Fiduciary Liability Insurance

Written by Aaron Adam

With the collapse of Wall Street last year, many firms considered "too big to fail" did just that. When many of these companies failed, the benefit and retirement plans they created for their employees were either severely hurt or also failed, leaving many employees in the lurch with regard to benefits.

The company officers responsible for administering these plans may be held liable for claims from employee lawsuits regarding lost benefits, so it is hopeful that many of these companies had good fiduciary liability insurance and employee benefit liability coverage.

Fiduciary liability insurance basics

Fiduciary liability insurance helps cover officers of companies and other people involved in pension, savings, health, welfare and profit sharing plans from claims of breach of fiduciary duties. Many of the claims for breach of fiduciary duty stem from the 1974 ERISA, or Employee Retirement Income Security Act, which specified the duties and responsibility of fiduciaries with regard to employee benefit plans and also increased their liability.

The law was created to help protect the interests of employees covered under pension and other benefit plans. With regard to fiduciaries, ERISA defines a fiduciary as someone who exercises any sort of discretionary authority or control over an employee benefit plan. The law defines employee benefit plans as plans or programs created to provide employee benefits to beneficiaries or participants.

Under ERISA, people defined as fiduciaries can be held liable for acts, errors and/or ommisions with regard to their work as fiduciaries. This responsibility can extend to accounting firms, law firms, investment advisiers and consulting firms outside the company that exercise control or authority over the plan.

If a employee or beneficiary of a employee benefit plan feels their interests have been harmed by a fiduciary of that plan, he or she may assert a claim against not only the plan, but also the fiduciary, putting the fiduciary's personal assets at risk of being tapped to pay damages. While it's often assumed that a D&O policy will cover these types of claims, the truth is that most D&O policies carry exclusions barring coverage for fiduciary claims.

What fiduciary liability insurance does is provide coverage for acts, errors and ommissions to parties that may be considered as fiduciaries. This coverage is often sold along with fidelity bonds and employee benefit liability insurance.

Fidelity bonds

A fidelity bond, essentially, is a bond that offers coverage to policy holders for any losses they might incur because of dishonest or fraudulent acts of individuals. Unfortunately, in some corporate collapses where employee benefits are harmed as a result, investigations will show that corporate officers raided or otherwise improperly made use of funds from employee benefit plans.

What fidelity bonds do is offer coverage for the benefits lost because of the dishonest or fraudulent act of plan fiduciaries. They don't protect fiduciaries from liability claims arising from fraudulent or dishonest acts.

Employee Benefit Liability insurance

These policies are often sold in conjunction with fiduciary liability insurance and serve to cover many of the claims that can arise from errors or omissions in the administration of a pension or benefit plan, including a failure by the company to enroll an employee in the plan or improper advice to employees regarding benefits.

Things to consider

When purchasing fiduciary liability insurance, be sure to read the policy so that you understand what your policy does and does not cover. Be wary of excessive exclusions or language in the policy that you don't understand.

When you purchase a fiduciary liability insurance policy make sure that it offers coverage for wrongful acts and that you understand the policy's definition of wrongful acts. Also make sure that the policy covers your legal expenses and that you understand its definition of damages. Some policies may not cover punitive damages, which can be quite high in these types of cases.

Also, find out whether the coverage is claims made, and how that coverage definition might relate to your business. Claims made policies only cover incidents that arise and are reported within the coverage period of the policy.

The uncertain economic environment and its potential impact on benefit plans make it an increasingly prudent decision for companies to protect their officers by purchasing coverage for suits regarding employee benefits and pension plans.