Why employers may need fiduciary liability insurance

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“Fiduciary liability insurance: isn’t every plan required to have that?” Actually, fiduciary liability insurance isn’t required, but this question reflects an all too common misunderstanding. Every fiduciary and other person who handles plan funds is required to be bonded against losses caused by their fraud and dishonesty — that’s been a legal requirement since even before ERISA was enacted. All too often, though, when I ask to see fiduciary liability policies, the document that arrives is not fiduciary insurance, but the ERISA bond. When I inquire further, it often turns out that those fiduciaries don’t have fiduciary liability insurance at all.

There is a big difference. The plan is the named insured under the bond, which means that the plan gets the reimbursement if there is a claim. The ERISA bond doesn’t protect the fiduciaries themselves, who can be personally liable for losses caused by a fiduciary breach. To protect themselves, fiduciaries need to have special coverage called fiduciary liability insurance.

Here are some additional reasons why this insurance is not optional as a practical matter even though it’s not legally required:

· Your corporate policy will not protect you if you are accused of fiduciary breaches; fiduciary activities are usually excluded.
· Your company’s agreement to indemnify you may be limited by state law or worthless if your company goes bankrupt.
· Even if you win a fiduciary breach lawsuit, and are found to have done nothing wrong, you will have legal defense fees that could be high.
· Settlements and court awards in fiduciary breach cases have been substantial. Some have exceeded $50 million.

There are a lot of different fiduciary insurance policies in the market, and they are not fungible. They will all have deductibles and exclusions. Some will require that there be an actual claim, but others will even cover operational violations that are discovered and voluntarily corrected under the IRS’ voluntary correction program. Some will give you a say in picking the lawyer to defend a lawsuit.

Employers should go over the terms and have the policy reviewed by an ERISA attorney to make sure coverage is complete. I’ve seen policies that had to be changed to cover all of the committee members because they only covered officers and directors and policies that didn’t cover all affiliated companies. You may need riders to get the coverage you want. If you have non-U.S. affiliates with plans, there are special considerations in reviewing coverage and you should consider coverage for breaches of foreign laws that are similar to ERISA.

Fiduciary liability insurance should never be viewed as a substitute for good fiduciary practices, but it is good to know you have backup if claims do arise.

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