$2M Professional Liability (E&O) Insurance for Payroll Service Providers

For payroll service providers whose client contract asks for $2M: it usually means $2M per claim, which a $1M/$2M policy does not meet.

What does a $2M requirement mean for payroll service providers?

Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your work cost a client money. A $2M clause for a payroll firm might read like this:

• Per claim vs aggregate: per claim is the most paid for one claim. The aggregate is the most paid for all claims in a policy year. A $1M/$2M policy pays only $1M per claim.
• Claims-made: Professional Liability almost always covers claims made and reported during the policy.
• Retroactive date: the earliest date of work the policy covers. This clause wants it no later than your first day on the account. See retroactive dates explained.

Who asks payroll service providers for $2M?

Many payroll firms are asked for $1M (see $1M for payroll service providers). $2M tends to show up when the client is larger or riskier:

• Larger employers with many workers or payroll in many states.
• Staffing agencies with high weekly payroll and large tax deposits.
• Banks and other lenders hiring a payroll firm.
• Companies outsourcing finance work under a master services agreement (MSA), a contract that sets terms for all future work.

How is $2M built?

$2M is usually one primary policy (the policy that pays first) written at $2M/$2M. Some firms instead keep a $1M primary and add a $1M excess layer, an extra policy that pays only after the primary limit is used up. Excess should follow form, meaning it uses the same terms as the primary. A commercial umbrella almost never covers Professional Liability.

Non-CPA payroll firms usually buy Miscellaneous Professional Liability, a form for service businesses without their own policy type. CPA firms that subcontract payroll to you may pass down their own client's limit. CPA firms that run payroll themselves usually buy Accountants Professional Liability.

Payroll firms that handle tax deposits often need a broker. Morrow can help you find it. If a client later asks for more, see $3M for payroll service providers.

What will underwriters ask for?

An underwriter decides whether to offer coverage and on what terms. At $2M, expect more questions:

• Revenue split by service: payroll runs, tax filing and deposits, year-end forms, benefit deductions, court-ordered wage deductions (garnishments) and bookkeeping.
• Whether client tax money passes through your accounts, and how much.
• Number of clients, employees paid, states you file in, and your largest client's share of revenue.
• How you check each run and deposit.
• The contract asking for $2M and your standard service agreement.
• Loss runs (a report listing past claims), any notices or client complaints, and your current policy with its retroactive date.

What affects the cost?

• Money handling and volume. Firms that handle client taxes or large payroll totals usually cost more to cover.
• Client mix. Staffing, healthcare and multi-state accounts usually cost more to cover than small local ones.
• How the $2M is built. A single $2M/$2M primary and a $1M primary plus excess are often priced differently.
• Claims history and controls. Past claims can raise the price. Written checks on each payroll run and tax deposit may help.
• Retention and defense terms. A retention is what you pay on each claim before the policy pays, like a deductible. A higher one usually lowers the premium.

Frequently asked questions

Do I need $2M Professional Liability as a payroll service provider?

Only if your contract or client requires it. Many payroll firms are asked for $1M first, and $2M tends to come from larger or multi-state clients.

Is $1M/$2M enough if my payroll contract says $2M?

Usually not, because $1M/$2M pays $1M per claim and the $2M is the yearly total for all claims. If the clause says $2M per claim, it usually needs $2M/$2M or a primary plus follow-form excess. If you carry $1M today, request new quotes through Morrow and keep your retroactive date where the market allows. Report known incidents to your current insurer (a carrier) before you switch.

Can I use a $1M primary plus $1M excess to meet a $2M clause?

Often, yes, but not always. If the clause is silent, confirm with the client that primary plus follow-form excess meets it. The certificate of insurance (a one-page proof of coverage) should list each layer. Clients usually cannot be added as an additional insured (a party given direct rights under your policy) on Professional Liability. If your clause requires it, send it to Morrow with your policy and Morrow can review it. See certificates for Professional Liability.

What could a $2M Professional Liability claim look like for a payroll firm?

Here are hypothetical examples. A firm misses a staffing client's tax deposits, and penalties and interest build up across several quarters. Penalties and interest caused by the error may or may not be covered. Many policies limit or exclude fines and penalties, so the policy wording decides. A firm sets up the wrong tax withholding (tax taken from paychecks) in a new state, and the client must correct a year of payroll.

This article is general information, not legal advice or a coverage determination. Coverage depends on the actual policy wording, carrier underwriting and your contract terms.