DEFINITION of 'Benefits Payable Exclusion'

An insurance policy exclusion that removes the insurer’s responsibility for paying out claims if the insured is able to pay them from another source. Benefits payable exclusions apply to liability policies in which claims may be brought against the insured that involve benefits that the insured has provided to employees and other parties.

BREAKING DOWN 'Benefits Payable Exclusion'

Many companies offer benefits to their employees, including defined benefit or pension plans. Companies and their employees contribute to the pension, and employees are able to access the pension funds once a certain set of conditions have been met. For example, the employee may be required to work for a certain number of years before being able to tap into the pension for retirement.

In some cases a company providing a pension may deny access to an employee, only to have the courts tell it that it is not allowed to do this. This entitles the employee to a specific amount of money from the pension plan. Benefit payable exclusions are designed to protect insurance companies from having to pay a claim equal to this entitlement, since the risk is considered a business risk.

For example, a company sponsors a retirement plan that its employees can contribute to. Because it is involved with the management of the plan it is considered a fiduciary, and in order to protect itself from this risk, the company purchases a fiduciary liability policy. A retired employee claims that the company did not act in his best interests when it failed to monitor the plan’s assets, and that as a result the plan is worth less. The courts determine that the employer did fail in its fiduciary duty, and awards the employee a specific amount of money. Because the policy contains a benefits payable exclusion and because the retirement plan had funds available to cover the entitlement, the insurer would not be held liable for the claim. If, however, the plan was insolvent then the insurer would be held liable.

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