FIDUCIARY BREACH? WILL YOUR INSURANCE LEAVE YOU OUT IN THE COLD – ASK THE LAWYER by Carol Buckmann
“Won’t my corporate policies cover me if I have fiduciary liability?” The client who asked me this question was a plan committee member who just assumed that his company’s errors and omissions coverage would have his back if his service on the committee resulted in fiduciary liability. I had to explain that corporate policies typically exclude ERISA fiduciary activities and that, in fact, he might not be protected at all under them. Plan ERISA bonds provide recovery only to the plan, and plans can’t indemnify fiduciaries for breaches, so he would be out of luck there as well. Since fiduciaries can be personally liable for losses caused by a fiduciary breach, and there are other ERISA penalties, committee members have a lot of exposure.
The good news I was able to give him was that special fiduciary liability coverage is available in the market. It just requires purchasing the right policy. But the policies are not fungible. There are different coverage options available, so it is important for the company and the committee to consider the following:
- What is the deductible?
- Who gets to pick the defense lawyer if there is a lawsuit?
- What are the coverage limits, and can more coverage be obtained by using multiple policies?
- Litigation is expensive. Will costs be advanced?
- Should extra coverage for plan errors corrected under IRS or DOL corrections programs be purchased?
- If there are plans outside the United States, should coverage be purchased that extends to breaches of laws similar to ERISA?
- What exclusions apply under the policy?
Sometimes fiduciaries have indemnification agreements in which their company undertakes to make them whole if there is an inadvertent fiduciary breach not caused by reckless or willfully bad behavior. These are a good backstop to fiduciary liability insurance, because of the limits on coverage, but they can’t be a complete substitute. There may be corporate law limits on the ability of companies to indemnify, and in any event, the indemnification right may not mean anything if the company is in financial difficulty.
We need good, conscientious plan fiduciaries, and we all know that there is a real possibility that fiduciaries can be sued even if they follow good practices and don’t think they have done anything wrong. It is important for companies to support their plan fiduciaries by purchasing insurance that doesn’t leave them out in the cold if their activities result in lawsuits. These policies are complicated, which means it is a good idea to consult an ERISA attorney as well as your broker when buying fiduciary liability insurance.
Carol Buckmann is a founding partner at Cohen & Buckmann PC and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.