Fiduciary Liability Insurance 

Fiduciary responsibility and is perhaps one of the market’s least understood errors and omissions coverages.

This insurance plan protects your business and its key employees, independent contractors, and contractors from being sued over potential mismanagement concerning their benefit plans. Not having this coverage can put your company and personal assets at risk. It also helps minimize expenses related to potential claims and settlements.

Read on to find out what fiduciary liability insurance is, its scope of coverage, costs, and more.

What is Fiduciary Liability Insurance?

Fiduciary liability insurance provides financial protection to the plan administrators and sponsors — or the fiduciaries — of pension plans, welfare plans, and employee benefits plans. Its purpose is to protect fiduciaries from claims alleging breach of duty, mismanagement, and other fiduciary responsibility violations.

Other insurance plans, such as directors and officers (D&O) insurance and general liability insurance, safeguard employers from a wide range of risks. But they don’t cover claims alleging mismanagement in fiduciary duties. Only this liability insurance does that.

As a business owner, you are automatically a fiduciary of these plans. Without trustee liability insurance coverage, you risk losing your personal assets if an employee or a group of employees files a claim alleging fiduciary mismanagement.

Importance of Fiduciary Liability Insurance

This is a crucial component of risk management for companies that sponsor these plans. Fiduciary liability insurance protects both the company and its fiduciaries from claims of mismanagement and related legal liability. Without this coverage, companies and their fiduciaries may be held personally liable for breaches of trustee duties, which can result in significant financial losses.

This insurance provides financial protection and peace of mind, allowing companies and their fiduciaries to focus on core operations without concern over potential legal repercussions. It also helps minimize expenses related to defending against claims.

Who is a fiduciary, and what are their fiduciary duties?

In this context, a fiduciary is an individual who manages a plan or has decision-making power regarding its management. Generally, business owners, plan trustees, administrators, directors, officers, and independent contractors with administrative authority are considered fiduciaries.

As a fiduciary, you are applicable laws such as (ERISA law) to act in the best interests of the beneficiaries of the plan participants. For this very reason, the role of a fiduciary comes with hefty legal responsibilities. You can be held personally responsible for your actions and decisions while managing a pension or employee benefit plan, highlighting the importance of fiduciary responsibility.

Who needs Fiduciary Liability Insurance for employee benefit plans?

If a business or company offers its employees a benefit plan, such as a health or retirement plan, it needs fiduciary liability insurance. Just to be clear, fiduciary liability insurance is not required by law. However, the law does require fiduciaries to act in the best interest of the individuals whose money they are handling, fulfilling their fiduciary responsibility.

It is important to note that having coverage does not remove or reduce liability. However, it does offer financial protection by covering the legal fees and potential judgments or settlements associated with claims of negligence in plan administration.

Business owners and senior officers are typically fiduciaries regarding employee benefits plans. With fiduciary liability insurance in place, the company’s and the fiduciaries’ personal assets are protected against fiduciary-related negligence claims.

Plan administration is seldom easy, and honest mistakes may occur despite best intentions. For this reason, having sufficient fiduciary liability insurance coverage is necessary.

For example, let’s say you own a small business offering employees a retirement benefit plan. You decide to hire a third-party service provider to administer the plan since you have no time to manage it yourself. However, the third party has a track record of opting for high-risk investments. When reviewing the plan, an employee finds it has been performing below par because of high-risk options.

The liability lies with your company because it is responsible for administering the plan — not the third party. It has a fiduciary duty to hire a responsible third-party provider whose actions align with the best interests of the plan’s beneficiaries. When you get served with a lawsuit, you can file a claim with the insurer, who will hire a lawyer to represent you and make a settlement payment, if required.

How Fiduciary Liability Insurance Works

This coverage is designed to shield companies and their fiduciaries from claims of mismanagement and related legal liability arising from their roles. The policy typically covers errors or omissions in plan administration, including areas such as health insurance, retirement contributions, and stock options.

Additionally, fiduciary liability insurance extends to legal liability arising from the selection of the service providers, such as investment managers and administrators. By providing financial resources to defend against claims and pay settlements or judgments, this insurance helps companies eliminate underperforming investment options and reduce investment fees, ensuring the best interests of participants are always prioritized.

Coverage and Limits

Liability insurance provides comprehensive coverage for companies and their fiduciaries against claims of mismanagement and related legal liability. This coverage typically includes protection against errors or omissions in plan administration, breaches of trustee duties, mismanagement of assets, and failure to comply with regulations.

The limits of this can vary significantly depending on the policy and the insurance company. Generally, policy limits range from $1 million to $10 million or more, depending on the size and complexity of the benefit plan. It’s crucial to choose a policy with adequate limits to ensure that both the company and its fiduciaries are well-protected from potential risks. Additionally, most policies include a deductible or retention amount that the company must pay before the insurance coverage kicks in, which is an important consideration when selecting a policy.

Choosing a Provider

Selecting the right insurance insurance company for trustee liability insurance is a critical decision. Here are some key factors to consider:

• Experience: Look for an insurance company with extensive experience in providing this coverage. An experienced provider will have a better understanding of the unique risks associated with managing these plans.
• Financial Stability: Choose an insurance company with a strong financial rating. This ensures that the provider has the financial resources to pay claims, providing peace of mind that your coverage is reliable.
• Policy Flexibility: Opt for a policy that can be tailored to meet your company's specific needs and its benefit plans. Flexible policies allow for adjustments as your company’s needs evolve.
• Claims Handling: Consider an insurance company with a reputation for efficient and fair claims handling. A provider with a strong track record in this area can make a significant difference in the event of a claim.
• Premium Costs: Compare premium costs from different insurance companies to ensure you get the best value. While cost is an important factor, it should be balanced with the quality of coverage and the provider’s reputation.

