Fiduciary Liability Insurance – what is it? Why do you need it? Who does it protect? What does it cost?
Fiduciary Liability Insurance is usually made part of a management liability insurance policy or portfolio and provides protection to the trustees of ERISA-based employee benefit plans such as retirement plans and health insurance plans.
Trustees of these plans are normally the business owners and leaders of a firm and this is an important point I want you to remember as I go through this.
What is ERISA on Fiduciary Liability Insurance?
Here, I’d like to have the on-screen highlight roll out the words letter by letter in a vertical format, like:
Know what I mean?
ERISA is the Employee Retirement Income Security Act of 1974 and is a federal law that sets certain standards for retirement and other benefit plans.
ERISA imposes strict duties and obligations upon the trustees or fiduciaries of employee retirement and benefit plans.
Violating or appearing to violate any of these duties and trustees can be subject to lawsuits, fines, penalties, and investigations.
Lawsuits and investigations can be very costly and cannot be paid for by the retirement plan assets.
Unfortunately, other policies such as your D&O or general liability or umbrella policies don’t cover these claims or expenses either.
When a lawsuit or investigation strikes it normally will name the trustee personally responsible and that means their personal assets are at risk.
This is the crux of why Fiduciary liability insurance is important for any business with a retirement plan.
It’s the only policy that protects your firm’s owners and leaders from potential lawsuits that allege wrongdoing with regard to your benefit plans and ERISA.
So, What are the types of lawsuits that trustees or fiduciaries of ERISA-based plans face?
- Improper advice provided to employees
- Conflicts of interest
- Imprudent Investment choices
- Improper investment managers
- Failure to provide sufficient choices or diversity in investment options
- Errors made in the administration of the plan
- Excessive fees within a plan
- Failure to follow plan documents
- Errors in the administration of the plan
- Failure to monitor third-party service providers
- and many others
It’s important to understand that fiduciary will not cover intentional wrongdoing, criminal acts, or embezzlement.
Do these types of lawsuits actually occur?
Yes, and lately with increasing frequency.
Lawsuits increased by 80% from 2019 to 2020 and 2021 frequency wasn’t far behind.
The trend impacts both large employers and small employers with many law firms trolling for dissatisfied employees online.
Is Fiduciary liability insurance the same as Fidelity coverage?
Fiduciary liability is often confused with fidelity coverage and something called Employee Benefits Liability Coverage or EBL.
But these are three distinct coverage parts, all with their own purpose which I’ll quickly explain.
First, Fidelity coverage for your company’s retirement plan is often called your ERISA bond and protects your plan from theft of funds.
Fidelity coverage is mandated by ERISA to ensure at least 10% of plan assets up to a maximum of $500,000.
Second is EBL or Employee Benefits Liability and this provides very limited liability protection for the trustees and administrators of an ERISA plan for administrative errors or mistakes made in the plan.
Commonly if you forget to add a beneficiary designation or something of this nature is when this coverage form kicks in.
The big takeaway here is that the owners of a company are often the trustees of the firm’s employee benefit plans.
They often will do their best to hire the right investment managers and offer options to employees, but they are still subject to potential lawsuits which can be extremely expensive and those costs either are borne by the company treasury or the owner’s personal assets if you don’t have Fiduciary.
In my opinion, it makes sense to include this when you have a company benefit plan.
What does Fiduciary liability insurance cost?
Typically, when a Fiduciary is added to a management liability policy the premium is usually around 15% of the D&O premium, but the premiums will be based on the size of the plan assets under management, the number of employees, and the limit of liability.
Want more info?
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