Fiduciary Insurance

Defending Against Fiduciary Claims

Fiduciary liability insurance protects companies and employers from claims made due to breach in fiduciary duty. In simpler terms, it indemnifies losses incurred when managing employee benefit plans.

According to the Employee Retirement Income Security Act (ERISA), everyone enveloped by an employee benefit plan, including the people responsible for the management of the plan, is deemed a fiduciary. Employers, internal investment committee, plan trustees and administrators, and directors and officers are considered fiduciaries. People to whom the fiduciary duties are owed are known as beneficiaries.

While benefit plans do attract top talent, companies should be cautious in the hiring process. If one of the fiduciaries make a mistake in their duty, then the organization can face lawsuits. The fiduciaries should act solely in the best interest of the employee benefit plan. So, if you fail to fulfill your fiduciary duties, then you and your employees will be held personally liable.

Businesses aren’t aware of fiduciary liability, as ERISA does not legally mandate fiduciary insurance. Moreover, even though fiduciary claims arise out of errors, errors and omissions insurance (E&O) will not cover such claims. It is because E&O protects your relationship with your customers, not your employees. Furthermore, d&o insurance and employee practices liability insurance will also not cover such claims.

Different types of coverages safeguard employers, but only fiduciary insurance covers both the business and employees against claims of mismanagement in fiduciary duties. Fiduciary insurance indemnifies people from ground-level clerks to top-level executives, as mistakes can occur at any level of the hierarchy.

Forbes reported that Walmart agreed to pay $13.5m to settle a fiduciary lawsuit. Having a right insurance policy can help you cover the cost of settlements. 

What makes a fiduciary claim dangerous is people can sue you without proof, thus presenting you with unnecessary yet expensive defense costs. Without a proper coverage to back you up, such claims can put personal assets at risk.

Who needs a fiduciary liability coverage?

Both public and private businesses, non-profit organizations, and financial institutions require fiduciary coverage. It is because most of these entities provide benefits to their employees.

Small businesses that do not offer employee benefits are straight out of the equation. But they can opt for a fiduciary insurance policy once they start providing benefit plans.

What does fiduciary insurance cover?

Fiduciary insurance compensates for the following claims:

• Careless selection and supervision of service providers
• Improper investments
• Making unauthorized changes in the employee benefit plans
• Prohibited transactions
• Lost or incorrect benefits stemming from inadequate counseling
• Mistakes in administering the plans itself
• Conflict of interest
• Not disclosing retirement plans properly

Fiduciary coverage indemnifies the cost of damages, attorney fees, judgments, and settlements.

Exclusions of fiduciary policy

• Failure to finance according to ERISA requirements
• Acts of dishonesty
• Criminal or acts of intentional wrongdoing
• Intentional embezzlement

Factors that determine the cost of fiduciary insurance

The following factors influence the cost of your insurance premium:

• The size of your business: The bigger your business is, the more risks you’ll be exposed to. Your premiums depends on the basis of the risks that you’ll potentially face.
• Choice of service providers: Underwriters also consider the history of claims made by your service providers when deciding on the cost of insurance.
• The industry you operate in: Businesses working in the same industry have similar risks, and thus the premium rates they’re charged are similar.
• Total plan assets: The value of assets set aside for benefit plans also impact your policy rates.
• The amount of coverage you choose: Depending on how may risks you want to cover, your premium rate may vary.
• Policy limits: The limit of each policy you wish to include in your insurance plan influence your insurance cost.

A fiduciary insurance policy is considered relatively affordable. Note that you can add a fiduciary policy to d&o insurance and employment practices liability insurance. Therefore, make sure to plan fiduciary coverage as per the need of your business.

Frequently asked questions