Fiduciary Liability Insurance Guide

Fiduciary Liability Insurance - Introduction

One of the perks of working for a large companies is that they tend to offer a wider variety of benefits than smaller companies. Health insurance, stock options, and 401(k)s are just a few of the things that can be attractive to a potential employee.

If your company offers these types of benefits, then you most likely have a department of people that oversees them. But did you know that if one of them makes a mistake she can be personally liable for the damages and your company could be liable as well?

Recently, the number of lawsuits and class action settlements involving employer-provided retirement plans has increased. By offering a retirement plan to your employees, you have a fiduciary duty to act in their best interest in regards to this plan. So this means that if a mistake does happen your employee(s) could take you to court.

Fiduciary liability insurance is the best form of risk management to protect the interests of your company and your employees.

What is Fiduciary Liability Insurance?

According to the Employee Retirement Income Security Act (ERISA), anyone who is overseeing employee benefits can be held liable for mismanagement. Merrill Lynch is still dealing with the fallout of a class action lawsuit that alleges that the firm breached its fiduciary duties by charging excessive 401(k) fees. Merrill Lynch has already paid $79 million and is now facing another $25 million settlement.

Fiduciary liability insurance is designed to protect both the business and the employees from claims of mismanagement and the legal liability arising out of their role as fiduciaries. A Fiduciary Liability policy covers all associated legal costs to defend against claims of errors and a breach of fiduciary duty.

Until the recent increase in lawsuits against retirement plan sponsors, many business owners were unaware of fiduciary liability insurance. The reason for this may be that the ERISA does not legally require it.

There are many different types of employer liability coverage, but only fiduciary liability insurance will protect both the company and the individuals against fiduciary-related claims of negligence, mismanagement, or actions that are not in the best interest of the plan participants.

Fiduciary Liability Coverage

By purchasing fiduciary liability coverage, both your company and the individuals who oversee employee benefits will be legally protected from claims of wrongdoing. With that, you can empower these employees to do their jobs without fear of potential litigation in the case of an honest mistake.

Fiduciary liability insurance protects your company against fiduciary mismanagement. However, it will not protect your company from fraudulent cases of theft.

Here are a few examples of situations it would protect your company from:

  • 401K fund choices
  • 401K provider choices
  • Administrative errors
  • Tax violations
  • Poor financial advice
  • Wrongful termination of plans
  • Conflict of interest

Expanded insurance coverage is also available to cover the costs of pre-defense claims and business expenses that are accumulated when a plan sponsor needs to change or modify the plan to make it compliant.

Do I Need a Fiduciary Policy?

If you have a small business with very few employees and don’t offer any benefits packages, you may not need fiduciary liability insurance. But if your business provides benefits or retirement packages, then it is something you should probably consider.

The costs associated with a lawsuit can be significant, even if your company is ultimately found to have done nothing wrong. And even if your company is extremely careful, mistakes can still happen.

Fiduciary Liability Insurance Examples

Fiduciary Liability Insurance Cost

The cost of your plan will largely depend on the type of coverage your business needs and the types of assets your company has. However, fiduciary liability insurance is usually a fairly affordable product and can also be added to other policies such as: D&O, EPLI and Crime.

Plans often range from $500 to $2500 per year, depending on the specific needs of your company. Policies can cover as much as $20 million or more per year.

The scope of fiduciary liability insurance has broadened over the years as claims activity has become higher. Although insurance provides the protection your business needs, it’s still a good idea to explore your options to find the best rate possible.

Fiduciary Liability Insurance - Conclusion

Anyone who acts on behalf of other people to manage their assets is what is known as a fiduciary. Fiduciaries are held to very high standards and are required to act in good faith on behalf of the interests of the people they serve.  

Fiduciary liability insurance will empower managers to act freely without worrying if they make an honest mistake, which can make them held financially liable; and will pay for the legal costs and the defense counsel to protect both the company and the individual in situations where they can be accused of making a mistake with someone’s employee benefits.

If you’re considering fiduciary liability insurance but don’t want to deal with the hassle of shopping around for policies, consider Embroker.

Embroker has partnered with leading insurance carriers to offer many different types of commercial insurance. You can sign up with absolutely no commitment and Embroker will analyze your current policy for gaps and offer expertise on insurance plans tailored to your business’s needs.

 P.S. Check out our blog or our Insurance Guide Section to learn even more.