In a time of increasing uncertainty for benefits planfiduciaries, greater focus on the terms and conditions of fiduciaryliability insurance policies is of paramount importance, abrokerage expert believes.

“Maximizing contract certainty is a hallmark of what we striveto do,” said Paul Slamar, managing director and fiduciary liabilityinsurance product leader for Aon Financial Services Group inChicago, explaining that provisions of fiduciary liability policieshave generally not gotten the same high level of buyer scrutinythat directors and officers liability policy provisions havereceived in recent years.

Fiduciary liability insurance–often written by the same insurersthat participate in the D&O market–covers employee benefit planfiduciaries (those who exercise control over the management oradministration of pension, health and other employer plans) forbreaches of their fiduciary duties and any errors they make.

Fiduciary duties are prescribed by the Employee RetirementIncome Security Act.

“If the [fiduciary liability] underwriter says we'll cover this,but we don't want to cover that, then the policy should clearlyindicate that,” Mr. Slamar said, explaining the concept of contractcertainty.

Giving an example, he said damages arising out of litigation arecovered under all fiduciary liability policies, while “benefits dueor allegedly due” are excluded under virtually all of them. Thisdistinction has become more important in recent years in light ofseveral court rulings, the first of which was handed down by theU.S. Court of Appeals for the Seventh Circuit in Harzewski vs.Guidant in 2007, he added.

In Guidant, where a central question was whether pastparticipants who had cashed out of an employee stock ownership planhad standing to bring an ERISA-based stock-drop lawsuit, the courtruled the former participants could bring suit, while alsoaddressing the relief sought–and whether it should be characterizedas benefits or damages.

“The court effectively made short shrift of this distinction,noting that although former employees eligible to receive a benefitcould sue under ERISA, some courts had difficulty seeing thisbecause they strained to distinguish between 'benefits' and'damages,'” Mr. Slamar explained.

Guidant court and several other following cases blurredthe benefits-damages distinction as not being germane. However, “itwas extraordinarily significant to fiduciary liability insuranceprograms,” he said, because of the policy's coverage for damagesbut absence of coverage for benefits due, whether through aspecific policy exclusion or through limiting language in thedefinition of loss.

After Guidant and several other cases that adopted itsholding, insurers reacted to address this dichotomy and add someclarity, with Chartis (then known as American International Group,before the recent rebranding of AIG's property and casualtyinsurers) leading the way through the introduction of an“Investment Loss Coverage” endorsement.

“They evaluated the exposure and indicated a belief that failureto take appropriate action with respect to an investment, whenthere was an ERISA fiduciary obligation to do so, was the type ofexposure the policy should address.”

Chartis' endorsement, as well as comparable carve-outs tobenefits-due exclusions introduced by other insurers, now indicatethat the otherwise potentially limiting benefits-due language ofthe policies does not apply to claims that arise from negativeinvestment results.

The specific language of these carve-outs typically indicatesthe insurers will cover “claims alleging a loss to either the planitself, or a loss in the actual accounts of participants by reasonof a change in value of the investments held by the plan, includingbut not limited to the securities of the sponsor organization,” Mr.Slamar said.

Explaining the importance of the last phrase, he noted thatalthough Guidant and other cases prompting theseendorsements involved drops in employer stock included in ESOPs anddefined contribution plans such as a 401(k), the carve-outsthemselves may relate to any plan investments, not just employerstock.

With the financial meltdown severely impacting many employers'plan investments, not only has the number of stock-drop casefilings increased, but cases alleging breach of fiduciary duty “forfailing to make appropriate changes for other types of investmentvehicles in [an] employer's menu of plan options” are also beingfiled, Mr. Slamar said.

BRACING FOR SEVERITY

In addition to volatile investment markets, Mr. Slamar said thecombined impact of Guidant and other court decisions, ahost of legislative changes, and the realities of the currenteconomy have produced an environment for class actions againstfiduciaries that some underwriters are describing as a perfectstorm.

Still, there's been no significant movement on the part ofinsurers to remove the carve-outs or otherwise tighten the languageof fiduciary liability policies, he reported. “There would betremendous pushback from purchasers and brokers who representthem,” he said.

Instead, a number of underwriters “are looking more closely atthe underwriting submissions–at policies, procedures, plangovernance and oversight that fiduciaries exercise over the plan,including their review of investment results,” he said.

