What Is Fiduciary Coverage and Why Is It Necessary?

Fiduciary coverage is a specialized type of insurance designed to protect individuals and entities entrusted with managing assets or acting on behalf of others. It addresses the financial risks associated with fulfilling these responsibilities and provides a safeguard against potential losses if fiduciaries are accused of failing in their duties.

Understanding Fiduciary Coverage

A “fiduciary duty” arises when an individual or entity has discretionary authority or control over plan management, assets, or administration, or provides investment advice for a fee. Under the Employee Retirement Income Security Act (ERISA), fiduciaries have a legal obligation to act solely in the interest of plan participants and beneficiaries. This includes acting prudently, diversifying investments to minimize risk, and defraying only reasonable expenses. Fiduciary liability insurance acts as a financial safeguard against claims alleging a breach of these duties.

Who Requires Fiduciary Coverage

Any employer sponsoring an employee benefit plan, such as 401(k)s, 403(b)s, or pension plans, requires fiduciary coverage. Individuals involved in the administration or management of these plans are considered fiduciaries under ERISA. This includes plan sponsors, trustees, plan administrators, and even members of investment committees. Even small businesses offering retirement or health plans can have significant fiduciary responsibilities. These responsibilities extend to anyone with discretionary authority over plan assets or administration, regardless of their official title.

Types of Protection Offered

Fiduciary coverage protects against claims alleging a breach of fiduciary duty arising from the management of employee benefit plans. This includes errors in plan administration, such as failing to enroll an employee or improper eligibility advice. It also covers claims related to imprudent investment decisions, failure to diversify plan investments, or conflicts of interest. Misrepresentations to plan participants, failure to properly monitor service providers, or wrongful denial of benefits are also covered. This insurance helps cover legal defense costs, settlements, and judgments resulting from these allegations.

Fiduciary Coverage and Other Business Insurance

Fiduciary coverage differs from other common business insurance types like Directors and Officers (D&O) liability insurance or Errors and Omissions (E&O) insurance. D&O insurance primarily protects company leadership from personal liability arising from general management decisions. E&O insurance, also known as professional liability, covers claims from errors or omissions in professional services. Most general liability, D&O, or E&O policies specifically exclude claims related to the management of employee benefit plans. Therefore, fiduciary liability insurance is necessary to provide comprehensive protection against these unique risks.

Obtaining Fiduciary Coverage

Securing fiduciary coverage involves providing insurers with detailed information about the employee benefit plans. This includes the plan type, total assets under management, and the number of plan participants. Insurers also require details about the plan’s history, including any prior claims, and information about the fiduciaries themselves. The application process involves working with an insurance broker specializing in employee benefits or liability insurance. The broker helps compile the necessary information, submit the application, and obtain quotes from various insurers. The premium for fiduciary coverage depends on factors such as the plan’s size, its total assets, and the desired scope of coverage. Policies can range from a few hundred to several thousand dollars annually, with coverage limits extending into the millions.