smaller businesses who buy their own EPL insurance policies can find retentions as low as $10,000 (or lower). The trick is to keep the retention low enough that you don’t have to suffer when a claim hits and high enough that your premiums aren’t a burden.
The average cost of defending and settling an EPL lawsuit is $125,000 (see the above-linked report from insurer Hiscox). This means that, chances are, you’re not going to be able to settle an EPL lawsuit for less than your retention. The insurer will most likely step in and start using your policy limits to defend you.
The question is, do you want to pay $10,000 or $75,000 out-of-pocket before that happens? That $65,000 difference could theoretically fund EPL premiums for a small business for the next decade or longer.
You and your neighbor have two different car insurance policies. Of course you do. You have two different cars and you drive less than he does. You are, after all, two completely different people. Even if you could save some premium dollars by sharing his policy, would you?
When planning a future, most people don’t want to consider what kind of bad decisions their neighbor might make. Planning for employment practices claims should be no different.
A PEO’s EPL insurance policy is often a generic one designed to protect diverse companies from some of the basic risks faced by employers. No more, no less. The coverage is not tailored to the unique risks posed by its client companies.
The risk of a harassment lawsuit, for example, is significantly lower at an educational not-for-profit with a majority female workforce than it is at a hypercompetitive VC with mostly male employees. A uniformed non-exempt employee who takes an hourly wage is more likely to get into a wage and hour dispute with her employer than a mobile employee with flexible hours and an annual salary.
Why should all of these companies be thrown in the same insurance bucket? The answer: they shouldn’t.
Take wage and hour claims as an example. These are disputes between an employer and employee regarding compensation. Wage and hour claims happen frequently, they’re costly, and plaintiffs have a winning record. As a result, coverage for these claims is most likely excluded from your PEO’s employment practices insurance policy.
For precisely those same reasons, you should be covered by a policy that protects you from wage and hour claims. Most EPL insurers will agree to sell you a sub-limit (often $100,000 to $250,000) to pay for the legal defense costs. Your PEO will most likely not offer the same concession.
Traditionally, insurance is just an agreement between two parties: you and an insurance company. You uphold your end of the bargain and they’ll uphold theirs. Ultimately, you rest easy knowing that there’s a clear contract in place protecting you for the next 12 months.
It’s a different story when you rely on your PEO’s EPL insurance policy. Now another party’s interests are involved. As soon as you fire them, your EPL insurance coverage disappears. This is not sound risk management. The existence of your insurance coverage shouldn’t hinge on a third-party service agreement that’s not always as clear-cut as advertised.
So what’s the worst case scenario? You fire your PEO, your EPL insurance coverage is cancelled, and then you go out and get new insurance, right? Unfortunately it’s not as simple as that. There is a concept known as “continuity of coverage” that is fundamental in dictating the way these policies work.
The short version is this: from the time you purchase your company’s first EPL insurance policy, you need to keep the coverage in force. Your policy won’t work the way it’s supposed to if you don’t. Without continuity of coverage, claims handling can become problematic and future insurers could restrict the coverage they offer you.
Ideally, you already have an EPL insurance policy in place that’s tailored to supplement the one provided by your PEO. But let’s say you don’t. You only use the the EPL policy provided by the same PEO with whom you’re about to “break up.” What do you do?
Before making any final decisions, talk to a qualified insurance professional. You’ll want to have a bindable quote in-hand from a carrier who has already agreed to honor the continuity of your coverage. On top of that, the coverage will need to be equal to (or better than) whatever the PEO provided. This will let you to take back control of your risk today without adding to your risk tomorrow.
The claims process is already a complicated one. Most EPL insurance policies require you to give up control of litigation to the carrier to some degree, if you want them to pay your defense costs. So before you even add a PEO to the equation, there are already conflicting interests at play.
Now, let’s add the PEO. If a lawsuit names both you and the PEO (which is likely to happen since they are the employer of record), the carrier may appoint the same attorney to represent both you and the PEO. There is a good reason for this: they don’t want the plaintiff playing your attorney and the PEO’s against one another.
There is also this potential wrinkle: you and your PEO may want different results from the lawsuit. What happens if you want to settle and the PEO wants to fight? Or vice versa? Considering the fact that insurers are often incentivized by cost concerns to settle cases, throwing a third point of view into the mix will only serve to add to your headache. To simplify things, the shrewd entrepreneur will lean on their own EPL insurance policy. It’s one of the best ways to avoid an EPL claim turning from bad to worse.
Wrapping it up
Regardless of your reason for getting own EPL, the first step is talking to a broker who knows what he or she is doing. It’s vital that your new EPL insurance policy is tailored in a manner that it helps, not hinders. Something as seemingly insignificant as one wayward sentence in your policy could pit your carrier and the PEO’s against one another, compounding problems further.
The right insurance professional will also be able to take a close look at your company and tell you what you need. What is the right limit for you? Is your retention low enough? High enough? Do you need a simple EPL policy or is a bespoke policy more your speed? Your answers may not be the same as your accountant’s–let’s get you a policy that reflects that. (If you’re not ready to jump to getting a policy, you can talk it out with one of our great Account Executives at (646)-854-1058 or email@example.com
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