Fiduciary Liability Insurance

Embroker helps you get fiduciary liability insurance to protect both your business and employees from claims related to the mismanagement of benefit plans and the legal liability arising out of their role as fiduciaries.


What Is Fiduciary Liability Insurance?

When choosing which company they want to work for, employees tend to favor companies that offer a wider variety of benefits.

An employee benefits plan is a benefit separate from the salary an employee receives from the employer. It’s outlined and directed according to a written plan document. Employee benefit plans are generally divided in two categories: employee welfare and retirement benefit plans.

Retirement plans are designed to ensure that employees will have a sufficient income once they retire. They include things such as defined benefit pension plans, 401(k)s and stock purchase options. On the other hand, welfare benefits programs can vary greatly. Typical benefit plans include medical and dental coverage, paid-time-off, disability and life insurance as well as educational assistance programs.


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 your company could be held liable?

Fiduciary liability insurance is the best form of risk management for protecting the interests of your company and your employees in these types of situations. Fiduciary liability insurance is designed to protect the business from claims of mismanagement and the legal liability arising out of their role as fiduciaries. A fiduciary liability policy covers associated legal costs to defend against claims of errors and a breach of fiduciary duty. One of the reasons why some businesses don’t know much about fiduciary liability is the fact that the ERISA does not legally require it.

There are many different types of employer liability coverages, 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.

Who Is A Fiduciary?

Anyone who is cited in a benefit plan document, as well as anyone who is considered to have decision-making power over the management of the plan and its assets, can be regarded as a fiduciary. Typical fiduciaries are employers, the company’s directors, and officers, and plan administrators and trustees.

What Is ERISA?

Employee Retirement Income Security Act (ERISA) of 1974 is a federal law passed to ensure that employees get the benefits promised in their retirement or welfare plans. Keep in mind that the law doesn’t require the employer to set up such plans – it just guarantees that their provisions will be fully respected.

ERISA also requires the business to take out a fidelity bond equal to a minimum of 10% of an employee benefit plan’s total assets. This bond serves to protect the plan’s assets from fiduciaries misusing or mishandling the funds in any way.

Keep in mind that ERISA bonds are not fiduciary bonds, even though the terms are often used interchangeably. The ERISA bonds will protect the plan itself, while fiduciary liability insurance protects the people in charge of the plan.

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Who Is a Fiduciary Policy For?

If your business is a very small one that doesn’t have benefits packages to offer employees, then you probably do not need a fiduciary policy. However, as soon as you start providing any type of employee benefits, you will want to look into fiduciary liability insurance.

As with all insurance, it’s always advised to take the “better safe than sorry approach,” considering that the paperwork and processes for employee benefits are often quite complicated. Even if your company is really careful about it, mistakes can happen.

If you’re offering medical, dental, vision, health insurance, or 401(k) and 403(b) retirement plans, and even something like a stock option plan (which can lead to your company being sued if there are any issues found with stock prices, as was the case with Yelp), you should consider fiduciary liability coverage.

Why Do You Need Fiduciary Liability Insurance?

The main reason businesses invest in fiduciary liability insurance is the fact that claims are almost always very costly. Not only are the costs of going to court and defending yourself high, but the chances of losing or having to settle with the plaintiff are significantly high as well. If you’re a growing business, one fiduciary liability claim can cripple your business financially.

Also, as mentioned earlier, employee benefit plans are generally very complex and mistakes can be made at any time, even if you have an entire team working on them. If the fiduciary does not follow the benefits plan exactly as it is laid out, they could be sued.

Furthermore, even if you’re hiring outside vendors to run your employee benefit plans, your employees with fiduciary responsibility or oversight of employee retirement plans will more than likely be named alongside the vendor in an employee’s complaint.

What Does Fiduciary Liability Insurance Cover?

Fiduciary liability insurance protects your company against fiduciary mismanagement. However, it will not protect your company from fraudulent cases of theft. We work with the best fiduciary liability carriers to protect against these claims and more:

  • Wrongful denial or improper change in benefits
  • Errors or omissions in plan administration
  • Improper advice or counsel
  • Failure to administer the plan according to plan documents
  • Conflicts of interest and prohibited transactions
  • Imprudent investment of assets or lack of investment diversity
  • Imprudent selection and failure to monitor third-party service providers
  • Automatic coverage for most newly created or acquired plans
  • Penalties and fees levied by the DOL and IRS under a voluntary settlement program
  • Coverage for challenges to settlor functions

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

Your fiduciary liability policy will usually cover all your legal defense costs, all settlements negotiated, damages awarded by the court when there’s a finding of wrongdoing, and investigations into the alleged wrongdoing.

What’s Not Covered?

It’s important to remember that fiduciary liability coverage is fairly focused and narrow. The focus is clearly on breach of duties related to the mismanagement of benefits. Obviously, fiduciary liability policies will not cover criminal acts and intentional wrongdoing, the intentional embezzlement of fidelity bonds or any other corporate funds.

Additionally, fiduciary liability insurance will not provide coverage for any outside advisors, consultants or administrators hired to manage the benefit plans. These experts should have their own policy in place. It’s a good idea to require a certificate of insurance proving that they have the coverage in place before hiring outside help to manage your benefits.

Keep in mind that most fiduciary policies will also exclude coverage for claims of failure to fund in accordance with ERISA requirements. Insurers don’t want to provide coverage for what can be seen as intentional violations of federal law. However, preferred policies will still provide defense coverage when such allegations are made.

What Does Fiduciary Liability Insurance Cost?

The cost of your plan will largely depend on the type of coverage your business needs and the size of your company and its assets. However, Fiduciary Liability insurance is usually a fairly affordable product and can also be added to other policies such as directors and officers insurance and employment practices liability insurance.

Some of the most common factors that impact fiduciary liability premiums include total plan assets under management, the limits of the policy, and quality of service providers.

Generally, policies can range from $500 to $2,500 per year, depending on the specific needs of your company. Policies can cover as much as $20 million per year.

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

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