Gaps in Coverage Can Leave You Open to Liabilities

Revised July 16, 2021

3.5 minute read

Imagine you are a large client conducting a request for proposal that requires a match to your current policy. A competitor, who advertises on national television, submits a proposal with significantly lower rates and indicates in writing that the policy was an exact match. You decide to switch carriers. Later, when reviewing the insurance booklet, you discover that the new policy was, in fact, not a match. Because these provisions did not match your district’s bargained contracts, this insurance carrier exposed the school to enormous liability. You decide to cancel your new policy and go back to your current carrier.

An annual review/audit of your insurance policies can help schools, cities, and counties ensure that they don’t have any gaps in coverage. A coverage gap is where your insurance contract doesn’t match your negotiated agreements, employment agreements, a past practice, unwritten understanding, or how you intend to administer your plan.

Having a gap in your policy exposes you to a potential liability. The insurance carrier is only obligated to pay claims per the language in your policy. If the policy doesn’t cover it, then the claim will be denied. If you promised a certain benefit to an employee, but your policy doesn’t cover it, you may have to pay for the claim yourself. At best you might have a grievance filed against you, at worst you may be liable for paying the claim. Many schools, cities, and counties aren’t even aware they have an issue until a claim gets denied – and then it’s too late.

Here are some common problem areas where schools, cities, and counties have found gaps in their coverage:

Leave of Absence

Employees may take an approved leave of absence from work and expect to remain covered under the policy (applicable to both life and disability insurance). Leave of absences include sickness or injury, (approved) unpaid leave, sabbatical leave, or lay-off. Likely, life and disability insurance will cease when s/he is not “actively-at-work”. Do your employment contracts obligate you to continue coverage for these employees? If so, contact your insurance agent to make sure your policy can be changed to match that obligation.

Life Insurance Age Reductions

Some life insurance certificates may not contain any age reductions and simply terminate when the employee retires/resigns. However, it's industry standard practice for policies to contain age reductions so chances are, you have them. If your policy has age reductions, you will find a section describing how covered benefits reduce when the employee reaches a certain age. For example, a policy may read, “Benefits reduce to 65% upon attainment of age 65, 50% upon age 70, and terminates upon retirement.” A gap can occur if your contracts or employment agreements promise a certain amount of life insurance until retirement and do not specifically list age reductions.

Maximum Annual Covered Salary (MACS)

The maximum annual covered salary on your disability plan is the highest salary the insurance carrier has contractually agreed to insure. If the MACS is $50,000 and an employee in your organization who makes $60,000 files a claim, the insurance company will pay the claim based on $50,000. If this employee is contracted to receive a disability benefit as a set percentage of their full salary, you could have a grievance or a legal situation on your hands. Check your bargaining contracts or agreements to see if they specify a MACS. If the contract does not state a specific cap, then find out the MACS on your policy to ensure you don’t have a gap. Annual review of your MACS is a good idea, especially around the time employees receive salary increases.

If you think you may have a gap in coverage, contact your agent/broker. S/he can review and amend the policy if needed or suggest additional language you can add to your negotiated agreements that will protect you. Keep in mind that any change to the policy may result in a fluctuation in rate.

Contact your NIS Representative if you have questions.