What Is Fiduciary Liability Coverage?

Fiduciary liability coverage is a specialized insurance designed to protect individuals and organizations managing employee benefit plans. It addresses financial losses from alleged or actual errors, omissions, or breaches of duty in administering these plans.

Fiduciary Roles and Responsibilities

A “fiduciary” in employee benefit plans is any individual or entity exercising discretionary authority or control over a plan’s management or assets, or providing investment advice for a fee. This includes plan sponsors, trustees, investment committee members, and even payroll or human resources personnel making plan administration decisions.

The Employee Retirement Income Security Act of 1974 (ERISA) establishes strict conduct standards for fiduciaries. ERISA requires fiduciaries to act solely in the interest of plan participants and beneficiaries, ensuring decisions are made for the exclusive purpose of providing benefits and defraying reasonable plan expenses. This is often called the “duty of loyalty” or “exclusive benefit rule.”

Fiduciaries must also act with the care, skill, prudence, and diligence a prudent person familiar with such matters would use. This “prudent person” standard means fiduciaries need expertise or must seek professional assistance. They must diversify plan investments to minimize large losses and adhere to plan documents consistent with ERISA. Maintaining comprehensive records of all plan activities, including investment decisions and communications, is also a responsibility.

Failure to uphold these duties, even if unintentional, can lead to personal liability for fiduciaries. Under ERISA, fiduciaries can be held personally responsible for any plan losses due to their breach of duty. This potential for personal financial exposure highlights the importance of managing fiduciary risk.

Fiduciary Liability Coverage Explained

Fiduciary liability coverage is an insurance policy designed to protect companies and their employees who act as fiduciaries from financial losses stemming from alleged or actual breaches of their duties related to employee benefit plans. It covers claims of mismanagement of plan assets or errors in plan administration, including legal defense costs, judgments, and settlements.

Common claims include imprudent investment decisions, such as failing to diversify investments adequately or selecting investments with excessive fees. Allegations can also arise from administrative errors, such as incorrect enrollment or termination of participants, miscalculations of benefits, or failure to provide proper disclosures. Conflicts of interest or improper handling of participant data can also lead to claims.

Policies typically exclude criminal acts, fraud, or intentional wrongdoing, as these are considered deliberate violations. For example, embezzlement or theft from a plan would not be covered by a fiduciary liability policy; such acts are usually covered by an ERISA fidelity bond, which protects the plan against dishonesty. Most policies do not cover bodily injury or property damage, which fall under general liability or other insurance types. Fiduciary liability insurance also differs from Directors and Officers (D&O) insurance; while D&O covers wrongful acts related to overall company management, fiduciary liability specifically focuses on the administration of employee benefit plans.

Policy Details and Claim Handling

Fiduciary liability policies are typically written on a “claims-made” basis, meaning the policy in force at the time a claim is made is the one that responds, regardless of when the alleged wrongful act occurred. These policies include policy limits, which represent the maximum amount the insurer will pay for covered claims, and deductibles (sometimes called retentions), which are the amounts the insured must pay out-of-pocket before the insurer’s coverage begins. Both defense costs and indemnity payments are subject to these limits and deductibles.

Several factors influence the cost of a fiduciary liability policy. The size of the employee benefit plan, including the total assets under management and the number of participants, plays a significant role. The types of plans offered, such as defined contribution plans (e.g., 401(k)s) or defined benefit plans, also affect premiums.

Insurers evaluate the plan’s governance practices, including the frequency of investment committee meetings, fee benchmarking reviews, and the process for selecting and monitoring service providers. Plans that offer company stock as an investment option, especially without limits on participant holdings, may face higher premiums. While policy costs can vary, smaller plans might see annual premiums ranging from a few hundred to a few thousand dollars, potentially reaching tens of thousands for larger, more complex plans.

When a potential claim arises, the first step is typically to notify the insurer promptly. The insurer then plays a central role in managing the legal process, often providing a defense attorney specializing in ERISA and fiduciary liability matters. This includes covering the legal defense costs, investigation expenses, and any eventual settlements or judgments, up to the policy limits and after the deductible is met. The insurer’s expertise helps navigate the complexities of fiduciary litigation, which can be extensive and costly.