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Fiduciary Liability Basics

July 2001

Those having anything to do with pension, savings, profit-sharing, employee benefit, and health/welfare plans are liable to the beneficiaries for any breach of their fiduciary duties. This article examines this liability and possible ways to handle the exposure.

by Mark Larsen
Tillinghast-Towers Perrin

There has always been potential liability for various officers of an organization as well as other persons acting in some capacity relating to an employer's pension, savings, profit-sharing, employee benefit, and health and welfare plans. Specifically, those persons employed by organizations to design and administer such pension and employee benefit plans, including the management of the assets and liabilities of the plans, are liable to the plan beneficiaries for any breach of these fiduciary duties.

This article briefly examines fiduciary liability and possible ways to handle the exposure.

Liability under ERISA

The passage of the Employee Retirement Income Security Act of 1974 (ERISA) substantially increased the liabilities of fiduciaries in the United States. It also better defined some of the responsibilities and associated liabilities of fiduciaries.

As its name suggests, ERISA was created to help protect the interests of pension and employee benefit plan beneficiaries. Under ERISA, an individual (or organization) is deemed a fiduciary if that person (or entity) exercises any discretionary authority or control over the management of any type of employee benefit plan. In particular, any person responsible for the investment, control, or disposition of assets held by the plan would be considered a fiduciary. ERISA broadly defines "employee benefit plans" as:

any one plan, fund or program established or maintained for the purpose of providing to its participants or beneficiaries employee benefits.

Fiduciaries can also be held liable for the acts, errors, and omissions of outside entities that provide administrative and related services. Outside entities representing this exposure include those organizations that service pension and benefit plans: consulting and actuarial consulting firms, law firms, accounting firms, professional administration firms, investment advisers and investment management companies, and the trust departments of financial institutions.

Fiduciary Liability Insurance

Fiduciary liability insurance is a popular vehicle for the financial protection of fiduciaries of employee benefit plans against legal liability arising out of their role as fiduciaries, including the cost of defending those claims that seek to establish such liability. Most popular is a stand-alone form or separate fiduciary liability policy.

At least two other types of "coverage" are related to fiduciary liability insurance, and it is important to clarify them. First, fidelity bonds are required by law (ERISA bonding). This is a form of insurance for dishonesty situations. When dishonest administrators or trustees have financially harmed an employee benefit plan, these bonds may be used, but only for the benefit of the plan and the plan's beneficiaries. This bonding insurance will not protect the trustees themselves from liability claims and is thus completely distinct from fiduciary liability insurance.

A second related coverage is employee benefit liability (EBL) insurance. EBL insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, including the failure to enroll an employee in the plan as well as the administration of improper advice as to benefits.

EBL insurance does not cover all situations of fiduciary responsibility, especially those regarding imprudent investment of funds. Fiduciary liability insurance coverage may or may not encompass EBL insurance coverage—the insurer involved, the purchasing entity, and the specific type of fiduciary liability coverage being employed will ultimately determine what scope of coverage is available.

Other Available Coverage

As noted, there is indeed more than one type of fiduciary liability coverage. Similar coverage may also be established using directors and officers (D&O) liability, commercial general liability (CGL), or trust E&O/professional liability policies as long as those policies have attached an endorsement specifically tailored to cover fiduciary liabilities.

Since the passage of ERISA in 1974, most D&O policies exclude ERISA claims. Simple removal of such an exclusion would provide coverage to directors and officers in their fiduciary capacity with respect to employees but would offer far less broad coverage than a typical endorsement which also protects the plan itself, as well as the corporate sponsor and individual non-officer fiduciaries.

See the Tillinghast—Towers Perrin 2000 Fiduciary Liability Survey results discussed in a subsequent article.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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