'Party's Over' For Fiduciary Liability

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By Gary S. Mogel

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Unlike the situation in employment practices liabilityinsurance, where coverage remains as broad as ever, fiduciaryliability insurance has undergone dramatic changes in the pastcouple of years, according to experts who spoke at a recentindustry meeting.

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Summing up the recent history of fiduciary liability insurance,John Coonan, vice president of Chubb & Son in Kansas City, Mo.,explained: “It was cheap, so they bought it. But now that party'sover,” speaking at a Professional Liability Underwriting Societysymposium in New York.

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Cathy Cummins, senior vice president of Marsh Inc.'s FINPROdivision in New York, said: “Fiduciary liability used to be a'throw-in' in other policies. Now it is underwritten with similarcare to D&O, with D&O-type retentions.”

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Discussing post-Enron ripple effects, Mr. Coonan pointed outthat a common allegation is that the fiduciaries did not exercisedue care in selecting the stocks and other investments ofretirement plans. For example, the plans may have been too heavilyweighted with the stock of the plan sponsor or contain otherwiseinappropriate investments, he added.

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“Underfunding of the plan is another major source of potentialliability for fiduciaries,” added panelist Jim Nestheide, vicepresident of the financial and professional services division ofThe St. Paul Insurance Companies in Cincinnati, Ohio.

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As respects underwriting of the coverage, Ms. Cummins pointedout that many companies will have a difficult time finding adequatecapacity in today's fiduciary liability market. “It's tough to meetthe carriers' guidelines, they often have enough capacity, but theydon't want to use it.”

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Regarding limits, Ms. Cummins could not say how much is enough.“It seems that some just take a dart and throw it at a board.”

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Ms. Cummins was also skeptical of the degree to which theSarbanes-Oxley Act, passed in part to protect retirement planassets, would reduce claims.

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“Most companies, including Enron, were already taking many ofthe steps now required by the Act, such as providing 30 days'notice of an impending blackout period.”

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Applying ERISA's strict disclosure requirements to the Enroncase, Gary Tell, an attorney with O'Melveny & Myers inWashington, D.C., said that Enron's fiduciaries “should have endedplan investments in company stock, or told employees that it was a'bad idea' to invest in company stock.”

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Ms. Cummins also noted that the Health Insurance Portability andAccountability Act may be a new source of liability. “HIPAA isoutside of ERISA [the Employee Retirement Income Security Act], butthere is still an exposure under fiduciary liability.”

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“HIPAA claims may arise under a fiduciary liability policy'semployee benefits errors and omissions coverage,” explained CarrieBrodzinski, vice president of the executive liability group forHartford, Conn.-based Travelers Bond. “For example, someone couldleave a health insurance application on the copying machine thatsays an employee has AIDS. That could violate HIPAA's healthprivacy provisions.”

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St.Paul's Mr. Nestheide stressed that it is the uncertaintysurrounding the new HIPAA provisions that concerns fiduciaryliability underwriters. He said that his company has devised anHIPAA questionnaire used by fiduciary insurance applicants thatasks about whether the applicant has a health privacy policy, hasdesignated a privacy official, and has given the required noticesto employees.

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A further impetus for claims is the rigorous requirements thelaw imposes on fiduciaries, added Howard Shapiro, an ERISAlitigator with New Orleans, La.-based Shook Hardy & Bacon.“Fiduciaries must even answer questions that are not asked,” hesaid. “For example, if an employee has an individual conversionright [under a group health plan], the fiduciary must advise adeparting employee of that right, even absent an inquiry.”


Reproduced from National Underwriter Edition, June 16, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.


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