$1M Professional Liability (E&O) Insurance for PEO and HR Outsourcing Firms

A $1M Professional Liability (E&O) requirement means your policy pays up to $1M per claim for errors in your PEO or HR outsourcing work, and some client contracts also ask for a $2M yearly total.

What does a $1M requirement mean for PEO and HR outsourcing firms?

Professional Liability (E&O, short for Errors and Omissions) covers claims that your services caused a client a financial loss. For a PEO or HR firm, that can mean a payroll, benefits or HR compliance mistake. A typical clause reads:

• Per claim: the most the policy pays for any one claim. Here, $1M.
• Aggregate: the most the policy pays for all claims in one policy year. Here, $2M. A $1M/$1M policy does not meet this clause. A $1M/$2M policy usually does.
• Two years after the contract ends: Professional Liability is usually claims-made: it covers claims first made and reported while the policy is active. Two more years of coverage is often met by renewing without a gap and keeping the same retroactive date (the earliest date of work the policy covers), or by an extended reporting period (extra time to report claims after the policy ends).
• Covered services: the clause names payroll, benefits and HR work. Your policy should name the same services.

For more on reading limits, see Professional Liability (E&O) limits explained.

Who asks PEO and HR outsourcing firms for $1M?

$1M is a common ask from smaller clients. Larger PEO books often see $2M or more, because one error can touch many worksite employees (the client staff you pay or manage) at once. See $2M Professional Liability for PEO and HR outsourcing firms. You will often see $1M from:

• Small and mid-sized employers signing a PEO or co-employment services agreement.
• Companies that outsource payroll, HR support, benefits enrollment or plan work.
• Clients that rely on you to file payroll taxes or run open enrollment.

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first), with no excess layers above it (excess layers are extra policies stacked above the primary limit). A commercial umbrella almost never covers Professional Liability (see Does a commercial umbrella cover Professional Liability?). Clients also are usually not added as an additional insured (an extra party listed on your policy). They usually accept a certificate of insurance, a one-page summary of your coverage.

Many PEOs also buy employment practices liability (EPL, for claims by employees such as wrongful firing) and fiduciary liability (for benefit plan mistakes). Each has its own limit. Firms that handle payroll taxes, benefits or client funds usually need a broker and a full application. Morrow can help you find it.

What will underwriters ask for?

An underwriter is the insurer's reviewer who decides whether to offer coverage and on what terms. For PEO and HR firms, they usually ask about:

• Your service mix: co-employment (sharing employer duties with the client), payroll, benefits, HR consulting and workers' comp administration.
• Number of client companies and worksite employees, by state.
• Whether you collect and deposit payroll taxes, and your controls for paying them on time.
• Whether you act as a plan administrator or fiduciary for any benefit plan.
• Prior claims, possible claims, and your current policy and retroactive date.

What affects the cost?

• Services you provide. Payroll tax and benefit plan work usually cost more than HR advice alone.
• Size of your book. More clients and employees mean more chances for error.
• Controls and claims history. Strong controls may help. Prior claims can raise the price or narrow options.
• Aggregate and retention. $1M/$2M usually costs more than $1M/$1M. A higher retention (the amount you pay on each claim before the policy pays, like a deductible) usually lowers the premium.
• Defense and prior acts terms. Defense outside the limit and broader prior acts coverage (coverage for work done before the policy started) often add cost.

Frequently asked questions

Do I need $1M Professional Liability as a PEO or HR outsourcing firm?

Only if your contract or client service agreement asks for it, and many do. Even when it is not required, a hypothetical late payroll tax deposit or a missed benefit enrollment could lead a client to say you cost them money. Without coverage, you would pay defense and any settlement yourself.

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

No, a $1M/$1M policy has a $1M yearly total, so it does not meet a $2M aggregate. Morrow can request quotes for a $1M/$2M policy and ask that your retroactive date and prior acts coverage carry over where the market allows. Keep your current policy in force until the new one starts. Report anything that could become a claim to your current carrier before it ends.

Does Professional Liability cover employee discrimination claims?

Usually not. Claims from employees about discrimination, harassment or firing are usually covered by employment practices liability. Because a PEO may be a co-employer, ask how worksite employees are treated under each policy.

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.