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Fiduciary Liability Insurance
Fiduciary liability insurance is a specialized form of professional liability coverage that protects companies and their employees who serve as fiduciaries for employee benefit plans, such as 401(k) plans, pension plans, or health insurance programs. This insurance is crucial for businesses as it protects them from claims of mismanagement, errors, or negligence in the administration of these plans, which can lead to costly lawsuits and financial losses.
What Is Fiduciary Liability Insurance?
Fiduciary liability insurance is a type of liability insurance that protects fiduciaries of a company’s employee benefits plan from legal action. A fiduciary is anyone who has discretionary authority or control over a plan’s management or assets, including plan trustees, administrators, and the company itself. This type of insurance is essential because fiduciaries are held to a high standard of care under the Employee Retirement Income Security Act (ERISA). They can be held personally liable for mistakes, even if they acted in good faith.
The policy covers a wide range of claims, from administrative errors and omissions to allegations of imprudent investment decisions or failure to provide accurate information to plan participants. Unlike other types of insurance, this coverage is distinct from a general liability or a directors and officers (D&O) policy. While a D&O policy may offer some protection for fiduciaries, it often has exclusions that make a dedicated fiduciary liability policy a necessary addition to a company’s risk management program.
For example, if an employee sues a company, alleging that the company’s 401(k) plan administrators failed to properly diversify the plan’s investments, leading to significant financial losses, a fiduciary liability policy would cover the legal defense costs and any resulting settlement or judgment.
Fiduciary Liability Coverage
Fiduciary liability insurance is a vital component of a company’s risk management strategy, especially for businesses that offer retirement plans or other employee benefits. The coverage limits should align with the company’s size, the number of plan participants, and the total value of the plan’s assets.
Who Needs Fiduciary Liability Insurance Coverage?
The parties that can benefit from this coverage are diverse:
Sponsors
Businesses who sponsor an employee benefits plan, such as a 401(k).
Fiduciaries
Individuals handling funds or property related to an employee benefits plan.
Companies
Aside from holding direct fiduciary responsibility, companies must maintain integrity and momentum.
What Does Fiduciary Liability Insurance Cover?
While you’ll need to consult the specific policy documents to confirm your coverage, here are a few scenarios that are typically covered:
Risky investments:
If a plan official makes risky investments in an employee’s retirement plan.
Bad counsel
If a plan official gives poor or ill-advised advice on investing in an employee’s retirement plan.
Errors
If a plan official makes errors in administering healthcare or welfare plans, resulting in lost or incorrect benefits.
Improper change
If a plan official wrongfully denies or makes improper changes to an employee’s benefits.
Service providers
If a plan official makes an ill-considered selection of third-party service providers.
Fiduciary Liability Insurance Policy
A fiduciary liability policy covers:
How Can I Manage My Fiduciary Liability Policy and Risks?
Managing fiduciary liability is crucial for any business that offers employee benefits. A good strategy is to have a clear understanding of your fiduciary duties, a comprehensive review of your plan’s administrative practices, and regular communication with plan participants.
This strategy includes a thorough audit of your benefits plans to ensure they are compliant with ERISA and other relevant regulations. The more accurately you can assess these factors, the more easily you can determine the correct coverage amount, which is crucial for protecting your business. A strong risk management strategy, including a robust fiduciary liability policy, can provide a vital layer of protection against financial ruin.
What Does a Fiduciary Liability Policy Not Cover?
Like all insurance policies, a fiduciary liability policy has exclusions. For example, it doesn’t cover the following claims:
Remember, a fiduciary liability policy focuses purely on protecting your business from liability when administering employee benefit plans.
Fiduciary Liability Insurance Cost
The cost of a fiduciary liability policy depends on several factors, including the size of the company, the number of plan participants, the total value of the plan’s assets, and the type of plans offered. Premiums are a small fraction of a company’s overall insurance spend and are very affordable when compared to the potential cost of a lawsuit from a disgruntled plan participant.
Fiduciary Liability Insurance Cost Factors
Premiums are a function of the risk the insurance company is taking on, as well as the amount of coverage you require. Companies with strong governance and a history of clean audits will have lower rates than those with a history of claims or regulatory scrutiny. How carriers determine premiums depends entirely on the specifics of the business, for example:
- Assets and Participants: The total value of plan assets and the number of plan participants are major factors.
- Plan Type: The type of plans offered (e.g., 401(k), pension, health plans) and their complexity will impact the premium.
- Prior Claims History: A history of claims can lead to higher premiums.
Additionally, many major insurers will customize a fiduciary liability policy, which impacts the premium. Some of the most prominent enhancements include:
- Higher liability limits to cover a greater risk of potential lawsuits.
- Broader definitions of a “fiduciary” to include more individuals.
Fiduciary Liability Insurance Claim Examples
A company fails to properly enroll a new employee in the 401(k) plan, and the employee later sues, alleging they lost potential retirement savings. The fiduciary liability policy would cover the company’s legal defense and settlement costs.
Plan participants sue the company’s fiduciaries, alleging that they failed to diversify the plan’s investments, resulting in significant losses during a market downturn. The fiduciary liability policy would protect the fiduciaries and the company.
An employee sues a company, claiming they were not provided with the correct information about their pension plan, leading to a smaller-than-expected payout. The fiduciary liability policy would cover the legal defense costs.
A company fails to properly enroll a new employee in the 401(k) plan, and the employee later sues, alleging they lost potential retirement savings. The fiduciary liability policy would cover the company’s legal defense and settlement costs.
Plan participants sue the company’s fiduciaries, alleging that they failed to diversify the plan’s investments, resulting in significant losses during a market downturn. The fiduciary liability policy would protect the fiduciaries and the company.
An employee sues a company, claiming they were not provided with the correct information about their pension plan, leading to a smaller-than-expected payout. The fiduciary liability policy would cover the legal defense costs.
Insurance Brokers For Fiduciary Liability Insurance
Founder Shield is a data-driven insurance brokerage serving high-growth, innovative industries. We have a passion for creating and developing innovative risk management products across emerging industries and work hand in hand with clients and underwriters to ensure transparency, efficiency, and reliability every step of the way. Our team has specialized expertise and experience in providing fiduciary liability services.
We partner with the leading professional liability insurance carriers to craft tailored risk management programs for public companies and venture-backed companies preparing for funding rounds. With fiduciary liability insurance a major budget item, we understand that companies look for new and creative solutions to help manage increasing costs while also securing best-in-class coverage.
Fiduciary Liability Insurance FAQs
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