EPLI for Professional Employers Organizations and Professional Employer Organization PEO Models

Professional Employer Organization PEO Models

EPLI for Professional Employers Organizations

What is a PEO model in employers practice liability insurance (EPLI)? A professional employer organization (PEO) is not a temp firm, a staffing agency, a simple payroll service or placement agency. A PEO serves as an HR department, providing:

• Employment Administration Relief for PEO
• Quality Professional Employee Benefits
• Employer Liability Management Services
• Productivity Improvement Resources

EPLI Policy for Professional Employers Organizations

A “conventional PEO model” (one possibly codified under Florida and Texas law) anticipates that the PEO, as a co-employer, will be significantly involved in its clients’ employment decisions. The underlying basis for offering EPLI coverage to professional employer organizations is premised upon the fact that the risks attendant to such a business involve its coemployer status with the client workforce and the likelihood the professional employers organization can favorably impact employment practices. As the PEO is connected to all phases of the employment relationship (hiring, discipline, termination), an underwriter views the PEO as having significant input into the type of decisions that form the basis for evaluating liabilities covered by the insurance. The “input and participation” of the conventional professional employers organizations model can provide the underwriter with the necessary confidence to offer the EPLI coverage to the PEO and its client companies.

Employers Practice Liability Insurance for Non-Employer PEO Models.

There are lots of agencies or nonemployer models (most commonly the ASO model) that peacefully coexist along a different but concurrent path in the industry and are designed to respond to different needs of certain types of client companies. ASOs assist the client company or may act as its agent in various administrative functions.

Unlike the conventional PEO, the ASO doesn’t become a co-employer with the client company from most EPLI underwriters’ perspectives, and does not assume any employment practice responsibilities. For these reasons, the elements necessary to establish the requisite risk management relationship with the client company are typically absent in the ASO model. An underwriter generally will not provide EPLI coverage to an entity that is not an employer. As an ASO does not participate in the employment-related decisions that are the basis for EPLI coverage, EPLI coverage is often not available without substantial underwriting of the client company. This, of course, often diminishes the cost economic justification of bundling the cost of EPLI coverage into the overall ASO services pricing. The ASO model tends to be a limited vehicle (albeit by design) vis-a-vis EPLI coverage.

Continuum of PEO Models and EPLI Coverages

It is quite easy to examine the “conventional” PEO and ASO models in their purest forms and realise why the underwriters are willing to extend EPLI coverage to one more readily than the other. Nevertheless, the reality of today’s industry is that companies cannot always be neatly labeled as either a conventional PEO or an ASO. This industry is growing, and traditionally respected labels in this area are not always reliable or accurate. So, these models are perhaps more accurately viewed as a continuum, with the conventional PEO model at one end and the ASO model at the other. In between, of course, there are a variety of working models that include aspects of each end of the continuum. It is in this “middle ground” where there is the potential for the evaporation of EPLI coverage the professional employers organization thought it possessed. Considerable risk awaits the organization that professes to be a co-employer PEO (and obtains EPLI coverage on that basis), but which, in reality, provides services that are more akin to an ASO. As an organization moves down the continuum away from the conventional professional employers organization model, the PEO moves into a precarious position with respect to EPLI coverage.

What is EPLI Coverage for Professional Employer Organizations?

An employment practices liability insurance coverage issue is most likely to manifest itself when, after a claim is made, an insurer determines that the alleged PEO performs more of an administrative function and does not qualify as an employer in its relationship with its client companies. At this point, the insurer could exercise its right to cancel coverage under the EPLI policy due to what it believes is a change in the risk. The insurer would argue that it issued the EPLI policy based on underwriting data submitted by the PEO that differs materially from the actual risk that exists. Such underwriting data involves whether the PEO would have significant input into employment practices. Most state insurance codes provide a statutory escape to insurers that would otherwise be bound to provide coverage for the entire policy period. The escape insurers most commonly use is the statutory provision that allows a short notice and cancellation if, for example, “There is substantial change in the scale of risk covered by the employers liability insurance policy” (see §27-1-31-2 of Indiana’s code).

Therefore, a PEO should not comfortably assume that, just because it has secured an EPLI policy, the insurer is bound to the policy for its term. The difficulty of such a scenario extends beyond the gap or complete lack of coverage that would follow. In addition to the direct monetary costs that would accompany any decision to fight the insurer’s cancellation of coverage, there would be collateral costs in the stability of the client base upon learning that the much-advertised EPLI coverage does not exist.

Gaps in Coverage and EPLI Underwriting Process

The EPLI underwriting process is the best opportunity to avoid confusion in employment practices liability insurance coverage. This process is designed to permit an evaluation of the risk to be insured. In the context of professional employer organizations, this evaluation will be focused on the ability of the PEO to control the risks of its client companies’ workplaces. Insurers offering employers practice liability insurance policies to PEOs generally have an appreciation for the different permutations of professional employer organization models that exist, and the underwriting process will involve a careful analysis of the extent to which the PEO will be involved in the employment practices of its client companies.

A PEO should expect premium quotes to rise as the underwriters appreciate that the PEO’s model more closely approximates the ASO model. It is critical a PEO provide the proposed underwriter with full disclosure of its business model. Those professional employer organizations seeking to rely on EPLI coverage as a risk management strategy are urged to carefully examine their business models to determine whether they have sufficient participation in the employment practices of their clients to secure a right of coverage. In this way, the PEO will gain confidence that the coverage it is buying is the coverage it will ultimately receive.

Professional Employer Organization PEO Models

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