$2M Professional Liability (E&O) Insurance for Third-Party Administrators

For third-party administrators (TPAs) asked for $2M by a plan sponsor or insurer: you need Professional Liability (E&O) that pays up to $2M for each claim, which a $1M/$2M policy may not meet.

What does a $2M requirement mean for third-party administrators?

Professional Liability (E&O, short for Errors and Omissions) covers claims that a mistake in your services cost a client money. For a TPA, that means errors in benefits or claims administration. A plan sponsor (the employer or group that runs a benefit plan) may write a $2M clause into your administrative services agreement (your contract with the client):

• Each claim: the most the policy pays for one claim. Here, $2M. See Professional Liability limits explained.
• Aggregate: the most the policy pays for all claims in one policy year. Here, also $2M.
• Claims-made: Professional Liability almost always covers claims made and reported while the policy is active. The work must be on or after the retroactive date (the earliest date of work the policy covers).
• Tail: an extended reporting period gives you extra time to report claims after a policy ends. See tail coverage.

Who asks third-party administrators for $2M?

Some smaller plans ask for $1M (see $1M Professional Liability for TPAs). $2M tends to show up when the plan or the client is larger:

• Self-funded employers (employers that pay health claims from their own funds) with many covered lives, meaning people covered by the plans you run.
• Plan sponsors of 401(k) and other retirement plans with sizable plan assets.
• Insurers and self-insured groups that hand off workers' comp or liability claims handling to you.
• Cities, towns, school districts and groups of public bodies that share risk.
• Stop-loss carriers (insurers that cap an employer's costs on very large claims) and benefits brokers that set terms for TPAs.

How is $2M built?

At $2M, the limit is often one primary policy (the policy that pays first) with a $2M limit. Sometimes it is a $1M primary policy plus a $1M excess layer (a second policy that pays after the first is used up). The excess should follow form, meaning it uses the primary policy's terms. Confirm with the client that primary plus follow-form excess meets the clause.

For a TPA, one large dispute over a plan's claims handling can be a single claim. A $1M/$2M policy pays only $1M for it, even though the $2M total is not used up. A commercial umbrella almost never covers Professional Liability. Clients usually cannot be added as an additional insured. Some accept a certificate of insurance (a one-page proof of coverage) instead, so check what your contract requires. If you carry $1M today, request new quotes for a $2M policy through Morrow. Morrow can ask carriers to keep your retroactive date and prior acts coverage where the market allows.

What will underwriters ask for?

An underwriter decides whether the insurer offers coverage and on what terms. For TPAs, they often ask about:

• Your services and revenue from each, such as health claims, retirement plans, COBRA (continued health coverage after a job ends), FSA and HSA accounts (tax-favored accounts for health costs), or workers' comp claims.
• How many plans, covered lives, claims or plan assets you handle, and whether you hold client funds or make final claim decisions.
• How you track deadlines and check claims accuracy.
• Data security, outside audit reports, and how you protect health and payroll data.
• Your contracts, loss runs (a report of past claims), and your current policy and retroactive date.

What affects the cost?

• Type of administration. Health claims and retirement plan work often rate differently than COBRA or account work.
• Volume. More lives, claims or plan assets usually mean bigger possible losses.
• Control over money and decisions. Handling funds or making final decisions usually adds risk.
• How the limit is built. A higher each-claim limit usually costs more than a lower each-claim limit with the same total.
• Retention and claims history. The retention (what you pay on each claim before the policy pays, like a deductible) and any past claims both affect price.

Frequently asked questions

Do I need $2M Professional Liability as a third-party administrator?

It depends on your contract. If it says $2M each claim, your policy usually needs a $2M each-claim limit. Some smaller plans ask only for $1M.

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

Often not. A $1M/$2M policy pays $1M for one claim, so it may fall short of a $2M each-claim clause. Hypothetical example: a missed COBRA notice leaves a former employee uninsured before a costly surgery, and the employer makes one claim against the TPA.

Does a TPA need fiduciary liability as well as Professional Liability (E&O)?

Often a client asks for both. Professional Liability (E&O) covers errors in your administration work. Fiduciary liability covers claims that someone breached duties to a benefit plan. Check which one your contract names.

What if my client asks for more than $2M?

Then the limit may need to be $3M or more. Very large employers and insurers sometimes ask for $3M to $5M. See $3M Professional Liability for TPAs.

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.