Fiduciary liability insurance is a type of management liability insurance. Other coverages within the management liability category of business insurance include directors & officers (D&O) and employment practices liability insurance. Often, they can all be packaged together on the same policy. Here’s what you need to know about Fiduciary.
Why do I need fiduciary liability insurance?
If you sponsor a benefit plan for your employees, you need fiduciary liability insurance. The Employee Retirement Income Security Act of 1974 (ERISA) is the key here. It defines “employee benefit plans” as:
any one plan, fund or program established or maintained for the purpose of providing to its participants or beneficiaries employee benefits.
According to ERISA, if your company decides to sponsor an employee benefit plan, it takes on a new fiduciary duty to its employees. ERISA actually gives these companies and their leadership teams a very important title: fiduciary.
If you’re a fiduciary, you have very specific responsibilities and defined penalties for not meeting those responsibilities. Obviously a 401(k) plan administrator (e.g. Vanguard) would be considered a fiduciary since they have the actual hands-on control of the investment. What some businesses don’t realize is that they, as sponsors, are fiduciaries too. They can also be held accountable for the plan’s losses if it’s determined that they didn’t exercise proper care.
What happens if an employee claims there was an error in the administration or calculation of benefits? Or they feel that they were improperly counseled and made (or failed to make) investment decisions that cost them money? Or there is some error in communication between the plan and the employees which leads to employees making misguided financial decisions? A dispute about fees? The answer: the employees get a lawyer and the lawyer sues everyone responsible. That includes you.
What is it?
Fiduciary liability insurance is an optional contract that would provide protection from legal liability related to the sponsorship of a employee benefit plan. Why optional? Because it is related to — but quite different from — an “ERISA fidelity bond” which fiduciaries are required by law to maintain. (More on that distinction here).
The policy will pay for defense costs as well as any judgments or settlements that are made against the company. It doesn’t cost much, either. These policies tend to have a favorable loss history and are often bundled together with directors & officers or general liability insurance. The retentions are usually low for the same reason. It’s common for smaller businesses to have fiduciary liability insurance with a $0 retention.
Fiduciary liability insurance is intended to round out your risk management program. A standard D&O policy won’t cover you for any claims related to violations of ERISA. Nor would any of your other policies. And unlike an ERISA fidelity bond, the policy will not cover claims arising out of dishonest acts or fraud. Companies should instead turn to the ERISA bond or crime insurance to provide this type of protection. These policies all fit together to provide a comprehensive program that protects you from as many directions as possible.
How do I protect my company and myself?
Want to read more on the subject? Check out our blog posts on fiduciary liability insurance.
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