What is Fiduciary Insurance and why do I need it?
Fiduciary Liability Insurance pays, on behalf of the insured, legal liability arising from claims for alleged failure to prudently act within the meaning of the Pension Reform Act of 1974. “Insured” is variously defined as a trust or employee benefit plan, any trustee, officer or employee of the trust or employee benefit plan, employer who is sole sponsor of a plan and any other individual or organization designated as a fiduciary. Group life and medical expense plans, as well as pension and retirement plans, are within the scope of the law.
1. Fidelity bonds are required by law (ERISA bonding). This is a form of insurance for dishonesty situations. When dishonest administrators or trustees have financially harmed an employee benefit plan, these bonds may be used, but only for the benefit of the plan and the plan’s beneficiaries. This bonding insurance will not protect the trustees themselves from liability claims and is completely distinct from fiduciary liability insurance.
2. Employee Benefit Liability Insurance. Employee Liability Insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, including the failure to enroll an employee in the plan as well as the administration of improper advice as to benefits.
Employee benefits liability coverage often is combined with fiduciary liability insurance policies, subject to the single limit. This is a distinct disadvantage because fiduciary liability presents an exposure that is infrequent but severe. The purpose for purchasing a fiduciary liability insurance policy, therefore, can be wiped out with frequent employee benefits liability claims.
Are you a fiduciary? Are your personal assets at risk? Are you subject to lawsuits, fines, and penalties? Many people are and don’t know it.
If you are an owner or officer who makes decisions about your company’s 401(k) plan or other qualified employee benefit plan(s), odds are, your personal assets are at risk! Under the ERISA act of 1974 (Employee Retirement Income Security Act), fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of their alleged errors, omissions, or breach of their fiduciary duties.
Employment Liability Insurance does not cover all situations of fiduciary responsibility, especially those regarding imprudent investment of funds.
Under ERISA, fiduciaries may be held personally liable for breach of their responsibilities in the administration or handling of employee benefit plans. Fiduciary Liability Insurance is not required by ERISA. However, it is strongly recommended if you are a fiduciary of a welfare and/or pension plan because your personal assets are at stake. Many fiduciaries believe incorrectly that their ERISA fidelity bond protects their personal assets.
Furthermore, many think that this type of coverage is included in their D&O policy. Most D&O policies exclude fiduciary liability exposures as well as those exposures pertaining to the Employee Retirement Income Security Act (ERISA).
ERISA also broadly defines the types of employee benefit plans for which fiduciaries are responsible. This extensive list can include pension plans, profit sharing plans, employee stock ownership plans (ESOPs), and even health and welfare plans.
Moreover, designated fiduciaries are not the only targets of such lawsuits; targets can also include the employer and even the plan itself. Claims can be brought by plan participants, participants’ legal estates, the Department of Labor, and the Pension Benefit Guaranty Corporation. Such claims may include allegations of:
- Improper advice or disclosure
- Inappropriate selection of advisors or service providers
- Imprudent investments
- Lack of investment diversity
- Breach of responsibilities or fiduciary duties imposed by ERISA
- Negligence in the administration of a plan
- Conflict of interest with regard to investments
A private company can help mitigate the personal liability of its fiduciaries by following the advice of outside experts and by selecting diverse, financially sound investments. But, it cannot entirely eliminate their personal liability .
In order to help protect private companies, their fiduciaries and the benefit plans they manage, against fiduciary liability claims, UNICO Group, Inc. offers Fiduciary Liability Insurance coverage.