Trends in Fiduciary Liability Insurance

Under ERISA, fiduciaries may be held personally liable for a breach of their responsibilities in the administration or handling of employee benefit plans even having purchased an ERISA Fidelity Bond.  Under ERISA 410, the plan cannot relieve you of this responsibility with indemnification language, however, it specifically permits persons with personal liability to purchase Fiduciary Liability Insurance.  But with new technology and a forever advancing world, fiduciary responsibilities are becoming more and more complex. Fiduciary Liability Insurance policies are evolving along with those responsibilities to best cover plan fiduciaries. So what kinds of fiduciary responsibilities are coming down the pike to add to your duties and how can you best protect yourself personally against a possible breach?

Pre-Claim Investigation Coverage

As Department of Labor plan audits have become more extensive in recent years, many plans want to protect themselves during these audits. Fiduciary Liability Insurance carriers have started to offer Pre-Claim Investigation Coverage to protect plans during this period. It covers the period before a claim, during the fact finding mission that doesn’t contain an allegation of a breach. Insurers will reimburse for the cost of an attorney to cover the plan during this period. The attorney then advocates for the plan during this investigation before a claim is found.

Nonfiduciary Claims

Fiduciary Liability Insurance covering nonfiduciary claims? Yup, that’s right. Fiduciary Liability Insurance traditionally hasn’t covered settlor function responsibilities, such as establishing a plan, terminating a plan, choosing plan features, and amending a plan’s benefits. However, as time has gone on, the line between fiduciary and settlor has blurred to the point that a plan amendment challenge, a settlor function, almost always is presented with a fiduciary breach claim.

The best way companies have found to counter these blurring lines between settlors and fiduciaries is to cover settlor functions within Fiduciary Liability Insurance coverage. Some insurance carriers are expanding the definition of “wrongful act” to include instances when someone is sued in their capacity as trustee, while others are altering the policies to expressly cover settlor functions. The policy language will determine what exactly is being covered, but even the definition of wrongful act is being expanded to cover specific settlor functions.

Voluntary Compliance Programs

Insurers have historically tried to guard against covering moral hazard claims, which occur if policy coverage incentivizes plan representatives to take unnecessary risks knowing they’d be covered. More recently, however, that has changed as regulatory agencies have encouraged employee benefit plans to remedy fiduciary violations proactively by taking specific remedial actions. The Department of Labor compliance program, for example, allows those potentially liable for fiduciary breaches to voluntarily and proactively apply for relief. Fiduciary Liability policies are now covering the costs of engaging in these voluntary compliance programs that essentially encourage the insured to make a claim against itself preemptively. The insurance usually covers the costs of investigating the potential claims and amount penalized should any violations be found.

502(c) Reporting Violations

Traditionally, Fiduciary Liability policies haven’t covered taxes penalties not explicitly covered in the policy. However, with individual fiduciaries facing personal liability for penalties under the ERISA Act and other recent statues with plans being unable to pay for these penalties from plan assets, Fiduciary Liability Insurance carriers have started providing coverage for some of these kinds of penalties.

Penalty coverage includes coverage for alleged failure to respond to written requests for plan information under ERISA 502(c). These are common claims as they often are combined with reporting violations as well. The Pension Protection Act of 2006 added additional new reporting requirements, making coverage for these penalties more valuable.

Healthcare Reform

The Affordable Care Act changed and expanded ERISA and the Public Health Service Act by incorporating ACA mandates for employer sponsored healthcare plans into Section 715 of the ERISA Act. Plan participants can file claims under ERISA to enforce these changes, while there is also expected to be litigation stemming from Section 510 of the ERISA Act, which prohibits interference with employee benefits and protection of present and future employee benefits.

For the most part, these new causes of action should already be covered under standard  Fiduciary Liability Insurance’s coverage for breach of fiduciary duties, but new penalties for ACA violations for varying regulatory agencies wouldn’t fall under that coverage. Coverage for those penalties has to be explicitly stated in the policy and carved out from the general penalty provision exclusion.

HIPAA/HITECH

Health Insurance Portability and Accountability Act (HIPAA) privacy and security rules were further broadened by the enactment of the Health Information Technology for Economic and Clinical Health Act (HITECH) in 2008 as HITECH enhanced patient privacy rights, provided patients with more ability to obtain copies of their health information, and strengthened the government’s ability to enforce the law. The Department of Health and Human Services (HHS) issued a ruling in 2013 under HITECH amending HIPAA privacy, information security, and breach policy.

