$1M Professional Liability (E&O) Insurance for Third-Party Administrators

For third-party administrators (TPAs) whose employer client (the plan sponsor) wants $1M: it is a common Professional Liability (E&O) limit, and the contract may also set a $2M yearly total.

What does a $1M requirement mean for third-party administrators?

Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your services caused a client a financial loss. In an administrative services agreement, the clause often reads like this:

• 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 would not meet this sample clause. A $1M/$2M policy usually would, but your contract may add other terms.
• One limit, many plans: the employers you serve usually share the same aggregate. One systems error touching several plans may use up much of it.
• Claims-made: the policy pays for claims made and reported while it is active. The work must be on or after the retroactive date (the earliest work date the policy covers). That is why the clause asks you to keep coverage after the agreement ends.

See Professional Liability (E&O) limits explained.

Who asks third-party administrators for $1M?

You will often see $1M from:

• Small and mid-sized employers that pay their own health claims (self-funded plans).
• Employers (plan sponsors) hiring a retirement plan TPA for testing, compliance and government filings.
• Employers outsourcing COBRA (continued health coverage after job loss) or health spending accounts (FSA, HSA or HRA).
• Self-insured employers and risk pools hiring a workers' compensation or liability claims TPA.
• Larger plan sponsors and public entities. They often ask for more (see $2M Professional Liability for third-party administrators).

How is $1M built?

At $1M, the limit is usually one primary policy (the policy that pays first), with no excess layers above it. TPAs usually buy Professional Liability written for benefits or claims administration.

Some contracts also ask for fiduciary liability (a fiduciary is someone legally bound to act in the best interest of a plan and its members). Before you buy, check three things: does the policy name your real services, does it exclude fiduciary acts or handling of plan funds, and is the aggregate right?

A commercial umbrella almost never covers Professional Liability (see Does a commercial umbrella cover Professional Liability?). Clients usually cannot be added as additional insured (listed on your policy) on Professional Liability. Some policies may allow a limited version, so check the wording and your contract before you sign. Some clients accept a certificate of insurance (a one-page summary of your coverage) instead, but check what your contract requires.

A $1M/$2M policy caps one claim at $1M but gives $2M for the year. A $2M limit lets a single claim reach $2M. Some policies offer only one limit, so a $2M aggregate may mean a $2M limit. Read your clause to see which one it asks for.

What will underwriters ask for?

An underwriter is the insurer's decision maker on coverage and terms. For a TPA, they often ask:

• Which services you provide, with a rough share of revenue from each.
• How many plans and participants you serve, and your largest client.
• Whether you make final claim decisions or follow the plan sponsor's rules, and whether your contracts say you are not a fiduciary.
• Whether you hold or move plan funds, and who can approve payments.
• Your controls for eligibility updates, filing deadlines and reporting claims to the employer's stop-loss insurer (the policy that caps a self-funded plan's big claims).
• Your written agreements, prior claims, anything that could become a claim, and your current retroactive date.

What affects the cost?

• Service mix. Discretionary claim decisions and handling plan funds usually cost more to insure than recordkeeping or COBRA notices alone.
• Size of your book. More plans and participants mean more chances for a loss.
• Claims history. Prior claims can raise the price or narrow your options.
• Aggregate and retention. $1M/$2M usually costs more than $1M/$1M. A higher retention (the amount you pay on each claim, like a deductible) usually lowers the premium.

Frequently asked questions

Do I need $1M Professional Liability as a third-party administrator?

Only if your contract or a client requires it, and administrative services agreements often do. Check the insurance section before you sign.

What kinds of claims could a third-party administrator face?

A late or missed task can lead to a claim. Here are hypothetical examples. A COBRA notice goes out late, and the employer pays a former worker's medical bills. A large claim reaches the stop-loss insurer after the deadline, and it denies the claim. Many policies pay defense costs inside the limit, so legal bills can use up part of your $1M.

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

No, a $1M/$1M policy would not meet a $1M/$2M clause. Request new quotes through Morrow. Morrow can ask carriers to keep your retroactive date and prior acts coverage (coverage for work done before the new policy began) where the market allows. Keep your current policy in force until the new one starts so there is no gap. Report anything that could become a claim to your current carrier before that policy ends.

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.