$5M Professional Liability (E&O) Insurance for PEO and HR Outsourcing Firms

If a large client asks your PEO or HR outsourcing firm for $5M in Professional Liability (E&O), you can meet it with one $5M primary policy or a smaller primary plus follow-form excess layers.

What does a $5M 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 is often a payroll, tax or benefits mistake. A $5M clause might read:

• Per claim and aggregate: the most paid for one claim, and for all claims in a year. (more on limits)
• Claims-made: the policy covers claims made while it is active, for work done on or after the retroactive date (the earliest date of work the policy covers).
• Stacking allowed: this clause lets primary and excess count together. If yours is silent, confirm with the client that they meet it.
• Three years after: you would usually renew every layer, with the same retroactive date.

Who asks PEO and HR outsourcing firms for $5M?

Many PEO and HR clients ask for $1M or $2M, and some ask for $3M. $5M usually appears when one client hands you a very large payroll or benefit plan, because one error can touch thousands of employees at once:

• Employers with thousands of employees in many states.
• Employers with large self-funded health plans (where the employer pays claims itself) or retirement plans that outsource enrollment or contributions.
• States, counties and large school districts, where the request for proposal (RFP) often sets the limit.

How is $5M built?

A primary policy pays first. An excess policy pays only after the layers below it are used up. "$3M xs $2M" means a $3M layer that sits above the first $2M.

Each excess layer should follow form, meaning it adopts the primary policy's terms. Match the retroactive date, policy period and named insured (the business listed on the policy) on every layer. Many Professional Liability policies pay defense costs inside the limit, so legal fees can use up part of the $5M.

What will underwriters ask for?

Underwriters, who decide whether to offer coverage and on what terms, will ask about:

• Your service mix: co-employment (sharing employer duties with the client), payroll, tax filing, benefits and COBRA (continuing health coverage after a job ends) administration, and HR advice.
• Total payroll and tax deposits you process, and your largest client's share of revenue.
• Funds controls: separate trust accounts, reconciliations, dual approval and tax deposit checks.
• Whether you act as a plan fiduciary (someone legally trusted to run the plan for its members).
• The contract asking for $5M, your client service agreement, and three to five years of loss runs (a report of past claims).

What affects the cost?

• Services and funds handled. Holding client tax money and running benefit plans usually cost more to insure than HR advice alone.
• Size of your book. More clients and states mean more chances for error.
• How the $5M is built. The primary layer usually costs more per $1M of limit than excess layers.
• Claims history and controls. Past claims can shrink the limit offered. Strong controls may help.
• Retention. Retention is the amount you pay yourself before the policy pays, like a deductible. A higher one usually lowers premium.

Frequently asked questions

Do I need $5M Professional Liability as a PEO or HR outsourcing firm?

Only if your contract or client requires it. Hypothetically, a software change leaves a large client's tax deposits unpaid in several states for a year, and the client blames you for penalties and cleanup costs. Many policies exclude the unpaid taxes themselves. Some cover resulting penalties and interest, often with a sublimit (a lower cap inside the policy), so check the wording.

Can a commercial umbrella give my PEO the $5M Professional Liability my contract asks for?

Almost never. A commercial umbrella usually excludes professional services. You usually need a follow-form excess Professional Liability layer or a higher primary limit. Read more on umbrellas.

I have $2M or $3M. How do I get to $5M Professional Liability?

Request new quotes through Morrow, either for a new $5M primary or for excess layers above a primary. Morrow can ask to keep your retroactive date and prior acts coverage (cover for past work) where the market allows. Report known incidents to your current carrier first.

Can my client be added as an additional insured on my PEO's Professional Liability?

Usually not. Professional Liability protects you against client claims, so naming a client as an insured does not fit. Some clients accept a certificate of insurance (a one-page summary of your coverage) that lists every layer.

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.