Reviewing Fiduciary Liability Coverage
The line can be a thin one. Poor investment performance by itself is not a breach of fiduciary duty. But offering plan participants only investment choices that consistently produce below standard investment returns may be. To ensure adequate protection from lawsuits by disgruntled plan investors, plan sponsors should periodically check their fiduciary liability coverage.
Are You Covered?
ERISA generally requires that all plan fiduciaries (including plan sponsors) be bonded for at least $1,000 or 10% of the plan assets, whichever is greater, to a maximum of $500,000. In addition, your company should carry fiduciary liability insurance that covers your plan or trust; past, present, and future trustees; plan employees; and your company and any employees who are acting as fiduciaries. Most policies are "claims-made" policies that cover any claims reported during the policy period. Alternatively, "occurrence" policies cover acts that occurred during the policy period, no matter when they are reported. Some policies cover administrative errors as part of their general coverage. Others require an endorsement to add this coverage.
What To Check
In reviewing your plan's liability coverage, here are some points to examine:
How the policy's liability limit and deductible are applied. The policy should define what it considers interrelated wrongful acts. Check for wording that lumps all claims together that relate to a single wrongful act or interrelated act even if claims are made in different policy periods and apply the liability limit for a single policy period. Make sure the policy's deductible will be applied only once to a single wrongful act or interrelated wrongful acts and not to each claim made for the act.
Exclusions. You may find policy exclusions listed in the definitions section of the policy and amendatory endorsements attached to the policy, as well as in the policy's standard list of exclusions. Note that some policies do not cover real estate claims unless investments are managed by a qualified professional asset manager. Many policies exclude indemnity coverage for allegations of discrimination, denial of benefits, reversion of assets, and failure to collect contributions.
Personal fiduciary protection. To personally protect fiduciaries, the policy must include a waiver of recourse provision. The premium for such waivers (generally $25 to $100 a year) cannot be paid out of plan assets. Your policy also should include a severability clause to prevent the dishonesty of one fiduciary on an application form from voiding coverage for all individuals named as insureds.
Defense payments. The costs of defending a breach of fiduciary liability generally are added to monetary damages resulting from a successful claim and applied against a single liability limit. For greater protection, you may want to consider buying a separate policy for defense costs or adding a "defense outside the limit of liability" endorsement to your policy. Also check whether your policy will pay defense costs for allegations of discrimination and other claims generally excluded from indemnity coverage. Because ERISA prohibits discrimination against a participant for exercising rights under an employee benefit plan, discrimination claims coupled with claims of fiduciary breach are fairly common.
Payments for penalties, taxes, and fines. Check whether your policy pays any portion of Department of Labor or IRS penalties, taxes, fines, or sanctions levied for breach of fiduciary responsibility. If not, you may want to add an endorsement for this coverage.
