$5M Professional Liability (E&O) Insurance for Third-Party Administrators

For third-party administrators (TPAs) asked by a large employer, public plan or insurer to carry $5M, the requirement is usually met with a primary policy plus one or two excess layers.

What does a $5M 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. A $5M clause in an administrative services agreement often reads like this:

• Per claim and aggregate: the most paid for one claim, and for all claims in a year.
• Primary plus excess allowed: this clause lets you stack policies. If yours is silent, confirm with the client that primary plus follow-form excess meets it.
• Three years after you finish: Professional Liability is almost always claims-made, so it only covers claims made while the policy is active. Keep every layer in force after the agreement ends, or buy an extended reporting period (extra time to report claims) on each layer. See tail coverage.

Who asks third-party administrators for $5M?

$5M usually means one client sends you very large claim or plan money flows.

• Self-funded employers (they pay employee health claims themselves) with tens of thousands of members in many states.
• State agencies, large cities, public risk pools and statewide employee or retiree plans, often through an RFP (request for proposal).
• Large union trust funds pooling several employers.
• Insurers, health plans and stop-loss carriers (insurers that cap an employer's large claim costs) outsourcing claims work.

Compared with $3M for TPAs, $5M often comes from clients with larger plans and more plan money in your hands. Compared with $10M for TPAs, $5M is more often reached with one or two excess layers, while $10M usually needs a larger tower.

How is $5M built?

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

Each excess layer should follow form, meaning it uses the same terms as the primary policy. Excess layers should follow the primary policy's retroactive date (the earliest date of work covered). Every layer should list the same insured business (the named insured) and policy period. TPAs usually buy Professional Liability written for TPAs, which fits claims and benefits administration work.

What will underwriters ask for?

An underwriter decides whether to offer coverage. Expect questions such as:

• Revenue by service line, and how much comes from the $5M client.
• Covered lives, annual claim dollars paid and your largest single claims.
• Who has final say on claims and appeals.
• Who approves payments and can release plan funds.
• Independent control audits (such as SOC 1 or SOC 2 reports), subcontractors and filing deadline tracking.
• The agreement and its indemnity terms (promises to pay the client's losses), loss runs (a report of past claims), open incidents and your retroactive date.

What affects the cost?

• Service mix. Claim decisions and handling plan money usually cost more to insure than recordkeeping.
• Client concentration. One very large client can drive your exposure.
• How the $5M is built. The primary layer usually costs the most per $1M.
• Claims history and controls. A clean history usually helps.
• Retention and defense terms. Retention works like a deductible, and a higher one usually lowers premium.

Frequently asked questions

Could a TPA claim really reach $5M?

Yes, one error on a large plan can reach that size. Hypothetical examples: a wrongly loaded eligibility file leaves thousands of members denied claims for months, or a system error sends duplicate provider payments. Whether a loss is covered depends on the policy wording, including any bodily injury or funds-handling exclusions.

Is $3M enough if my administrative services agreement says $5M?

No, a $3M limit does not meet a $5M clause on its own. You need either a new $5M primary policy or excess layers above a primary. Morrow can request quotes that aim to keep your retroactive date and prior acts coverage (coverage for work done before the new policy starts) where the market allows. Report anything that could become a claim to your current carrier first.

Does fiduciary liability count toward a $5M Professional Liability requirement for a TPA?

Usually not. Fiduciary liability covers claims about plan decisions or plan assets and is a separate policy. A commercial umbrella almost never covers Professional Liability either.

Can a plan sponsor be an additional insured on my TPA Professional Liability policy?

Usually not, and never automatically. Some carriers will add a plan sponsor (the employer or group behind the plan) on request, usually only for liability arising from your services, and it may be needed on each layer. Many clients accept a certificate of insurance that lists each layer, policy number, limit and policy period. Confirm what your contract requires.

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.