Fiduciary Liability Insurance

Insurance Policies to Consider For Fiduciary Liability Insurance

What Is Fiduciary Liability Insurance?

Fiduciary liability insurance is a risk management measure that businesses take to protect themselves and their employees from claims of negligence or mismanagement related to fiduciary. It keeps you safe from any legal liability that you may find yourself in a while playing the role of a fiduciary.

Even though there are many types of employer liability insurance, fiduciary liability is the only one that covers both your employees and your company from claims of actions or mistakes that are made against the interest of plan participants.
 

Who Is a Fiduciary?

A fiduciary is a person or a trustee who has decision-making powers over the process and management of the employee benefits plan and anyone who is mentioned in the employee benefits plan document. This can include plan administrators, the organization’s directors, managers, and other employers.

When someone files a fiduciary claim in a company, the fiduciary/fiduciaries of the company are held liable. Fiduciary liability insurance covers all the legal costs associated with fiduciary liability to protect fiduciaries against these claims.

That said, the main reason why many businesses don’t know about fiduciary liability insurance, let alone have it, is because ERISA (Employee Retirement Income Security Act) does not legally require it.  

ERISA Explained 

The Employee Retirement Income Security Act (ERISA) is a federal law act passed in 1974 that is in place to guarantee that employees are given their welfare and retirement benefits as promised by the companies. Although this act does not require employers to develop or offer employee benefits plans, it does ensure that if a company has an employee benefits plan, it is fully provided to the employees.

According to this law, businesses are also required to take out a fidelity bond that should be at least 10% of the total assets of the employee benefits plan. This is to ensure that these assets are safe from fiduciaries misusing the funds of the benefits plan.

However, do note that even though the terms ERISA bonds and fiduciary bonds are used interchangeably, they are not the same thing. An ERISA bond protects the employee benefits plan, whereas the fiduciary liability insurance protects the fiduciaries responsible for the plan.

What Is Fiduciary Liability Insurance Not?

It is quite common for people to mix fiduciary liability insurance with other types of liability insurance. It is a unique type of insurance that covers the fiduciaries involved in handling the employee benefits plan. This type of coverage is not included in other types of liability insurance, including general liability.

Many people confuse fiduciary liability insurance with:

• Professional liability insurance
• General liability
• Fidelity bond
• Directors and officers insurance
• Workers’ compensation insurance
• Employer practices liability insurance

Moreover, you should also not confuse employee benefits insurance with fiduciary liability insurance. These offer completely different coverage for separate purposes. If your business has any of the above-mentioned insurance policies, you should not assume that you also have fiduciary liability insurance.

Moreover, as a business owner, you should always talk to your insurance provider to discuss your coverage if you offer employee benefits plans in your organization.

How Much Does a Fiduciary Liability Insurance Cost? 

The exact cost of fiduciary liability policy actually depends on the size of your organization, the assets of the employee benefits funds, and the type of coverage you need. However, you should not worry about it hurting your bank account as this type of insurance policy is actually affordable. 

 You can even get it added to any other policies you have in place for your organization, such as the employment practices liability insurance or the directors and officers' insurance. Typical fiduciary liability insurance can range from $500-$2,500 annually, depending on various factors. The most common factors that affect these policies include the quality of service providers, the total assets in the fund, and the limits of the policy. 

Who Needs a Fiduciary Policy?

Not all businesses need a fiduciary policy. For instance, a startup or a small business that does not have an employee benefits plan does not require a fiduciary policy at all. However, if they do start offering employee benefits plans in the future, they would need to get a fiduciary policy.

All the other companies that do offer employee benefits plans should always have a fiduciary policy for risk management. Remember, prevention is better than cure. It is human to make mistakes, and if a fiduciary in your company does end up making one, considering how complicated these processes can be, you would be better off with coverage.

If you are a business that offers any benefits to your employees, including 401(k)s, 403(b)s, medical and dental insurance, health insurance, a stock option plan, or vision insurance, you should get a fiduciary liability insurance plan.

