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.
As corporate governance protocols broaden and statute laws change, the exposure of employee benefit plans, pension plans, and plan sponsors to fiduciary and pension litigation is growing.
A Fiduciary Liability policy covers all associated legal costs to defend against claims of errors and a breach of fiduciary duty.
The Employee Retirement Income Security Act of 1974 (“ERISA”) establishes strict standards of fiduciary conduct. Any fiduciary that breaches any ERISA obligations, responsibilities, or duties may be personally liable to compensate the plan for any resulting losses. If the Department of Labor brings an action, fiduciaries can also face civil penalties.
We wrote this guide to help you, the reader, understand both the basics of Fiduciary Liability insurance as well as some more advanced considerations. Our hope is that you walk away from this article a more empowered buyer, with a better understanding of the risk you can transfer to other parties via the fiduciary liability insurance product.
If you’d like help, we’d invite you to talk with a broker or get started by creating an Embroker account. Our dedicated fiduciary liability team can help clients address these exposures. For more clarity on pricing, your business will be benchmarked against similar businesses to identify any unforeseen exposures and premium savings opportunities.
Finally, if you are involved with a venture-backed startup, you can get market leading fiduciary liability insurance in less than 60 seconds through the Embroker Startup Program – click here to get an instant quote.
Fiduciary Liability Insurance – Introduction:
When choosing which company they want to work for, employees tend to favor companies that offer a wider variety of benefits. 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 your company could be held liable?
By offering a retirement plan to your employees, you have a fiduciary duty to act in their best interest in regards to this plan. 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 for protecting the interests of your company and your employees in these types of situations.
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 alleged that the firm breached its fiduciary duties by charging excessive 401(k) fees. The company has already paid $79 million and is now facing another $25 million settlement.
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 Needs a Fiduciary Policy?
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 Businesses 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 it. 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 defenses 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 Doesn’t Fiduciary Liability Insurance Cover?
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.
Highly-Publicized Examples of Fiduciary Liability Insurance at Work
- Wells Fargo faced a lawsuit claiming that it funneled more than $3 billion of employee retirement savings into expensive, underperforming proprietary mutual funds to enrich itself. The employees accused the company in a breach of fiduciary duties to all 401(k) participants over a period of six years. See: Here’s Why Wells Fargo Employees Are Suing Over Retirement Plans
- Trinity Health hospital paid $107 million to settle a pension mismanagement lawsuit filed by a group of workers who accused the hospital of improperly classifying its pension plans, which resulted in the pension being underfunded by $139 million. See: Trinity Health hospital to pay $107M to settle pension mismanagement lawsuit
- A lawsuit was filed against Fidelity Investments and its parent company, FMR, accused the company’s 401(k) plan fiduciaries of self-dealing, among other things. See: Fidelity Faces Another 401(k) Self-Dealing Lawsuit
Fiduciary Liability Insurance Costs
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 D&O and EPLI 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.
Now that you have a better understanding of fiduciary liability insurance, you may be wondering how all of this affects your business and where to go from here. If you need more help or information, you can reach out to our team of expert brokers. If you prefer to get started on intelligent quotes, create your Embroker account today.
Having a quality fiduciary liability insurance policy in place and a broker who can help you navigate the terms and conditions, as well as the claims process, can save you money and, more importantly, time.
Embroker is the easiest way to intelligently insure any business. We’re here to help!