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In the world of insurance, the need for fiduciary liability is sometimes misunderstood because it’s easily confused with fidelity bond coverage meant to guard against employee theft and dishonesty or with ERISA fidelity bond coverage that applies to theft from an ERISA employee plan. Policyholders may also incorrectly assume that Employee Benefits Liability (EBL) covers employee plan claims, but EBL is limited to coverage for administrative errors, such as failure to enroll and doesn’t extend to breaches of fiduciary duty like imprudent investment (source). Some may also assume that D&O coverage automatically includes fiduciary liability (source). While it’s true that fiduciary liability is often written into the same policies as D&O coverage and covers many of the same people, D&O policies function to cover a broader variety of issues such as shareholder claims alleging mismanagement that result in devalued stock prices or an organization’s inability to repay debt.

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COVERING DEFINED BENEFIT & CONTRIBUTION RETIREMENT PLANS

Fiduciary liability specifically covers those responsible for choosing and administering employee retirement and welfare plans. This includes plan sponsors (i.e. employers), trustees, directors, officers, and internal investment committee members. It’s the job of fiduciaries to act in the best interest of beneficiaries and participants when choosing advisors or investments, minimizing expenses, and adhering to plan documentation. Such substantial responsibility comes with potential liability that requires the right kind of insurance protection (source).

Fiduciary liability is a distinct form of coverage specifically aimed at covering those charged with creating and managing benefit and retirement plans. 401k plans likely come to mind first, but the majority of companies outsource the administration of these plans to larger financial services organizations, which helps to standardize plan administration and employee investment options. Fiduciary liability coverage also applies to 403bs, IRAs, stock purchase plans, employee stock ownership plans, and defined benefit plans. Perhaps the biggest area of exposure for employers’ lies with defined benefit pension plans requiring employer contributions, such as pension plans. Fiduciaries may face claims arising from inability to fund retirement plans due to dramatic revenue losses. Large losses in employer stock value could also impact the retirement savings of employee plan participants leading to fiduciary liability claims (source).

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BOTTOM LINE

The coronavirus pandemic has created a global atmosphere uncertainty, and it will likely have a more substantial impact than we can currently foresee, making it vital that policyholders work proactively to reduce risk across the board. Contrary to common misconception, EBL, ERISA bonds, and to some degree D&O insurance, will not completely cover fiduciary exposures, creating a unique and vital role for fiduciary liability coverage. Any business that offers benefits plans has some level of exposure in the area of fiduciary liability. Larger organizations are more likely to employ personnel solely responsible for managing employee benefits in alignment with ERISA law, but smaller businesses without dedicated benefit managers may find themselves at greater risk (source).

Meeting the business challenges presented by our current global crisis head-on requires that policyholders and insurers collaborate to review all coverage, including fiduciary liability, to determine if coverage changes are needed in light of exposures presented by COVID-19 (source). Agents should ensure that any fiduciary liability policy includes appropriate settlor capacity. This is a type of coverage afforded by some fiduciary liability insurance policies (only by endorsement), rather than within the terms of standard policy forms. Settlors are those responsible for macro-level decision making such as plan funding or termination, and fiduciaries are tasked with executing plans. While such exposures have always been an inherent part of providing employee benefit plans, the economic effects the COVID-19 pandemic provides greater opportunity for exposure. While no specific underwriting questions have yet emerged, it’s likely that some will see premium increases, especially when it comes to covering defined benefit pension plans.

Partnering with CRC, a trusted, knowledgeable wholesale broker with expansive market reach can help policyholders prepare for the economic issues ahead. Agents with any questions should contact their CRC Group producer to discuss how we can help clients prepare for and protect against the exposures of the next large-scale health crisis or global economic event.

Contributors

• Greg Schenendorf is an Assistant Vice President and Professional Liability Broker with CRC Group’s Long Island, New York office.
• Mark Waldeck is the Office President of CRC Chicago and active member of CRC Group’s ExecPro Practice Group.