Why employers today need a fiduciary liability policy for protection

A fiduciary liability policy protects the personal assets of a plan due to allegations of breach of fiduciary duties.

Specifically, it protects plan sponsors and trustees from defense cost and penalties if they are sued for decisions they make for an employee benefit plan.

“They may be sued by an individual who was a participant of the plan or by a group or class if they feel they are misrepresented,” says Craig Hassinger, president of SeibertKeck Insurance Agency.

“A group can also sue if they feel that the decisions by the trustees could have been made better to yield a higher return,” he says.

Smart Business spoke with Hassinger about this type of insurance coverage, and how it provides critical protection to plan sponsors and trustees in today’s corporate world.

What exactly does a fiduciary liability policy cover?

This policy covers the following:

  • Breach of fiduciary duties.
  • Negligent errors and omissions.
  • Improper disclosures to plan participants.
  • Remiss investment advice.
  • Imprudent choice of outside service provider.
  • Faulty advice of counsel.
  • Improper amendments to plan documents.

How much does it cost to defend a fiduciary liability claim?

While the majority of fiduciary claims are presented by employees, past or present, and their families, the Employee Retirement Income Security Act of 1974 (ERISA), enforced by the Department of Labor (DOL), also is able to submit claims. The claims brought by the DOL can result in civil penalties as well as lawsuits.

The average defense cost per fiduciary liability claim is $365,000, with an average settlement of $994,000, according to Tillinghast-Towers Perrin.

In addition, a staggering 69 percent of substantive ERISA litigation is resolved in favor of the plaintiffs, according to an April 2009 Pension Litigation Data-ERISA Litigation Study.

As a business owner, are you at risk?

You could be at risk if you are someone who makes decisions about your company’s employee benefit plan(s), including a 401(k) plan.

Under ERISA, 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.

What types of coverage should business owners know about?

There are two other types of coverage that are related to fiduciary liability coverage — ERISA bonding and employee benefit liability.

ERISA bonding is fidelity bonds that are required by law and applies in dishonest situations. When a plan administrator or trustee is dishonest and causes financial harm to the employee plan, the ERISA bond would respond. The bond would provide protection to the plan and the plan’s beneficiaries that were affected by the harmful situation. An ERISA bond does not provide protection for the administrator or trustee from liability claims.

Employee benefit liability policies cover claims that result out of errors or omissions in the administration of the employee benefit plan. The errors or omissions include all situations from improper advice of benefits to failure to enroll an employee in the plan.

Understanding your risk is the first step in protecting you, your company, your employees and the future for all three. A knowledgeable insurance agent will review your risks and be able to assist you in finding the correct coverage for your executive and fiduciary liability needs.

Craig Hassinger is the president of the SeibertKeck Insurance Agency. Reach him at (330) 867-3140 or [email protected].

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