Under this HHS rule, liability was expanded by subjecting HITECH and implementing regulations to a civil monetary penalty, subjecting business associates and downstream contractors to direct liability for HIPAA violations while increasing monetary penalties for such violations based on the degree of culpability for each violation. Fiduciary Liability Insurance carriers have, in response, started to implement penalty endorsements to reimburse employee benefit plans charged with HIPAA violations.

IRS 4975 Penalties

Remitting contributions within the required time frame has long been a problem for employee benefit plans. Failure to remit within that time frame leads to a prohibited transaction subject to to an excise tax under tax code section 4975. Failure to remit within the prescribed time may also give rise, under ERISA, to civil penalties penalties and, if failure is deemed to be willful, criminal penalties. These penalties under 4975 are not covered under traditional Fiduciary Liability Insurance policies unless specifically covered and added to the policy as many policies are beginning to do.

Cyber Liability Insurance

Employee benefit plans face the threat of cyber hacks and security breaches due to their reliance on modern technology. Hackers, thieves, and even employees pose cyber threats to plans. Fund computer systems or servers may have to be shut down or have operations interrupted. Data can be lost in potential hacks. Cyber Liability Insurance is becoming an added endorsement for Fiduciary Liability Insurance and is coming soon to Colonial Surety’s ERISA Fidelity Bond packages.

Third versus first party claims are crucial to cyber coverage. Third party claims relate to claims by third parties such as employees or regulators alleging wrongdoing in connection to a computer system or breach of privacy due to theft or loss or misuse of data. First party claims, on the other hand, are related to injury caused by the insured themselves and involve actions such as proper notification to beneficiaries of information being compromised as well as other investigations related to the breach. Most first party claims are not covered under standard Fiduciary Liability Insurance as funds still have exposure for notification and contention restoration expenses even without a third party claim, while it is questionable whether certain third party claims would be covered under standard Fiduciary Liability Insurance.

Benefit Overpayment Claims

Mistakes in calculating and paying each plan beneficiary’s retirement benefit on a monthly basis are common and funds and fiduciaries are often at a loss of what to do when a benefit is calculated or paid out incorrectly. Fund trustees and plan administrators must fix incorrect pension calculations to comply with plan documents and that correction must result in the beneficiary or participant receiving the correct amount going forward while the fund must recoup all past incorrect overpayments with interest. The fund has limited options to perform this correction on overpayments, however. It can reduce future payments or ask for the overpayment back, but those can cause problems, especially with deceased beneficiaries or participants.

Whether standard Fiduciary Liability Insurance applies to these losses to the overall plan is cloudy. These problems rarely involve third party claims as participants will not object to receiving more than their allotted sum. So, unless the DOL asserts a breach of fiduciary duty, it is unlikely for the standard Fiduciary Liability Insurance to cover one these kinds of losses. In a first party overpayment situation, without a third party claim such as this, then, first party voluntary overpayment coverage would be required. It is rarely offered currently, however, as many carriers have failed to delineate and understand the different issues regarding first versus third party claims in benefit overpayment.

502(a)(3) Equitable Relief (Amara Surcharges)

In Cigna Corp. v. Amara, the United States Supreme Court decided that a form of monetary compensation is available under the equitable relief provision of the ERISA Act Section 502(a)(3), including a surcharge upon showing “actual harm.”

Since this decision, at least some courts have shown that they will grant equitable relief to beneficiaries whose benefit claim is foreclosed under Section 502(a)(1). A majority of Fiduciary Liability Insurance policies, however, do not specifically address relief stemming from the Amararuling. Equitable relief under Amara would not technically count as a benefit under the plan, so while the carrier would likely defend against a claim here for breach of fiduciary liability, the question remains as to whether the policy would indemnify the plan. Some carriers are starting to specifically offer explicit Amara coverage as, currently, it is unclear whether these types of issues are covered under standard Fiduciary Liability Insurance policies.


It’s all but certain that new forms of Fiduciary Liability Insurance will have to crop up to fight against currently unforeseen future claims. But with what we know now, Fiduciary Liability Insurance carriers such as Colonial Surety are looking to provide more and more types of coverage in the future to combat the claims potential customers are uncertain about.

If you would like to learn more about about purchasing 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.

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