What Does Fiduciary Liability Insurance Cover?

Fiduciary liability insurance provides protection for individuals and entities responsible for managing employee benefit plans, such as 401(k)s, pension plans, and health benefits. Its fundamental purpose is to shield fiduciaries from personal liability that can arise from alleged breaches of their legal duties in overseeing these plans. Fiduciaries are legally obligated to act in the best interests of plan participants and beneficiaries, a responsibility often imposed by regulations like the Employee Retirement Income Security Act of 1974 (ERISA). This specialized insurance helps manage the financial risks associated with the rigorous standards placed on those who administer employee benefit programs.

Types of Covered Claims

Fiduciary liability insurance addresses a range of specific allegations and scenarios that can lead to claims against those managing employee benefit plans. One common type of claim involves imprudent investment decisions, where fiduciaries are accused of poor investment choices, failing to diversify plan assets, or allowing excessive fees charged by investment managers. For instance, a lawsuit might arise if plan participants allege that a retirement plan’s investment options were imprudently selected.

Claims also frequently stem from administrative errors and omissions in plan management. These can include mistakes such as incorrect enrollment of participants, failure to properly process contributions or distributions, or miscalculating benefits owed to individuals. An example might involve an employee not properly enrolled in a healthcare plan who subsequently incurred significant medical expenses without coverage.

Another area of exposure is the failure to monitor service providers adequately. Fiduciaries have a continuing duty to prudently select and oversee third-party administrators, investment advisors, recordkeepers, and other service providers to the plan. Allegations may arise if these providers perform poorly or engage in activities that harm the plan, and fiduciaries are deemed to have failed in their oversight responsibilities.

Conflicts of interest represent another significant category of covered claims, where fiduciaries are accused of acting in their own self-interest rather than solely for the benefit of plan participants. This includes instances where fiduciaries might benefit personally from plan transactions or decisions. Similarly, prohibited transactions, which involve specific types of dealings between a plan and “parties in interest” that are disallowed by law, can trigger claims under these policies.

Communication failures can also lead to claims. This type of claim often involves allegations that fiduciaries provided inadequate, misleading, or untimely information to plan participants regarding their benefits, plan changes, or investment options. For example, a claim could arise if retirees were not notified of a blackout period during a transition to a new administrator.

Financial Protections Provided

Fiduciary liability insurance policies provide financial safeguards designed to protect the personal assets of fiduciaries and the financial stability of the sponsoring organization when a covered claim arises. A significant component of this protection is coverage for defense costs. These costs encompass legal fees, court costs, investigation expenses, and other expenditures associated with defending against a claim, even if the claim ultimately proves to be unfounded.

Policies also typically cover judgments and settlements. This means the insurance will pay for financial damages awarded by a court or agreed upon as part of a settlement due to a covered breach of fiduciary duty.

Certain civil penalties and fines imposed by regulatory bodies, such as the Department of Labor, may also be covered where insurable by law and the policy terms. While some penalties might be covered, punitive damages are generally not insurable due to public policy considerations. Policies may also include coverage for voluntary compliance program expenditures, which assist with legal and accounting expenses to evaluate and address potential regulatory non-compliance.

Furthermore, fiduciary liability policies can cover restitution amounts that fiduciaries are legally required to restore to the plan due to a breach. This ensures that the plan participants and beneficiaries are made whole for any losses incurred as a result of the fiduciary’s actions.

Who the Coverage Extends To

Fiduciary liability insurance policies extend protection to a broad range of individuals and entities involved in the management and administration of employee benefit plans. The plan sponsor, which is typically the employer that established the benefit plan, is a primary beneficiary of this coverage.

Individual fiduciaries are also directly covered under these policies. This includes named fiduciaries, trustees, plan administrators, members of internal investment committees, and any other individuals who exercise discretionary authority or control over the plan’s management or assets. Even individuals who provide investment advice to a plan for compensation are considered fiduciaries and are typically covered.

Coverage often extends to employees and staff who are involved in the administration of the plan, even if they are not formally designated as fiduciaries. Their actions, such as processing enrollment forms or handling plan records, could inadvertently lead to a fiduciary breach, and the policy provides protection for these potential liabilities.

The benefit plan itself is also frequently a named insured under these policies. This provides protection for the plan’s assets against losses that may result from covered fiduciary breaches.

In situations involving mergers or acquisitions, coverage may also extend to predecessor entities. This ensures continuity of protection for liabilities that might arise from actions or omissions that occurred before the change in ownership or structure.

Common Policy Exclusions

While fiduciary liability insurance offers extensive protection, policies typically include specific exclusions that define what is not covered. One common exclusion is for dishonest, fraudulent, or criminal acts committed by fiduciaries. If a fiduciary intentionally defrauds or steals from a plan, such acts are generally not covered by fiduciary liability insurance; instead, they would typically fall under a fidelity bond, which protects the plan from such misconduct.

Another standard exclusion pertains to bodily injury or property damage claims. These types of claims are typically covered by other insurance policies, such as general liability or workers’ compensation, and are not within the scope of fiduciary liability coverage.

Professional services provided by the insured in their capacity as an attorney, accountant, or other professional are usually excluded. Claims arising from these services are generally covered by professional liability (errors and omissions) insurance, which addresses risks specific to those professions.

Policies often include a prior acts exclusion, meaning claims arising from acts or omissions that occurred before a specific retroactive date or the policy’s inception may not be covered. This is designed to prevent coverage for known or expected liabilities that existed before the policy was put in place.

Claims solely related to the employer’s failure to adequately fund the plan are also commonly excluded. While mismanagement of existing funds would be covered, the insurance does not act as a guarantee for the employer’s financial contributions or solvency. The rationale is that the policy should not cover intentional violations of federal law regarding funding requirements.

Certain fines and penalties may be uninsurable by public policy or specific law, and these are typically excluded. While some civil penalties may be covered, others like punitive damages or taxes are generally not. Lastly, claims brought by one insured party against another insured party under the same policy are often excluded, known as an “insured versus insured” exclusion.