What is covered by Fiduciary Liability Insurance?

This protects both the company and individuals if someone sues them for an actual or alleged wrongful act committed by them in their fiduciary capacity, which includes their fiduciary responsibility. Your policy will typically cover:

• Legal costs to defend against claims alleging you didn’t act in the best interest of the plan’s beneficiaries
• Settlements negotiated
• Damages awarded to the claimant by the court in the event of an actual wrongdoing
• Cost of investigation into the alleged errors or omissions

Here are some examples of lawsuits that fiduciaries commonly face and are protected against if they have trustee liability insurance:

• Conflicts of interest
• Imprudent investment choices
• Failure to follow the plan documents
• Failure to provide sufficient choices in investment options
• Failure to report to plan participants regularly or inaccurate reporting
• Improper advice provided to the employees
• Excessive or inappropriate management fees charged to plan participant accounts
• Failure to properly monitor the service providers
• Errors in administering the plan
• Failure to enroll eligible employees
• Wrongful termination of eligible employees
• Premature termination of an employee benefit plan

What is not covered?

Fiduciary liability coverage offers financial protection against situations arising from a breach of fiduciary responsibility. It doesn’t cover intentional wrongdoing or criminal acts.

Besides criminal acts like theft, embezzlement, or fraud, fiduciary liability insurance doesn’t cover any individuals you hire to manage the benefit plan. They should have their own fiduciary insurance coverage in place. If you are hiring an outside advisor, it’s important to ensure they have the necessary coverage.

Risks of Not Having Fiduciary Liability Insurance

Companies that sponsor such plans without this specific liability coverage expose themselves to significant risks. Without it, both the company and its fiduciaries may be held personally liable for breaches of fiduciary duties, leading to substantial financial losses.

Moreover, companies lacking this protection may struggle to defend against claims of mismanagement, which can severely damage their reputation and lead to financial instability. Additionally, the absence of this coverage can result in non-compliance with ERISA regulations, potentially incurring fines and penalties. Therefore, having this insurance is essential to safeguard against these risks and ensure smooth operations.

Fiduciary Liability and ERISA Compliance

This is an essential component of ERISA compliance. The Employee Retirement Income Security Act (ERISA) mandates that companies sponsoring such programs act in the best interests of plan participants and beneficiaries. Liability insurance helps companies meet these requirements by providing financial protection and peace of mind for both the organization and its fiduciaries.

Additionally, this coverage aids in eliminating underperforming investment options and reducing investment fees, which are key ERISA requirements. By securing this insurance, companies demonstrate their commitment to ERISA compliance and significantly reduce their risk of non-compliance, ensuring they meet all regulatory obligations while protecting their financial interests.

Plan Sponsor Responsibilities

As a plan sponsor, understanding your responsibilities and potential liabilities under ERISA is essential. Here are some key responsibilities:

• Act Solely in the Interest of Plan Participants and Beneficiaries: Your primary duty is to act in the best interests of the plan participants and beneficiaries, ensuring their benefits are protected.
• Administer the Plan per Its Terms and Applicable Laws: Ensure that the plan is managed according to its terms and complies with all relevant laws and regulations.
• Select and Monitor Third-Party Service Providers: Carefully choose and regularly monitor service providers, such as investment managers and record keepers, to ensure they act in the best interests of the plan participants.
• Ensure Compliance with ERISA Regulations and Applicable Policy Provisions: Stay informed about ERISA regulations and ensure that the plan complies with all applicable policy provisions.
• Eliminate Underperforming Investment Options and Monitor Investment Fees: Regularly review and eliminate underperforming investment options and monitor investment fees to ensure they are reasonable and in the best interests of the plan participants.
• Provide Required Disclosures to Plan Participants and Beneficiaries: Ensure that all required disclosures are provided to plan participants and beneficiaries in a timely and accurate manner.

Failure to fulfill these responsibilities can result in fiduciary liability claims and potential legal action. Trustee liability insurance can help protect the company and its fiduciaries from these risks, providing financial protection and peace of mind.

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What is the cost of Fiduciary Liability Insurance?

How much you’ll pay for fiduciary liability insurance cost depends on factors such as fiduciary responsibility, business size, and the total plan assets. Larger companies often have a higher risk exposure than smaller businesses and, hence, typically require more protection against financial liabilities, leading to higher premiums.

With that said, it is a relatively affordable financial product. The annual premium for most plans ranges from $250 to $2,500, depending on your company’s specific needs and the insurance company you choose. Typically, these plans can provide up to $20 million in coverage.

You can buy fiduciary liability coverage as a stand-alone policy or bundle the coverage with other insurance policies, such as management liability insurance, employment practice liability insurance, or directors and officers insurance. Many insurers offer a discount when you buy more than one policy. So, if your business requires more than one type of liability insurance cover, buying them under one umbrella policy may lead to substantial savings. Opting for bundled policies can further minimize expenses and improve cost-efficiency for businesses.

How is Fiduciary Liability Insurance different from directors and officers (D&O) insurance?

Fiduciary liability insurance protects parties (such as a company and its senior officers) administering employee benefits plans against claims related to fiduciary responsibility and mismanagement. D&O insurance, in contrast, covers directors or officers from claims that may arise due to actions or decisions taken on behalf of the company.

Conclusion

Fiduciary liability insurance is arguably one product your business can’t do without if it has a fiduciary responsibility, such as offering employee benefits like pension and welfare plans. It protects against liability for managing or administering such plans. While a must-have, it is relatively affordable.

You can reduce costs by working with an independent insurance broker like Dundas Life. We work with multiple A-rated insurers in Canada and can help you compare different plans to find the best deal. Book a call with an advisor today.