$5M Professional Liability (E&O) Insurance for Payroll Service Providers

For payroll service providers whose client contract asks for $5M in Professional Liability (E&O), the limit may come from one $5M policy or from a primary plus follow-form excess layers.

What does a $5M requirement mean for payroll service providers?

A $5M requirement means the client wants Professional Liability limits of $5M. Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your work cost a client money. A $5M clause may read like this:

• Per claim and aggregate: the most paid for one claim, and for all claims in a year.
• Affiliates: one error across many client entities may become one large claim.
• Claims-made: the policy covers claims made and reported while it is active. The retroactive date is the earliest date of work it covers. See retroactive dates.

Who asks payroll service providers for $5M?

Many payroll clients ask for $1M to $3M (see $3M and $2M for payroll service providers). $5M is $2M more than $3M and usually shows up when the client's own risk is very large:

• Enterprise employers outsourcing payroll and tax filing for thousands of workers.
• Banks and lenders with one standard for every vendor touching money.
• Hospital systems and health plans with large shift-based workforces.
• Government agencies and public universities, where bids often set the limit.
• Software platforms that resell your payroll work under their own name.

How is $5M built?

Some markets will write a $5M primary policy. Others offer a smaller primary, so $5M is built as a primary plus one or two follow-form excess layers. Which is available depends on the carrier and your risk. A primary policy pays first. An excess policy pays after the layer below is used up. "$3M xs $2M" means a $3M layer above the first $2M.

Each excess layer should follow form, meaning it uses the primary policy's terms. Every layer should share the same retroactive date, policy period and named insured (the business the policy covers). A commercial umbrella almost never adds Professional Liability limits.

Payroll firms that are not CPA firms usually buy Miscellaneous Professional Liability, a general form for service businesses. CPA firms usually buy Accountants Professional Liability.

What will underwriters ask for?

Underwriters (the carrier staff who decide whether to offer coverage) usually focus on how you handle client tax money and how large your clients are.

• Revenue by service, and whether you also file returns and deposit taxes for clients.
• How much client tax money moves through your accounts and whether two people approve each release.
• Paychecks per year, states you file in, and your largest client's revenue share.
• How you track deadlines, staff for tax season and test software updates, and any outside controls audit.
• The $5M contract, five years of loss runs (a report listing past claims) and your current policy.

What affects the cost?

• Money handling. Holding and paying client tax money usually costs more to cover.
• Client size and concentration. One huge client or many affiliates can mean a larger possible loss.
• How the tower is built. The primary layer usually costs the most per $1M of limit. Higher excess layers are usually priced lower per $1M.
• Claims history. Past penalty disputes can raise the price or shrink what a carrier offers.
• Retention. A retention works like a deductible. A higher one usually lowers premium.

Frequently asked questions

Do I need $5M Professional Liability as a payroll service provider?

Only if a client contract or bid requires it. In a hypothetical example, a firm misses tax deposits for a large employer, and penalties and interest build across many entities.

I already have $1M or $2M. How do I get to $5M Professional Liability?

Request new quotes through Morrow, either a new $5M primary policy or excess layers above a primary. Morrow can ask carriers to keep your retroactive date and prior acts coverage (cover for work done before the new policy starts) where the market allows. Report anything that could become a claim to your current carrier before that policy ends.

Will a client accept a primary plus excess tower for $5M?

Often, but it depends on the contract. Confirm with the client that primary plus follow-form excess meets the clause. A certificate of insurance (a one-page proof of coverage) can list every layer, its limit and policy period. Clients usually cannot be added as additional insureds (extra parties named on the policy for protection) on Professional Liability.

Does Professional Liability cover stolen client tax money?

Often not. Theft or misuse of client funds is usually excluded and handled by a separate crime policy or bond.

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.