Mr. Slamar said some fiduciary insurers were already bracing foran onslaught of lawsuits even before last year's meltdown in thefinancial markets. With roughly 80 million baby boomers nearingretirement, and the anticipated additional strains to the pensionindustry, some underwriters expressed concerns that lawyers wouldbecome “increasingly more vigilant in looking for possible actions”to be filed on behalf of large groups of soon-to-be-retiringplaintiffs.

The economic downturn is adding “new dimensions to the mix,” hesaid, explaining that plant closings, divestitures and layoffs inincreasing numbers are contributing to the ever-expanding growth inthe ranks of voluntary and involuntary former benefit planparticipants.

A significant ruling in Guidant, (which gained furthersupport in a footnote to a 2008 U.S. Supreme Court decision inLaRue vs. DeWolff Boberg & Associates) said thatformer employees eligible to receive a benefit from adefined-contribution plan could sue under ERISA, even though theyhad already cashed out of the plans.

According to Mr. Slamar, the Guidant ruling allowedsome lingering stock-drop cases to gain traction–cases hanging overfrom the turn-of-the-21^st-century corporate meltdownsbrought on behalf of retired former participants of 401(k) plansthat were heavily invested in employer stocks.

In the current economic environment, the Guidant logic“could simplify the means by which competent plaintiffs' firmsconversant with ERISA can seek to pursue class actions on behalf offormer participants for a variety of perceived ERISA breaches,” Mr.Slamar said.

He offered as examples, employer decisions to lay off employeesfor the purpose of trimming ongoing benefit obligations, as well asmore direct decisions to freeze, amend or terminate benefitplans.

If the plaintiffs' bar can allege staff reductions or planfreeze, amendment or termination decisions were not in accordancewith ERISA or plan documents (or that the steps and processesfollowed in reaching these decisions were not), they may be able topursue class-action claims on behalf of plaintiffs. In the wake ofGuidant, these classes could include large groups of former planparticipants, he said.

This potential for more and bigger class actions doesn't evenconsider suits typically pursued that relate to companies that havefailed or are otherwise unable to meet their obligations, hesaid.

Bankruptcies and employer financial struggles set off more alarmbells for Christine Dart, vice president and global fiduciaryliability product manager at Chubb in Warren, N.J. She listedseveral situations that could fuel suits against fiduciaries:

o Underfunded defined-benefits plans.

If a company with a defined-benefit plan goes into bankruptcyand subsequently into liquidation, and if that plan is not funded100 percent, then those benefits will be assumed by the PensionBenefit Guaranty Corp., Ms. Dart explained, noting that the PBGChas a multibillion-dollar deficit.

When those liabilities are assumed by PBGC, she noted, “peoplemistakenly think they'll get every cent on the dollar” that theywere promised at retirement. “That's not necessarily the case. It'sdependent on your salary” and other factors.

When such facts come to light, those employees are more likelyto bring an action for the failure of the fiduciaries to properlyfund the benefit plans, she said.

(Unlike defined-contribution plans, which have separate accountsfor individual participants and investment options and proceduresby which employees and employers make contributions to theaccounts, under defined-benefit pension plans employers guarantee aspecific benefit amount to participants at retirement.)

o Deferred compensation plans.

Unlike 401(k) assets, which are protected against creditorscoming after them in a bankruptcy situation, deferred compensationplans are not, Ms. Dart said. In a bankruptcy situation,individuals who may have deferred their compensation for two orthree years now stand in line with other creditors.

o Workforce reductions.

A struggling company that lays off some workers can faceallegations of fiduciary breaches tossed into employment practicesliability suits that primarily allege discriminatory workforcereductions, she said. “You laid me off improperly and you did sonot to pay my benefits,” she added, describing the argument inthese cases.

o Severance pay.

Struggling companies can set workforce reductions in motion byoffering incentives for employees to take early retirementpackages. In some cases, there may be a second downsizing, withenhanced packages offered at the second stage.

“We have seen those claims in the past,” she said, whereparticipants accepting the first plan questioned when companiesknew they were going to enhance their offers, and whether they hada duty to disclose this, since such disclosures would have promptedsome workers to wait to become eligible for higher benefit amountsinstead of taking the first package.

Like Mr. Slamar, she also referred more generally to suitsbrought in the wake of defined-benefit plan terminations, freezesand decisions to eliminate matching contributions fordefined-contribution plans.

Terminations of retiree medical benefits can also fuel suits,she said–highlighting, in particular, situations that may arise forfirms involved in mergers and acquisitions. If such firms don'thave the previous company's plan documents, they may not knowexactly what was promised to retirees.

