'Party's Over' For Fiduciary Liability

By Gary S. Mogel

Unlike the situation in employment practices liability insurance, where coverage remains as broad as ever, fiduciary liability insurance has undergone dramatic changes in the past couple of years, according to experts who spoke at a recent industry meeting.

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's over,” speaking at a Professional Liability Underwriting Society symposium in New York.

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

Discussing post-Enron ripple effects, Mr. Coonan pointed out that a common allegation is that the fiduciaries did not exercise due care in selecting the stocks and other investments of retirement plans. For example, the plans may have been too heavily weighted with the stock of the plan sponsor or contain otherwise inappropriate investments, he added.

“Underfunding of the plan is another major source of potential liability for fiduciaries,” added panelist Jim Nestheide, vice president of the financial and professional services division of The St. Paul Insurance Companies in Cincinnati, Ohio.

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

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.”

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

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

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

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

“HIPAA claims may arise under a fiduciary liability policy's employee benefits errors and omissions coverage,” explained Carrie Brodzinski, vice president of the executive liability group for Hartford, Conn.-based Travelers Bond. “For example, someone could leave a health insurance application on the copying machine that says an employee has AIDS. That could violate HIPAA's health privacy provisions.”

St.Paul's Mr. Nestheide stressed that it is the uncertainty surrounding the new HIPAA provisions that concerns fiduciary liability underwriters. He said that his company has devised an HIPAA questionnaire used by fiduciary insurance applicants that asks about whether the applicant has a health privacy policy, has designated a privacy official, and has given the required notices to employees.

A further impetus for claims is the rigorous requirements the law imposes on fiduciaries, added Howard Shapiro, an ERISA litigator with New Orleans, La.-based Shook Hardy & Bacon. “Fiduciaries must even answer questions that are not asked,” he said. “For example, if an employee has an individual conversion right [under a group health plan], the fiduciary must advise a departing 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 serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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'Party's Over' For Fiduciary Liability

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