Fiduciary Liability is often combined with Directors & Officers (D&O) Liability and Employment Practices Liability (EPLI) to form the basic management liability package or portfolio. But it often confused for fidelity bond coverage or employee benefit coverage (which is found in many general liability policies).
Fiduciary liability coverage is playing a growing and important role to protect the trustees of ERISA (Employment Retirement Income Security Act of 1974) based plans. Trustees of retirement and employee benefit plans in privately held companies are typically the owners, officers, managers and directors; the same group of people that D&O protects. And, similar to D&O claims, fiduciary claims can name a trustee personally liable for their acts, errors or omissions.
So what does fiduciary liability cover? It covers the potential legal liabilities which can arise from claims for failing to act prudently when handling ERISA based benefit plans. Under the 1974 Act, ERISA imposed substantial liabilities on fiduciaries (trustees) of plans such as pension plans, 401(k) plans, group employee benefit plans, etc.
When do claims arise? Today, we are seeing claims arise when trustees fail to select prudent investment advisors, or selecting advisors and funds which have high internal charges. A recent claim against The Home Depot charges that 401(k) participants are being shortchanged in their retirement funds due to high fund maintenance costs and charges.
Fiduciary liability will also protect fiduciaries when they are held liability for the acts, errors and omissions of outside entities that provide administrative and related services to their ERISA benefit funds. This may include third party actuaries, accountants, attorneys, consultants, investment advisors, trust companies and investment management companies.
The differences between Fiduciary Liability, Employee Benefit Liability and Fidelity
As reviewed above, fiduciary liability is needed to protect the trustees (often the owners) of an ERISA based plan from potential liability that could arise from failure to act prudently in their role as a trustee. Potential liability claims under fiduciary can be substantial and put the personal assets of decision makers at risk.
Employee Benefit Liability (EBL) insurance, provides protection for the trustees, administrators and entity for administrative failures in handling an ERISA based plan. It is a type of errors and omissions coverage. An example of EBL type claim is the failure to add a beneficiary to a health insurance plan who is than denied medical treatments due to lack of coverage. EBL coverage is limited in its scope and should be purchased in conjunction with Fiduciary Liability.
Fidelity coverage or a fidelity bond is required by ERISA when you have a pension, profit sharing, or 401k plan to insure against the dishonesty or theft of funds from your ERISA plan. Typically the limit of the bond is 10% of plan assets to a maximum of $500,000. This bond will protect the funds from dishonest situations but will not respond to potential liability suits that could arise from dishonest acts of trustees.