I regularly find clients have signed up for “group” insurance policies – usually because they appear to be a low-cost option in these tough times.
These group (or ‘shared’) policies can come from a variety of sources. Co-employers or PEOs (Professional Employer Organizations) offer Workers’ Compensation and sometimes Employment Practices Liability insurance. Payroll service providers offer Workers’ Comp and sometimes Employee Benefits and 401(k) plans. Some Membership groups or Associations (like Nurses, Teachers, or Social Workers) offer Professional Liability coverages, or Errors & Omissions. And even Vendors or subcontractors can add your firm to their General Liability policy as an Additional Insured – this is also shared insurance.
Smaller businesses go this route for three reasons: cost, service, and coverage.
- Costs can be less than taking out your own policy and some can be ‘free’ (for example becoming an Additional Insured) or ‘included’ (which can mean ‘costs unknown’).
- Outsourcing payroll and certain HR services can be very advantageous to some businesses; service quality definitely can vary, and I always recommend you delegate with full understanding – don’t abdicate.
- Insurance coverages can range from standard and acceptable (Workers’ Comp for example) to limited and perhaps dangerous – if not well understood.
What can go wrong? ~
- Like most things we purchase, ‘You get what you pay for’ often applies to insurance. It’s easy to get trapped: cheaper options need careful scrutiny.
- I’ve almost always found that group solutions have lower coverage limits and some surprising exclusions and limitations.
- And, finally, many clients develop a false sense of security – “This provider/ association/ other is high quality, why should I worry?”
Recently a client signed up with a co-employment firm to outsource almost all their HR needs. With this deal they got Employment Practices Liability insurance in a type of group policy. Careful coverage review found a number of gaps and limitations that were unacceptable. A separate policy was required for proper coverage.
How to manage ~
You don’t have to automatically eliminate group solutions, but here are a few suggestions:
- Dig deeper and get details, testimonials and references: call them!
- Have Service Agreements reviewed by your attorney, as for all contracts.
- Get insurance coverages reviewed by your professional insurance advisor without fail; and get written comments and recommendations.
- Delegating to your service provider can be fine, but don’t abdicate. Stay on top of renewals, cost increases, changes to a new insurer and, of course, scheduled service deliveries, especially for safety, training, etc.
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{ 5 comments… read them below or add one }
Charles, you raise a thorny issue. Employers increasingly look to off-load to their employees the expense and liability of benefits.
The effected individuals are least informed and poorly positioned to source and negotiate alternative provider terms. Few individuals have lawyers or insurance agents with the depth of training to ensure that an adequate balance is struck between cost and contract agreement even on a one-shot review, let alone in evaluating periodic changes.
How does a new group or a new group member best assess possible coverage gaps?
Beware a possible aggregate limit when dealing with group Property and casualty coverages, such as professional and E&O. My wife works for a large real estate firm that charges each realtor $500 for $1,000,000 liability limits for her E&O, placed within a “master” policy. However, the policy has an annual aggregate of $2,000,000. If they have multiple claims that year, she may have no coverage if the aggregate for that year has been met. To add insult to injury, defense costs are WITHIN the limits, which could reduce her coverage that much faster.
Another thought provoking topic. An important point is that some firms that attempt to take the low cost approach may be the ones that really need a more robust insurance program because they don’t have a deep pocket to finance uninsured losses. The false sense of security you mention should be combatted by starting with a good risk assessment and then mapping the coverages available to the existing risks. I’m sure this is something that you would do a great job of providing to companies.
Very thought provoking topic and I agree there are many reasons for a “smaller business” to consider a group or association type product. As stated, always review the group form against an individual policy for terms, conditions, exclusionary wording and warranties. While price may be less, the coverage (?) could prove to be non-existent!
I would mention one type of “group policy” that does hold value…. a group personal excess policy. Usually, these are purchased by “professional entities” i.e. law firms, accounting firms, medical groups etc. The concept is quite simple, the law firm purchases a policy on behalf of a specific group, i.e. all partners, and this is offered as a “perk” to the employee…usually the limits far exceed an individual personal excess policy (sometimes $10million per lawyer) and the premium is paid by the firm. An excellent coverage and employee enhancement tool!
Charles – you are correct that PEOs often promote a false sense of security. Prospective clients should read the fine print of the PEO agreement and they will learn that the PEO contract assigns all the employer liability to the client – not the PEO. There are other pitfalls such as requiring large company HR compliance (FMLA; WARN etc.) to smaller employers without much disclosure or help in this complex area. Another option for outsourcing is an Administrative Service Organization (ASO) where individual insurance coverages are maintained. Here is one option my company provides – http://www.sharedhr.com/marketing/Pages.aspx/Considering-a-PEO-