The Employee Retirement Income Security Act of 1974 (ERISA) increased the liability of anyone who administers a benefit plan, including the CEO, CFO, Plan Administrator, and human resources employee. To address the employee dishonesty requirement for ERISA, the ERISA Bond was created. Although this bond addresses ERISA’s provisions, it is not sufficient since plan administrators remain exposed in many ways. The ERISA Bond can be written separately or can be endorsed onto an Employee Dishonesty policy. In addition, the weakening economy, downsizing and pension freezes have increased the number of claims filed within the past few years. To fill the gap and to protect administrators in an increasingly litigious environment, Fiduciary Liability Insurance was created.
Why Isn’t an Employees Benefit Liability Policy Sufficient?
The coverage provided through an ERISA Bond is limited to dishonest acts and does not provide coverage for the mismanagement of benefit plan assets or a decision to use a Third Party Administrator (TPA). Many of the EBL policy forms will exclude claims arising out of ERISA.
The Need for Fiduciary Liability
ERISA has always placed personal liability upon the trustee or fiduciary. The corporate bylaws do not have a provision to use the indemnification provisions, within the liability imposed by ERISA. Richard G. Clarke says “The liability is stated as ’personal’ and affected persons are advised that corporate bylaws indemnification provisions are not applicable to this personal liability. Thus, creating the need for a new product, known as Fiduciary Liability.”1
Fiduciary Liability insurance offers an effective alternative to transfer the risk of all legal fees and damages at a predictable expense that would otherwise be the responsibility of the company and trustees.
The majority of fiduciary claims are brought by past or current employees or their families. However, claims may also be brought by another fiduciary or by the Department of Labor (DOL), which enforces ERISA. When the DOL brings an action, fiduciaries can face civil penalties as well.
The typical causes of claims are: denial of benefits, misleading representation, and communication of plan benefits. Employee Stock Option Plans can trigger both Director & Officers and fiduciary liability claims. If the stock declines in value, it can easily be considered management malpractice.
How Fiduciary Liability Insurance Works
Since Fiduciary Liability is a Claims Made Liability policy, coverage is triggered when the claim is made. The best possible negotiation is to cover all possibilities and to have the policy not list a retroactive date or provide full coverage. Negotiation of the retroactive date is particularly important when changing insurance carriers.
Fiduciary Liability is often included on the same policy with the Directors & Officers and the Employment Practices Liability. The size and type of firm (private vs. public) will determine the limit for each insurance coverage and the policy aggregate limit. As the possibility for claims continues to rise, management will want to consider an overall increased aggregate limit. In general, the higher the limits, the higher the retention. The premium is based on the individual benefit plan assets, annual contribution, past loss experience and employers’ funding practices.
What to Look for in Considering Fiduciary Liability Insurance:
- Duty to Defend or no Duty to Defend.
- Specific coverage for violation of HIPPA and COBRA violations
- Discovery clause, anything less than 12 months, 365 days or one year should be negotiated.
- Bilateral discovery activation provision, whereby the Extended Reporting Period is activated upon termination of coverage by either the insured or the insurer.
- Policy’s definition employee benefit plan. If this is limited to just ERISA, coverage needs to be negotiated to include other sources of fiduciary liability.
- 90 –day cancellation notice
- Is there manuscripted language for managed care liability coverage? It may not be available.
- Negotiate for the broadest of severability provisions available.
- Punitive damages are often excluded or not available in certain states. It is important to have punitive damages covered where possible.
1Clarke, Richard G., “Fiduciary Liability: The Most Misunderstood of Management Exposures,” Insurance Journal, September 20, 2004.