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  • Fiduciary Liability & Fidelity Bond Coverage

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    Fiduciary Liability Insurance Guards Against Mismanagement Claims

    Fiduciary liability insurance (and management liability insurance) is targeted at protecting businesses’ and employers’ assets against fiduciary-related claims of mismanagement of a company’s employee benefit plans. It is not required by the Employee Retirement Income Security Act (ERISA) or any federal statute. If a claim is made against the policyholder of this insurance, it covers the legal expenses of defending against the claim, as well as the financial losses the plan may have incurred due to errors, omissions or breach of fiduciary duty.

    Under the ERISA Act of 1974, fiduciaries may be held personally responsible for the mismanagement of employee benefit plans.

    ERISA regulates not just retirement plans, but virtually all employer plans that provide employee benefits, including health, life, profit sharing, disability, and employee leave. Although ERISA does not require employers to establish benefit plans for their employees, it sets out minimum standards for these plans, including a clear code of conduct for fiduciaries who are charged with managing and overseeing employee benefit plans and programs.

    Under ERISA Section 409, both employers (the plan sponsors) and outside providers hired in a fiduciary capacity are potentially exposed to significant liabilities. If a plan is not managed properly and/or benefits are lost because employees were not given adequate information or instruction, fiduciaries can be held “personally liable” to “make good” any losses that they’re responsible for. The ramifications are broad, from legal claims arising from poorly invested pensions, to charges of failing to inform employees about their eligibility for coverage for medical procedures or other welfare benefits.

    If you purchase fiduciary liability insurance for your company and employees engaged in fiduciary roles, the policy does not extend to any outside advisers, consultants, or administrators of your benefits plans. These providers are responsible for securing their own coverage. Also, keep in mind that even if you hire outside advisors to take on your plans’ fiduciary functions, this doesn’t automatically exclude you from any associated liabilities—you are still responsible for monitoring these fiduciaries’ activities.

    Fiduciaries are defined by their roles

    In describing the scope of what qualifies a person as a fiduciary, in “Meeting Your Fiduciary Responsibilities” (February 2012), the Employee Benefit Security Administration writes:

    • Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.

    In other words, ERISA focuses on what people do with regard to a plan, not what their job title may be. ERISA demands accountability from anyone who has discretionary authority or control over a plan’s management or assets.

    The “breach of fiduciary duty” and other errors or omissions that are covered by a fiduciary liability policy will typically include:

    • With regard to providing advice on investing employees’ retirement plans like 401(k)s, poor or negligent investment practices, including failure to offer adequate diversification options, charging excessive fees, or acting in a way that presents a conflict of interest
    • In administering health and other welfare plans, inadequate policy communications or errors in counseling or providing interpretations to employees that result in lost benefits
    • Errors in computing or administering plans, such as improper enrollment or terminations, that result in lost benefits

    Fiduciary liability policies and ERISA fidelity bonds serve quite different functions

    Fiduciary liability insurance does not cover fraudulent acts—and does not satisfy ERISA bonding requirements.

    If someone acting as a fiduciary deliberately defrauds or steals from a plan, that kind of act would be covered under a fidelity bond. Although allegations of negligence, poor oversight and other breaches of fiduciary responsibility are technically “illegal” under ERISA, they aren’t deliberately fraudulent.

    More to the point, fiduciary liability policies protect fiduciaries’ liability, in terms of paying for their legal defense and restoring whatever damages they may be responsible for. ERISA fidelity bonds are required to protect the employees’ benefits, as represented by the employee plans.

    Coverage is typically not included in other types of liability policies

    Even if your business carries other liability policies to protect your company against legal claims, coverage for fiduciary liability is likely not included—or adequate. For example, most directors and officers (D&O) policies specifically exclude coverage of fiduciary liability claims. A different type of insurance policy, called employee benefits liability insurance, provides coverage for employee-plan claims, but is limited to administrative errors.

    Although you may already carry errors and omissions coverage for your business’ professional services, E&O insurance is specifically designed to cover your relations with customers—not your own employees—so fiduciary liability would not be included. The exception of course, is if you are a professional in the business of acting as a fiduciary. Finally, general liability policies aren’t broad enough to protect the personal assets of all those in your employ who may be hit with a fiduciary liability claim.

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    • To learn about how to comply with ERISA, start here.
    • For more information on how ERISA defines companies’ fiduciary responsibilities, start here.
    • If you have employees and your company offers any kind of retirement, health or other employee welfare plan, then you already know what a challenge these are to oversee and administer. To abide by the law and ensure that your plans are properly managed, you may want to consider using a third-party fiduciary or service provider who offers expertise in this area, or consulting with a benefits professional to ensure that your employee programs are well-designed and managed. If you do work with an outside professional, make sure they carry fiduciary liability coverage.
    • Schedule a conversation with your insurance professional to discuss your company’s employee benefit programs and unique exposures to fiduciary liability.