Fiduciary liability insurance, also known as management liability insurance, is intended to protect businesses and employers against claims resulting from a breach in fiduciary duty. Essentially, the policy protects parties against liability for managing or administering employee benefits plans.
First things first: who or what is a fiduciary?
Every single individual included in an employee benefit plan document by name or title, as well as anyone with discretionary decision-making authority over the administration or management or the plan or its assets can be considered a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). Common fiduciaries include: employers (who are typically the plan sponsors); plan administrators; plan trustees; directors and officers; and internal investment committees.
As explained by Travelers: “As a fiduciary, it’s your job to select advisors and investments, minimize expenses and follow plan documents exactly. You have a duty to act solely in the interest of plan participants and beneficiaries - not the company. That’s a lot of responsibility and it comes with potential liability that requires the right protection.”
What is an employee benefit plan?
Employee benefit plans, which are managed and administered by fiduciaries, generally fall into two broad categories: retirement plans and welfare plans. Retirement plans include things like (but not limited to): defined benefit pension plans, profit sharing plans such as 401(k)s, stock purchase plans and employee stock ownership plans. Welfare plans are things like: medical benefits, dental, life and disability.
What is ERISA law?
ERISA was passed in 1974 to ensure that employees participating in benefit plans, whether pension plans or welfare plans, get the benefits promised by such offerings. The law does not require employers to set up these plans for workers. Rather, it polices the plans once they’re put in place to ensure they meet certain standards.
The introduction of ERISA essentially created fiduciary liability exposures for employers that offer employee benefits plans. As a result of this, fiduciary liability insurance coverage became widely available in the mid-1970s.
Who does the fiduciary liability insurance policy cover?
Fiduciary liability insurance will only cover the insured company and its employees engaged in fiduciary roles. The coverage does not extend to third-parties, outside advisers or administrators of benefits plans.
As The Hartford explains: “Any outside advisers, consultants, or administrators of your benefits plans … are responsible for securing their own coverage. Also, keep in mind that even if you hire outside advisors to take on your plans’ fiduciary functions, this doesn’t automatically exclude you from any associated liabilities - you are still responsible for monitoring these fiduciaries’ activities.”
What breaches of fiduciary does this policy typically cover?
Lots of people describe fiduciary liability insurance as being similar to errors and omissions (E&O) insurance. It protects fiduciaries against claims alleging:
- Errors in administering plans, such as improper enrolment or terminations, resulting in lost or incorrect benefits;
- Errors in counseling when administering health or welfare plans, resulting in lost or incorrect benefits;
- Giving poor or negligent advice on investing employees’ retirement plans;
- Making risky investments in a defined benefit pension plan;
- Wrongful denial or improper change in benefits;
- Imprudent selection of and/or monitoring or third-party service providers.
Which companies are more at risk to litigation as a result of fiduciary breaches?
Any company that offers benefits plans has this exposure. While large organizations are more likely to have experienced personnel dedicated to employee benefits and well-versed in ERISA law, smaller companies may not and therefore might be more at risk of litigation.
What is an ERISA bond?
ERISA bonds are required under section 412(a) of the ERISA law. They’re different to fiduciary liability coverage. This first party coverage protects the plan and its participants by bonding any employee who handles funds or any other property of the plan, thus protecting the plan from risk of loss from fraud or dishonesty by the bonded employees.
Is employee benefits liability insurance the same as fiduciary liability insurance?
No it’s not. Employee benefits liability insurance provides coverage for employee plan claims, but is limited to administrative errors, like failure to enroll. It does not extend to breaches of fiduciary duty, like imprudent investment and so on. This coverage is normally an endorsement to a general liability policy.
Contrary to popular belief, ERISA bonds, employee benefits liability insurance, and to some extent D&O insurance will not fully cover fiduciary exposures. That’s why fiduciary liability insurance plays a unique and a vital role.