What is a 'Benefits Payable Exclusion'

A benefits payable exclusion is a clause in an insurance policy that removes the insurer’s responsibility for paying out claims related to employee benefits if the insured is able to pay them from another source.

Benefits payable exclusions apply to benefits-related liabilities for which the company is responsible, not the insurer.

BREAKING DOWN 'Benefits Payable Exclusion'

Many companies offer benefits to their employees, including defined benefit or other pension plans. Companies typically contribute to these plans, and sometimes, employees also contribute. Employees usually access the pension funds upon retirement once they meet a certain set of conditions. For example, most plans require a certain number of years on the job before employees receive pension benefits.

In some cases, a company denies an employee’s pension benefits, only to have the courts tell the company it did so wrongly. This usually entitles the employee to a specific amount of money from the pension plan.

Benefit payable exclusions are designed to protect insurance companies paying a claim equal to this entitlement, since this payment is a business risk for which insurance is not responsible.

For example, say a company sponsors a matching retirement plan to which employees also contribute. Because it is involved with the management of the plan, the company is  a fiduciary. In order to protect itself from this risk, the company purchases a fiduciary liability policy. Also, let's say a retired employee claims that the company did not act in this employee’s best interests when it failed to monitor the plan’s assets. As a result, the value of these benefits is less than it would be otherwise. The courts get involved and determine that the employer failed in its fiduciary duty, and awards the employee a specific amount of money.

If the policy contains a benefits payable exclusion and the retirement plan had funds available to cover the amount awarded by the court, the insurer is not liable for the claim.

If the plan had no funds or insufficient funds, however, an insurer would need to pay the award.

Benefits Payable Exclusion vs. Benefits exclusion

Do not confuse benefits payable exclusion with benefits exclusion. The latter refers to pre-existing conditions or specific illnesses or procedures not covered by a health insurance policy. These exclusions attempt to limit the number of expensive treatments paid for by insurance companies, some of which they deem to have low rates of success for patients. Insurers sometimes deem cosmetic surgery, weight loss programs and acupuncture as unnecessary and exclude them from coverage, for example. Also, many insurers reject expenses related to long-term care.

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