What Is Fiduciary Liability Insurance?

Fiduciary liability insurance addresses the financial risks associated with managing employee benefit plans. It offers protection for individuals and organizations from claims that allege a breach of their duties when overseeing these plans. This type of insurance is designed to safeguard assets against potential lawsuits and regulatory actions. It helps mitigate the financial consequences that can arise from errors or omissions in plan administration.

Defining Fiduciary Liability Insurance

Fiduciary liability insurance provides financial protection against claims related to the mismanagement of employee benefit plans. Its purpose is to protect fiduciaries, including individuals and the organizations they represent, from allegations they breached their duties.

This type of insurance is distinct from more general forms of coverage, such as general liability or professional liability insurance. While general liability covers bodily injury or property damage, and professional liability addresses errors in professional services, fiduciary liability insurance focuses specifically on responsibilities related to managing assets or administering benefit plans for others. It is also different from an ERISA bond, which protects the plan’s funds from theft or fraud rather than the fiduciaries’ personal assets.

Fiduciary liability insurance is a standalone policy designed to cover lawsuits alleging a breach of fiduciary duty. Employee benefits liability (EBL) coverage, often an endorsement to another policy, offers limited protection primarily for administrative errors. EBL does not cover claims arising from poor investment decisions or conflicts of interest, which are core areas addressed by fiduciary liability insurance.

Understanding Fiduciary Responsibilities

A fiduciary is an individual or entity entrusted with managing assets or administering plans on behalf of others, often in the context of employee benefit plans like 401(k)s, pension plans, or health plans. Anyone who exercises discretionary authority or control over plan management, assets, or administration, or who provides investment advice for a fee, can be considered a fiduciary. This status is determined by the functions performed, not just a job title.

Fiduciaries are subject to specific duties that often stem from laws such as the Employee Retirement Income Security Act (ERISA). ERISA sets minimum standards for most private-sector employee benefit plans. The law imposes a high standard of conduct, requiring fiduciaries to act solely in the interest of plan participants and beneficiaries.

One core duty is the duty of loyalty, which means acting exclusively for the purpose of providing benefits to participants and defraying reasonable plan expenses, avoiding conflicts of interest. The duty of prudence requires fiduciaries to act with the care, skill, and diligence that a prudent person familiar with such matters would use. This includes selecting and monitoring advisors and investments carefully.

Fiduciaries also have a duty to diversify plan investments to minimize the risk of large losses, unless circumstances make it clearly prudent not to do so. Additionally, they must administer the plan in conformity with the plan documents, provided these documents are consistent with ERISA. Failure to adhere to these responsibilities can result in significant personal liability for fiduciaries.

Scope of Coverage

Fiduciary liability insurance policies cover a range of claims arising from alleged breaches of fiduciary duty. These include allegations of mismanagement of plan assets, such as imprudent investment decisions or excessive fees charged to the plan. Claims related to administrative errors, like improper enrollment, incorrect benefit calculations, or failure to communicate plan details, are also covered.

Coverage extends to allegations of failing to monitor third-party service providers, which is a continuing responsibility for fiduciaries even when functions are delegated. Claims involving conflicts of interest, where a fiduciary’s personal interests might have influenced decisions regarding the plan, are likewise addressed.

The coverage provided by these policies usually includes the substantial costs associated with legal defense, regardless of the claim’s merit. It also covers the financial impact of settlements negotiated out of court and judgments awarded by the court. Furthermore, some policies may cover the costs of investigations initiated by regulatory bodies and certain civil penalties imposed.

Common exclusions exist within fiduciary liability policies. Claims arising from intentional fraud, criminal acts, or deliberate wrongdoing are not covered. For instance, if a fiduciary deliberately steals from a plan, that act would generally fall under a fidelity bond, not fiduciary liability insurance.

Policies generally exclude claims for bodily injury or property damage, as these are covered by general liability or workers’ compensation insurance. Claims for benefits that are due to participants under the plan are often excluded, as fiduciary policies are designed to cover liability for mismanagement rather than to guarantee benefit payments. Claims arising from failure to fund the plan in accordance with legal requirements are also frequently excluded.

Key Considerations for Coverage

Fiduciary liability insurance is relevant for any organization that sponsors employee benefit plans, regardless of size. This includes small businesses, non-profits, and large corporations. Even when third-party administrators manage aspects of a plan, the sponsoring organization and its fiduciaries often retain ultimate responsibility and potential liability.

When considering a policy, it is important to review the policy limits, which represent the maximum amount the insurer will pay for covered claims. Deductibles, the amount the insured must pay out-of-pocket before the insurance coverage begins, are also a factor. These financial terms directly impact the out-of-pocket exposure for the insured entity and individuals.

Fiduciary liability policies are generally written on a “claims-made” basis. This means the policy in force at the time a claim is made is the one that provides coverage, regardless of when the alleged wrongful act occurred. This differs from “occurrence” policies, which cover incidents that happen during the policy period, even if the claim is reported much later.

Claims-made policies often include a “retroactive date,” which limits how far back in time an event can have occurred to be covered. Acts occurring before this date would not be covered. The specific terms and conditions of fiduciary liability insurance vary significantly between different policies and insurance carriers, making a thorough review of policy language important.