Fiduciary Liability Insurance (ERISA)

Fiduciary Liability insurance protects fiduciaries, as defined by ERISA, against loss, damages, and defense costs arising from the administration and management of employee benefit and pension plans. If you are an employer, plan sponsor, or one of the plan fiduciaries involved with employee benefit plans, including retirement plans and health insurance, this coverage is designed for the risks that come with those responsibilities. Under ERISA, fiduciary responsibility depends on what actions you take and whether you act in a fiduciary capacity, not just on your job title, so executives and other fiduciaries can be treated as functional fiduciaries and held personally liable for what happens to the plan. Common claims include ERISA violations, breach of fiduciary duty, negligence, negligent advice, plan administration issues, imprudent investments, and lawsuits brought by plan participants or regulators over careless plan management. This article explains what fiduciary liability insurance coverage includes, why plan sponsors and other fiduciaries need a fiduciary liability insurance policy, how these claims arise, and how to obtain the right fiduciary insurance policy. A fiduciary liability policy is also distinct from an ERISA fidelity bond issued by an insurance company or surety company, which protects against fraud, and standard general liability, D&O, EBL, and similar policies typically do not cover breach claims tied to employee benefit plan errors.

Why You Need Fiduciary Liability Insurance Coverage

In 1974, Congress passed ERISA (Employee Retirement Income Security Act), the applicable law governing most private employee benefits. ERISA sets minimum standards and legal guidelines for most voluntarily established pension and health plans in private industry, and ERISA Section 409 imposes personal liability based on a fiduciary’s actions, not job titles.

Under ERISA, a fiduciary can be held personally liable for losses to a benefit plan resulting from alleged errors, omissions, or breaches of fiduciary duty, putting personal assets at risk, while plan assets cannot be used to indemnify fiduciaries for a breach under plan documents or ERISA. Fiduciaries face a complex regulatory environment, new requirements under the Pension Protection Act, evolving case law, and increasingly complicated investment decisions, along with a legal responsibility to act in the best interests of plan participants and protect plan assets. These exposures make coverage essential, even though fiduciary liability insurance is not mandatory, because employers in Athens face the same significant liabilities as employers nationwide.

Past or present employees or their families, as well as regulators, may bring a lawsuit, and the defense can also involve regulatory investigation costs and expenses tied to compliance issues. However, the Department of Labor (DOL), which enforces the provisions of ERISA, may also bring claims that can lead to civil penalties. You’ve worked too hard and sacrificed so much to build a successful business. Don’t let others' actions put your business at financial risk.

Fiduciary Liability Claims Examples

Misleading statements – $285,000

A private company sponsored an employee benefit plan for its employees, specifically a 401(k) plan with a company match, as one of the covered retirement plans. The company contracted with an outside investment advisor to manage the plan, but the employer, plan trustees, and other fiduciaries still had fiduciary responsibility in a fiduciary capacity despite delegating investments. Certain employees talked about how well they were doing in the plan, especially those who invested in the risky technology-based mutual fund. When a longtime employee overheard other employees, including the Human Resources manager, talking about their great return, he decided to move most of his 401(k) plan money into the same fund. The employee was one year from retirement when the value of his plan dropped nearly 40% over 12 months. The employee sued his employer and, as a trustee of the plan, the Human Resources manager, alleging misleading statements and violation of fiduciary duty with regard to the 401(k) plan. After a lengthy trial, the claim showed how claims can arise from errors in employee benefit plan management; ERISA imposes personal liability for fiduciary duty breaches, and fiduciary liability insurance protects against claims of fiduciary duty breaches tied to imprudent investments, yet the defendants were held liable personally for losses.

Employee Benefit Plan Communication — $150,000

Six retired employees of a consulting firm sued the company, alleging entitlement to early retirement benefits under employee benefit plans administered by the firm. The retired employees (plaintiffs) alleged they relied on oral and written representations of the plan administrator, an employee in the human resources department, framing the dispute as a plan administration issue involving plan documents and possible administrative errors. The plan document was alleged to be ambiguous, preventing a successful motion for summary judgment. The insurance carrier provided defense to its insured and paid $150,000 in resolving the dispute, illustrating how fiduciary liability insurance can respond across various employee benefit plans.

Failure to provide disability coverage — $550,000

An employee enrolled in the long-term disability plan, one of several employee benefits offered under an employee benefit plan alongside medical, life insurance, and retirement plans, filed suit against a clothing store, alleging violations of ERISA, the Americans with Disabilities Act, and Title VII. Specifically, the employee (plaintiff) alleged the employer had wrongfully terminated her due to disability. The insurance carrier afforded a defense. At trial, it was determined that the plaintiff was entitled to long-term disability benefits and that the employer had breached its duty in failing to fully consider all of the medical information. The case was appealed and was settled prior to a decision. In addition to significant defense costs of $300,000, the insurance carrier agreed to pay the plaintiff’s attorney fees in the amount of $250,000. The dispute shows how fiduciary liability coverage can respond when plan management decisions create major liabilities and defense expenses. It also reflects the kind of exposure tied to mismanagement and imprudent investments under ERISA-governed plans.

Get the protection you need tomorrow, today.

To learn more about our Fiduciary Liability insurance products and fiduciary liability coverage options, including settlor coverage for business decisions and settlor functions involving defined benefit plans, multi-employer plans, and governmental plans, speak with one of our experienced professionals today. With Pepper, Johnstone & Company’s fiduciary experience, our team can help review the right insurance policy and fiduciary policy for plan sponsors managing employee benefit plans and explain how fiduciary liability insurance is essential for managing employee benefit plans because Settlor coverage protects against claims related to plan establishment decisions.