The Need for Fiduciary Liability Insurance is Greater than Ever
Any debate about the need for Fiduciary Liability Insurance has been clearly decided within the last few years. Lawsuits against any parties involved in retirement plans aren’t going away and Fiduciary Liability Insurance is here to protect fiduciaries against those suits.
A fiduciary’s liability is one of the most misunderstood areas of exposure for those who are in charge of retirement plans. Many retirement advisers are explicitly taking on fiduciary discretion over retirement plan funds and assets, exposing them to liability as fiduciaries. When you’re exposed to liability as a fiduciary, you can held personally liable for a breach of fiduciary duty, even if unintentional. You don’t have to do something willfully wrong; all that matters is that there was a breach at all.
Plan fiduciaries are held to a very high standard of care as well, further upping the risk of becoming a plan fiduciary. Plan fiduciary decisions, unlike those of corporate fiduciaries, are also not subject to the business judgment rule, which states that there is a presumption that the fiduciaries acted in the best interests of the corporation whose affairs they were in charge of.
Traditional directors’ and officers’ insurance doesn’t typically cover retirement plan fiduciary liability either, putting those fiduciaries in the same boat as plan sponsor clients. There are also regulatory limits on the ability of a plan or employer to indemnify a third party fiduciary or adviser who has been sued, even if they want to do so. Typically, these parties are not insured under the standard Fiduciary Liability Insurance policy, even if they are considered fiduciaries under ERISA.
Fiduciary Liability Coverage has been carved out to be its own insurance, often coupled with ERISA Fidelity Bonds. Directors’ and officers’ coverage no longer covers fiduciary liability as a result. Fiduciary Liability Insurance also cannot be used to restore losses to an employee benefit plan when a plan fiduciary discovers an error he or she made; someone has to make a claim against an insured for a wrongful act as Fiduciary Liability Insurance is a third party coverage. It will provide a defense against that claim if there is a duty to defend provision and pay for any covered award against the insured entered up to the point of liability.
The potential height of defense costs of a breach should influence the amount of Fiduciary Liability coverage you purchase. You have to weigh how much potential legal fees will cost combined with the amount of a potential injury resulting from a breach to determine the appropriate amount of coverage required. Some very large advisory firms may require up to $100 million in coverage, for example.
Because claims are often related to actions in years past, it is important to consider both past and future liability when assessing your current coverage. A choice of counsel clause, which determines whether the adviser or insurer can choose an attorney, also should be a key consideration in assessing coverage. It’s also important to keep in mind that you must notify your insurance carrier of possible claims once they arise. Failing to comply with this requirement can result in a loss of some or all of your fiduciary coverage.
So who should you reach out to if you would like to purchase Fiduciary Liability Insurance?
Colonial Surety Company is a Treasury Listed surety company providing ERISA Fidelity Bonds packaged with Fiduciary Liability Insurance. Colonial is one of the leading providers of ERISA related products, offering bonds approved by the Dept of Labor. We make it easy to obtain your bond instantly as well as allowing you to purchase retroactive bond coverage for the years the plan was not previously covered.
If you would like to learn more about purchasing an ERISA Fidelity Bond, or an ERISA Fidelity Bond package including Fiduciary Liability Insurance, call 888.383.3313 or email ERISADept@colonialsurety.com. Learn more about becoming a Pension Professional Partner here.