What Is a Benefits Payable Exclusion?
A benefits payable exclusion is a clause in insurance policy contracts that removes the insurer's responsibility for paying claims related to employee benefits. Specifically, the clause protects the insurer from paying for benefits that could otherwise be paid from an alternative source, such as the employer's pension plan.
- A benefits payable exclusion is a legal clause indemnifying an insurer against claims relating to employee benefits.
- These types of claims are regarded as an uninsurable business risk.
- In practice, courts will sometimes require insurers to cover such claims even if a benefits payable exclusion clause is in place.
How Benefits Payable Exclusions Work
Companies often purchase insurance in order to protect themselves from rare but potentially catastrophic losses, such as those caused by extreme weather events or expensive legal settlements. Most insurers, however, will not insure against risks that are an ordinary or predictable aspect of the company's business practices, such as the risk of losses due to rising costs or wages.
These types of risks are collectively known as "business risks," and they include the risk that employees might make claims against the company for certain benefits owed to them as a result of their employment. A common example is employee retirement pension benefits, which can be very costly to the employer. Because these costs can be viewed as a predictable part of business activities, most insurers would regard such benefits payments as a business risk. Accordingly, they would exclude themselves from having to cover those payments by adding a benefits payable exclusion clause to their insurance contracts.
It is important to note, however, that in some cases a court may require an insurer to cover benefits-related costs even if a benefits payable exclusion was included in their contract. This could occur if the company in question had taken reasonable precautions to service the claim themselves, but were nonetheless unable to do so. For instance, if a company's benefits plan becomes insolvent despite the company having made regular and reasonable contributions into the plan, a court might decide to hold the insurer responsible for covering any shortfalls. From the insurer's perspective, this potential legal risk must be taken into consideration when deciding what level of premiums to charge in order to protect against this risk.
Real World Example of a Benefits Payable Exclusion
Emma is the owner of a mid-size company with several dozen employees. Over the years, she has taken active efforts to increase the wages and retirement benefits of her staff, regularly contributing to her company's employee retirement pension plan.
Unfortunately, many of Emma's older employees reached retirement shortly before a major financial crisis. As a result, the pension funds that had been invested in stocks and other financial assets saw a sudden and dramatic decline. Despite her best efforts to fund the plan adequately, Emma now found herself unable to provide the retirement benefits expected by her recently retired employees, some of whom then sued the company.
In court, Emma's insurer argued that due to the benefits payable exclusion clause of their contract, they were not responsible to cover the unpaid benefits payments. To Emma's surprise, however, the court ruled against her insurer, arguing that because the company's retirement plan had become insolvent despite the reasonable efforts of the company's management, the insurer would be required to honor the unfunded portion of the claims made by Emma's employees.