Why Is Fiduciary Liability Insurance Important? 

The reason why you are better off with fiduciary liability insurance is that these claims can be incredibly costly. There are very high chances of losing the case or deciding to settle with the employee. Moreover, the costs of defending your company and its employees and going to court can be too much, especially for a medium-sized business. It could seriously hurt your growth.

Moreover, the process of handling, managing, and processing employee benefits plans can be very complex. There is a lot of paperwork involved, and even if you have multiple eyes on the team, things can still go south. Something as simple as a fiduciary not being able to follow the benefits plan properly could result in a lawsuit,

If your company has outsourced the management and handling of your employee benefits plan, there is still an internal resource involved in overseeing these plans. And if the vendor is named for misusing or mismanaging the benefits plan, your internal resource responsible for the fiduciary duties would also be held responsible.

For instance, a department of a private tech firm was in charge of overseeing the employee retirement plan for the employees. One of the fiduciaries made a little mistake that resulted in the employee, who was affected by this mistake, suing the company and the fiduciaries involved.

After the court's decision, it was revealed that the mistake was, in fact, on the part of the fiduciaries, and the company had to settle for $1,000,000. Is your company able to bear a loss of this level? No, right?

The U.S. Department of Labor investigates hundreds of fiduciary cases every year. Below, we have listed some of the findings of how companies violated the Employee Retirement Income Security Act (ERISA):

• Made illegal contributions to the benefits plan.
• Failed to process the amounts to employees timely.
• Failed to transfer the amounts to terminated employees.
• Allowed loans to share-holder employees improperly.

And the list of these results goes on and on. Whatever the case, not having fiduciary liability insurance can expose you to a lot of risks. All of the employee benefits plans are regulated by ERISA, which mandates that fiduciaries are personally liable if they improperly manage or fail to release the employee benefits. As clearly stated above, fiduciaries are personally liable for the mishandling of employee benefits plans.

In case one of your employees feels like their case has been mishandled, they can actually go ahead and sue the fiduciary who was working on their plan. It could be a director, a group of employees, plan administrators, managers, or anyone else overseeing the plans, no matter what their designation is. 

What Does a Fiduciary Liability Insurance Cover?

A company’s fiduciary liability insurance is in place to protect it from mismanagement of employee benefits plans by fiduciaries. It protects both the company and its employees who are playing the role of a fiduciary.

A fiduciary policy covers all the defense costs, settlements, and damages given by the court if there is misconduct. It also covers the investigation costs of these alleged misconducts. However, this policy does not protect you from theft and fraud.

Your fiduciary liability insurance can protect you against:

• An improper change or wrongful denial of the benefits.
• Omissions or errors in the administration of the plan.
• Failure to carry out the plan as per the documents.
• Improper counsel or advice.
• Forbidden transactions and conflicts of interests.
• Unwise investment of assets.
• Unwise hiring or failure to oversee the services of third-party vendors.
•  Automatic coverage for acquired or new plans.
• Fees and fines imposed by the IRS or DOL in the case of voluntary settlement.
• Challenges in the settlor’s functions.

There is also expanded insurance coverage that covers the business expenses and pre-claim defense costs that occur when the plan needs to be changed to make it more compliant.

What Does a Fiduciary Liability Insurance Not Cover? 

It is important to know what the fiduciary liability insurance will not offer coverage for as its coverage is quite narrow. This policy mainly covers the breach of fiduciary duties that involves the mishandling and mismanagement of benefits. Of course, these policies do not cover the intentional mistakes, misconducts, and criminal acts that the employees or the companies have done. 

Moreover, this policy also does not cover the costs for any outside consultants, administrators, or vendors that are outsourced to oversee the employee benefits plans as these vendors have their own policies. Before you hire these vendors for their services, it is best that you ask for a certificate of insurance to ensure that they are covered.

Additionally, most of the fiduciary policies also do not include coverage for any intentional violation of federal law. For instance, they do not cover claims of failure to fund as per the ERISA requirements. However, preferred policies do offer defense coverage in case of these allegations.