“It might have been communicated to them verbally that they weregoing to have lifetime benefits,” she said.

Mr. Slamar noted that while there's a long-held notion that themajor exposure in fiduciary litigation is “almost the exclusivedomain of the pension side,” class-action statistics compiled by aChicago-based employment law firm last year revealed a number ofERISA class-action settlements related to health and welfarebenefits.

According to the “Workplace Class-Action Litigation Report”published by Seyfarth Shaw in January, four of the top-ten suits(including two of the top-three settlements, which involvedautomotive companies and exceeded $1 billion) dealt with attemptsto transfer retiree health benefits to retirees through thecreation of a voluntary employee beneficiary liability association,or VEBA, Mr. Slamar said.

Although the report revealed that ERISA class actions were themost costly employment actions last year, with the top-10settlements totaling $17.7 billion (compared to just $118.4 millionfor the top-10 employment discrimination suits), claims frequenciesshould be lower on the fiduciary side, according to CarrieBrodzinski, fiduciary and EPL product manager for Beazley Group inFarmington, Conn.

“With fiduciary, it's a lot more black and white as to whethersomething went wrong,” Ms. Brodzinski said, noting that personalinteractions and conduct allegations typify employment practiceslawsuits.

Fiduciary liability is based on “a statutory scheme, and there'sonly one–in employment practices, you can have federal and state[violations], and all the states are different,” she explained.“With fiduciary, there's one law–ERISA–and it's dealt with infederal court. It's harder to bring an ERISA claim, because youhave to really point to something much more concrete and say therewas a breach of fiduciary duty.”

LAWMAKERS MOVE IN

Even in instances where federal courts have ruled in favor offiduciaries, federal lawmakers are moving to impose new rules onplan fiduciaries, experts said, pointing to recent fallout from acase known as Hecker vs. Deere.

Giving some background, Ms. Dart and Mr. Slamar described aFebruary ruling by the Seventh Circuit, affirming a lower court'sdismissal of a case against John Deere. The appeals court foundthat fiduciaries for Deere's 401(k) plan did not breach their dutyby offering investment options with Fidelity mutual funds–fundsthat allegedly charged excessive fees.

Ms. Dart explained that Deere also had an open-end brokerageaccount, allowing participants to choose to invest in 2,500 otherfunds that may have had lower fees, in addition to options toinvest in any of the 20 Fidelity funds offered.

Deere prevailed by offering what is known as a 404(c) defense–asafe-harbor defense, which Ms. Dart said is available for plansoffering at least three investment choices and allowingparticipants to move between those choices, among other things.

The court said Deere's plan offerings were prudentlydiversified, and that “nothing in ERISA requires every fiduciary toscour the market to…offer the cheapest possible fund.”

Following the decision by a three-judge panel, plaintiffs–joinedby the U.S. Department of Labor–petitioned the full court to rehearthe case. In the petition, the DOL argued that the court “had notgiven its position–that ERISA fiduciaries are always potentiallyliable for selecting 401(k) plan investment options–sufficientdeference,” according to a bulletin issued by Morgan Lewis, the lawfirm representing Deere.

The court denied the petition and issued a supplemental opinionin July, Mr. Slamar reported. In the new opinion, the court statedthat this “wasn't a case of not giving appropriate deference…, butinstead a matter that could be easily addressed in the regulatoryprocess.”

The Hecker plaintiffs have since filed a petition forcertiorari with the U.S. Supreme Court, and U.S. Rep. GeorgeMiller, D-Calif., chair of the House Education & Laborcommittee, introduced the 401(k) Fair Disclosure & PensionSecurity Act of 2009, requiring greater disclosure of fees forservice providers that offer investment alternatives for planparticipants, Mr. Slamar reported. (For more information, see“House Bill Targets 401(k) Advice,” at http://bit.ly/2s4oG9.)

Mr. Slamar noted that Rep. Miller had introduced similarlegislation late in the Bush administration that did not gain muchtraction. President Barack Obama's administration has already givenclear signals that there will be a strong emphasis on the rights ofemployees, Mr. Slamar said, noting that one of the president'sfirst actions after his inauguration was to sign the Ledbetter FairPay Act–a law put in place to remedy what many lawmakers saw as ajudicial wrong arising from a 2008 Supreme Court ruling severelylimiting the window to file a pay discrimination suit.