Fiduciary Liability Insurance

What is Fiduciary Liability Insurance?

Fiduciary Liability pays, on behalf of the insured, the legal liability arising from claims for alleged failure to prudently act within the means of the Pension Reform Act of 1974. The term “insured” is generally defined as a trust or employee benefit plan, any trustee, officer or employee of the trust or employee benefit plan, employer who is the sole sponsor of a plan and any other individual or organization designated as a fiduciary. Group life and medical expense plans, along with pension and retirement plans, are within the scope of this law.

Two other coverages related to fiduciary liability insurance include:

• Fidelity Bonds - These are required by law (ERISA bonding). In the event dishonest administrators or trustees are accused of financially harming an employee benefit plan, these bonds may be used, but only for the benefit of the plan and the plan's beneficiaries. This bonding insurance will not protect the trustees themselves from liability claims. This coverage differs from fiduciary liability insurance.
• Employee Benefit Liability Insurance - Employee Benefit Liability Insurance programs cover many claims arising out of errors or omissions in the administration of an employee benefit plan. Common claims covered by an Employee Benefits Liability policy include the unintentional failure to enroll an employee in the group plan as well as the administration of improper advice as it pertains to available benefits.

Employee benefits liability coverage often is combined with fiduciary liability insurance policies, subject to a common single limit. This single limit is disadvantageous because fiduciary liability presents an exposure that, though infrequently experienced, can result in severe litigation expenses.

Why do I need Fiduciary Liability Insurance?

Under ERISA, fiduciaries can often times be held personally liable for a breach of their administrative responsibilities in the handling of employee benefit plans. Fiduciary Liability Insurance is not required by ERISA; however, it is a coverage we highly recommended if you are a fiduciary of a welfare and/or pension plan because your personal assets are at stake. ERISA Fidelity Bonds DO NOT protect personal assets.

Another common expectation is that Fiduciary exposures are included in their D&O policy. Most D&O policies exclude fiduciary liability as well as those exposures pertaining to the Employee Retirement Income Security Act (ERISA). ERISA broadly defines the types of employee benefit plans for which fiduciaries are considered responsible. This extensive list can include pension plans, profit sharing plans, employee stock ownership plans (ESOPs), and even health and welfare plans.

Fiduciaries, though, are not the only ones at risk of such lawsuits; targets can also include the employer and even the plan itself. Claims can be brought by plan participants, participants’ legal estates, the Department of Labor, and the Pension Benefit Guaranty Corporation.

Allegations commonly witnessed in claims include:

• Improper advice or disclosure
• Inappropriate selection of advisors or service providers
• Imprudent investments
• Lack of investment diversity
• Breach of responsibilities or fiduciary duties imposed by ERISA
• Negligence in the administration of a plan
• Conflict of interest with regard to investments

Companies can minimize the personal liability of its fiduciaries by employing the consult of outside experts and by selecting diverse, financially sound investments. But, it cannot entirely eliminate their personal liability.

Typical Fiduciary Liability Insurance coverage highlights:

• Broad definition of insured including the company, its benefit plans, and its fiduciaries
• Optional $100,000 sub-limit for pre-qualified voluntary settlement damages
• Optional coverage for defense outside the limits of liability
• Coverage for 502(i) and 502(l) civil penalties
• Broad wrongful acts definition includes allegations of breach of fiduciary duty and errors and omissions
• No deductible will apply for most risks
• Actual coverage is subject to the language of the policies as issued.

Who is considered a Fiduciary?

Any individual included in the plan document by name or title, or any one who has discretionary authority over the management of a plan or its assets. The definition is intentionally vague, thereby holding accountable all individuals who may be responsible for misuse of plan assets or a loss to plan participants.

Any employee who possesses discretionary authority over a company plan or anyone who assists in its administration can be subject to liability. This list of individuals often times includes an appointed fiduciary, a group plan administrator, a human resources manage, or any employee responsible for the administration of a plan.