Fiduciary Liability Lawsuits are on the rise and many business owners and decision-makers don’t know about this important coverage part. Fiduciary Liability insurance is often known as the redheaded stepchild of management liability insurance. Most business owners and decision-makers know about Directors & Officers Liability or D&O as well as Employment Practice Liability or EPLI insurance. But many do not know about or have purchased Fiduciary Liability Insurance which often rounds out a good management liability insurance program.
Fiduciary liability insurance protects the trustees of an ERISA-based plan from lawsuits that allege some form of wrongdoing or breach of duty as prescribed by ERISA. ERISA is the Employee Retirement Income Security Act of 1974 which is a federal law administered by the U.S. Department of Labor. It intends to protect the participants and beneficiaries of corporate pension plans and other employee benefit plans.
Today we are seeing what can be described as the third wave of potentially damaging fiduciary lawsuits hitting employers for excessive fees. The first two waves of fiduciary lawsuits involved very large pension plans, but today the targets include retirement plans having less than $1B in assets, and in 2020 there were over 100 excessive fee cases filed. According to the D&O Diary that was a five-fold increase in claims over 2019.
Why is this important for middle-market employers?
Because like other management-related liability lawsuits, fiduciary claims often name the trustees of a retirement plan, whether it’s a pension plan or 401k plan, as defendants; meaning that the trustees are often the officers of a firm, are putting their personal assets at risk.
Excessive fee claims often allege that plan sponsors and trustees fail to monitor or adequately negotiate the fees charged by investment fund managers and administrators, as well as failing to manage plan options and performance standards. Plan trustees often see their 401k plan as a set and forget type of arrangement which puts them in the danger zone with ERISA obligations.
These fiduciary claims are often brought by boutique law firms that have expertise in this field and have won similar cases based on their deep knowledge of excessive fee claims. This leads to expensive defense costs which lead the defense council too often seeking to settle. That means you’re footing the bill.
In the past, little attention was paid to Fiduciary Insurance. It was often added into a Management Liability policy for a slight upcharge of like 10% and was thought of as a “nice to have” coverage option.
Today, Fiduciary is a “MUST HAVE” coverage due to the increasing litigation around excessive fees, the premiums are going up.
Here’s the bottom line.
If you’re a middle-market employer or trustee of an ERISA-based plan – even a self-directed 401k plan you need to address your firm’s duties under ERISA. This includes a documented approach to monitoring your plan’s investments, costs, and performance compared to other options available to you. For larger firms this means stronger governance, auditing the third parties you engage, benchmarking, and knowing and documenting your options.
Lastly, it means that if you don’t have fiduciary liability insurance, you should get it, and if you do have it, it may be time to evaluate your coverage limit options. With the rise in expensive litigation the $1M limit you may have, may be insufficient. Speak to your insurance broker about benchmarking limits compared to your peer group and see if an increase should be considered.
My name is Gordon Coyle and if you’re looking for help on your management liability insurance or other business insurance policies, give me a call, let’s chat. No pressure, no sales gimmicks just some conversation to see if I can help you and if we might be a good fit for your business insurance needs. I work in all 50 states and love solving insurance and risk problems and issues for business owners. Click the button below to get the process started, and I look forward to speaking with you.
