Are You Insured?
Fiduciary Liability Insurance – Assistance in Your Time of Need
One of the most problematical areas of employee benefits litigation hinges on fiduciaries and their duties to plan participants and beneficiaries. If you’re a fiduciary, the cost of defending yourself can be high, regardless of any fault. That’s where fiduciary liability insurance can assist you.
ERISA defines a plan fiduciary as an individual who:
- Has discretionary authority or control with respect to plan management or disposition of plan assets,
- Renders investment advice for a fee, or
- Has discretionary authority or responsibility for the plan’s administration.
According to research compiled by Travelers Indemnity Company, the average settlement in fiduciary breach litigation is $994,000, and the average cost of defending oneself against such a claim is $365,000. To make matters even worse, 69% of “substantive” ERISA litigation resolves in the plaintiffs’ favor.
You may think you’ve protected yourself from any fiduciary liability by delegating the majority of the decision-making authority for your benefit plans to financial institutions and/or specialized consultants. This would be incorrect. Even though it’s possible to reduce your exposure, it’s usually not possible to remove yourself completely from the entire liability.
Are You Covered?
So what exactly does fiduciary liability insurance cover? Let’s start by reviewing what it doesn’t cover.
Some fiduciaries may confuse fiduciary liability insurance with ERISA’s fidelity bond requirement. These bonds protect the plan from any dishonesty on a fiduciary’s part, but do not protect the fiduciaries themselves from any claims brought by others. In addition, be sure not to confuse fiduciary liability coverage with employee benefit liability (“EBL”) insurance. While both of these policies will cover administrative errors and omissions, EBL coverage does not cover any clear ERISA violations.
Fiduciaries who also serve as a director or officer of the employer will usually be covered under the company’s directors’ and officers’ (“D&O”) coverage. However, typically these policies do not cover incidents that occur while a person is acting in a fiduciary capacity. Finally, what if your company promises to indemnify you for losses incurred during your time as a fiduciary? That may not provide as much security to you as you may first think, depending on the company’s financial position at the time that any litigation occurs.
What Does Fiduciary Insurance Cover?
Fiduciary insurance can cover both the fiduciary and the company sponsoring the plan. The types of insurance coverage you can select include:
- Faulty advice from counsel,
- Improper plan document amendments and disclosures to plan participants,
- Incorrect investment advice,
- Imprudent choice of outside service provider, and
- Negligent errors and omissions.
While shopping for fiduciary liability coverage, as with just about any other category of insurance protection, consider the carrier’s financial strength. You can research this using ratings provided by services such as A.M. Best Company and Standard & Poor’s.
Find out how long the provider has been offering fiduciary liability insurance and what their track record is for paying claims promptly. Finally, you should always compare costs and remember that the least expensive policy may not always be the best, depending on what items are (or are not) being covered.
Play it Safe
If you’re a plan sponsor, or you have fiduciary responsibilities, you should always strive to play it safe. Contact your benefits specialist to find out if you’re covered under a fiduciary liability insurance plan.
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