The Department of Labor (DOL) caused a stir recently as the deadline approached for changing the rules under ERISA about the definition of “fiduciary.” Although the DOL change, as well as possible action by the Securities and Exchange Commission, has been tabled, the question remains: Just who qualifies as a fiduciary and who needs to carry fiduciary liability insurance?
This question frequently comes up when agents are conducting exposure reviews with commercial clients and prospects. Businesses that offer employee benefits and retirement accounts are charged with being sure employee premiums and investments, as well as funding promised by the employer, are dutifully handled and invested. They owe a fiduciary duty to handle those funds properly, with the best interest of the employee in mind. But does that make these employers fiduciaries in the strictest sense?
Should the employer purchase fiduciary liability insurance, or is an employee benefits liability coverage endorsement on the CGL policy sufficient?
As we note in FC&S Online, the generic difference is that the employee benefits liability endorsement covers only administrative mistakes, such as failing to add an employee to a health insurance plan or failing to provide information to an employee when she becomes eligible to participate in a 401(k) or other retirement income plan. It specifically excludes (among other items) inadequate performance of investments and damages for which any insured is liable as a fiduciary as defined by the Employee Retirement Income Security Act of 1974 (ERISA) and its amendments.
Conversely, the fiduciary liability insurance coverage form covers “claims” arising from “wrongful acts.” The wrongful acts are negligent acts, errors, or omissions that result in an actual or alleged breach of fiduciary duties as imposed by ERISA and in the administration of employee benefit programs. It also applies to any matter claimed against a fiduciary solely because of his service as such.
The obvious differences are between administrative mistakes (a payroll manager failing to add an employee to the health insurance plan) and fiduciary mistakes (investment advice, choice of plans and, as the fiduciary liability form states, “discretionary authority or discretionary control with respect to the management of an ‘employee benefit program’ or the disposition of its assets”). (Source: ISO Fiduciary Liability Coverage Form MP 00 07 10 06)
Fiduciary liability coverage is a hard sell to commercial clients who are not pension advisors. But what about the choices the employer makes in choosing a management company, in choosing the funds that a 401(k) plan offers, in conducting educational meetings with employers? Does that open the door for these employers to incur at least defense costs when sued as a fiduciary—even if the suit is later thrown out?
ERISA is one of the most complicated federal laws in existence. I cannot begin to think I understand even its simplest portions. However, I believe that employers who provide employee benefits—especially retirement plans—need to seriously consider the choice between an employee benefits liability endorsement and actual fiduciary liability coverage.
I'm interested to see whether other insurance professionals have encountered resistance from commercial clients and prospects when discussing fiduciary liability insurance. Do you think they should buy fiduciary liability coverage or simply the employee benefit liability endorsement to the CGL?