In 2020, ninety fiduciary-related lawsuits were filed, more than doubling the forty filed in 2019, which doubled from twenty a few years prior. Carriers have paid $1.25 billion in claim settlement and legal defense fees since 2005.
The response from carriers seeking to protect their portfolios from the significant increase in filings and resulting losses is to take premiums higher, lower policy limits, and tighten their coverage restrictions. Overall, challenging market conditions prevail for those who need and offer Fiduciary Liability risk management services.
What is Fiduciary Liability Insurance & Who Needs It?
Fiduciary Liability insurance is specialized coverage designed to protect the fiduciaries who manage employee benefit plans. Individuals cited in an employee benefit plan document and those who have decision-making power over the management of a plan and its assets are considered fiduciary. Typically, employers, company directors, officers, plan administrators, and trustees also are considered fiduciary. They all need the protection a Fiduciary Liability Insurance Program provides.
Most employers have standard liability coverage, such as general liability. However, a fiduciary liability insurance policy is the only way to cover their company and the individuals against claims of negligence, mismanagement, or actions that harm employee benefit plan participants.
What Does Fiduciary Liability Insurance Cover?
Fiduciary Liability Insurance covers both individuals and employers against losses stemming from lawsuits for negligent fiduciary acts they commit. In general, fiduciary liability insurance protects against lawsuits arising from errors made by an insured person or mistakes committed during the performance of their duties.
A fiduciary liability policy protects an organization against any potential liabilities associated with its role as a fiduciary. For example, it protects business owners from financial losses due to an employee who commits acts that violate their duties of loyalty, good faith, fair dealing, honesty, and confidentiality.
Because the Employee Retirement Income Security Act (ERISA) doesn't technically require companies to be aware of their fiduciaries' legal obligations, they often aren't. Or, they may have awareness but lack education on the risks. The types of claims that a fiduciary liability policy will safeguard are excluded from other liability policies companies and individuals hold.
Fiduciary Liability Insurance helps defend employers who hire an incompetent employee whose actions cause injury to others covered by an employee benefits plan. For example, it will pay legal defense costs when injured parties sue them.
Fiduciary Liability Insurance typically includes coverage for these types of claims:
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Plan administration errors or omissions resulting in losses
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Prohibited transactions
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Conflicts of interest
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Negligent investment of plan assets
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Lack of diversity in investments
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Mistakes in defining benefit plan eligibility
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Failure to file required reports and administer the plan according to plan documents
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Improper election of advisors or service providers
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Providing faulty or wrong advice
What Does it Not Covered?
Let's reiterate what fiduciary liability insurance protects. First, it covers claims against financial advisers for their actions taken with clients' accounts. Second, it focuses on breaches of duty relating to benefit fraud. Third, fiduciary liability insurance covers losses caused by negligence and errors made by employees acting within their scope of employment.
It doesn't cover criminal acts or intentional wrongdoings committed against an insured entity. Furthermore, fiduciary liability policies typically won't cover any third parties hired to help administer a plan, including accountants, attorneys, actuaries, investment advisers, and brokers. Third parties should have personal fiduciary liability policies in place. Finally, it is solid advice to require third parties to provide proof of adequate liability coverage before allowing them access to employee records.
Most fiduciary insurance policies will not cover any claim related to an employer's failure to pay benefits if required under federal law (ERISA). Carriers will balk at paying claims if they believe a covered person violated federal laws intentionally. However, preferred insurance policies continue to cover claims not named in the policy.
ERISA Law
Established in 1974, ERISA (Employee Retirement Income Security Act) sets minimum standards for retirement plans and insurance coverage private companies provide. In addition, Congress enacted ERISA to protect workers' rights in retirement and health care programs established under private sector collective bargaining agreements.
Because ERISA is not mandatory, employers don't need to offer the benefits ERISA protects. However, any benefit plans that meet the legal definition of an employee welfare benefit plan are bound to ERISA standards and must comply with laws that require providing certain protections for plan members and assets.
Obligations Under ERISA
Every employee benefits plan must include an individual named "fiduciary" who has responsibility for managing the plan's assets. The law makes fiduciaries responsible for any losses caused by their actions, which means their assets are at risk to pay any damages awarded to claimants.
ERISA protects retirement plans like 401(k)s, pension, and stock purchase plans. In addition, it covers both employer-sponsored health insurance programs for employees' use and tax benefits available through FSAs.
ERISA exclusions include church-run employee benefit programs, government-sponsored insurance programs, and mandatory coverage for employees under certain types of laws (such as workers' comp).
It's worth noting that ERISA fidelity bonds aren't fiduciary bonds. They are frequently referred to as fiduciary bonds because they function similarly to actual fiduciary bonds. Therefore, ERISA bonds only protect the plan itself. Those in charge of the plan need Fiduciary Liability Insurance to protect them from claims of negligence and errors.
Fiduciary Liability Insurance Costs (and what factors affect the price)
There are too many variables to quote flat rates for fiduciary liability coverage. For example, until recently, the annual premium range for fiduciary liability insurance ran from $500 to $2,500. However, the unprecedented rate of 401(k)-related lawsuits filings is changing everything, as mentioned above. As a result, premiums are running 30% - 35% higher as insurance companies react to market conditions.
Best Fiduciary Liability Insurance Programs
It's understandable after reading this report that readers feel the need for experienced advisers who offer the best Fiduciary Liability insurance programs to help them navigate providing adequate coverage for clients. We understand that need, so we created the Program Business Market Directory. Our goal was to make it easy for agents to find and connect with the top brokers, MGAs, and program managers.
A quick search of the directory would lead you to Axis Insurance Services. In 1999, Axis Insurance Services, LLC was formed as a nationwide leader in the professional and management liability insurance industry. Axis understands the complexity of handling financial or medical benefits plans and properly insuring fiduciaries. Its experienced team specializes in the financial services sector and provides competitively priced, top-quality fiduciary liability insurance programs.