2000 Fiduciary Liability Survey
August 2001
Those dealing 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 by Mark Larsen of Tillinghast—Towers
Perrin examines a survey designed to help organizations assess exposures to
such claims and construct appropriate financial protection programs.
by Mark
Larsen
Tillinghast—Towers Perrin
The 2000 Fiduciary Liability Survey is a self-selecting, nonprobability sample of fiduciary liability claim and
insurance purchasing patterns. It is the ninth such survey in a series, and
the first produced by Tillinghast—Towers Perrin, following its acquisition of
Watson Wyatt's Risk & Insurance Services Practice in April 1998.
The primary objectives of the survey are to help organizations assess probable
exposures to claims against the fiduciaries of employee benefit plans they sponsor
and construct appropriate financial protection programs. (For more information,
refer to Fiduciary Liability Basics article in this
series.)
Survey Participants
Surveys were mailed to organizations in the United States and Canada. Data
for U.S. participants is in U.S. dollars, and in Canadian dollars for Canadian
participants. Among the 483 U.S. survey participants, all major industrial groups
were represented. Their median asset size was approximately $600 million, and
196 organizations with over $1 billion in assets participated in the survey.
Nearly half (47 percent) of U.S. participants were publicly traded corporations.
Slightly less than three-quarters of the for-profit U.S. participants experienced
merger, acquisition or divestiture activity during the past 5 years. Fifteen
percent of U.S. respondents terminated a pension or savings plan in the past
5 years, and slightly more than one-quarter of these received a reversion from
the plan termination.
The 52 Canadian survey participants had much in common with—and some differences
from—their U.S. counterparts. A wide variety of industrial groups were represented,
with a median asset size of about $1 billion. Nearly half (48 percent) the Canadian
participants were publicly traded corporations.
Recent experience with a merger, acquisition, or divestiture was reported
by 73 percent of our for-profit Canadian respondents. One-fifth of Canadian
survey participants terminated a pension or savings plan in the past 5 years,
and 22 percent of these received a reversion from the plan termination. Nearly
half of Canadian respondent companies have a subsidiary in the United States.
Insurance Coverage
The purchase of fiduciary liability insurance is common among our survey
participants, with 90 percent of U.S. participants and 75 percent of Canadian
participants having some form of coverage. Banks, manufacturers, and technology
firms in the United States reported the highest prevalence of coverage, with
over 97 percent carrying insurance. Less than three-quarters of governmental
and nonprofit organizations and educational institutions in the U.S. purchased
fiduciary liability insurance.
Among Canadian participants, utilities and financial services firms reported
the highest prevalence of fiduciary liability insurance (93 percent), while
durable goods manufacturers reported the lowest (40 percent).
| Utilities |
$35.00 |
| Durable Goods Manufacturing |
20.00 |
| Nondurable Goods Manufac. |
20.00 |
| Petroleum, Mining & Agric. |
20.00 |
| Transportation & Communic. |
20.00 |
| Banking |
10.00 |
| Merchandising |
10.00 |
| Technology |
10.00 |
| Construction & Real Estate |
7.50 |
| Personal & Business Services |
6.25 |
| Government & Other Nonprofit |
5.00 |
| Healthcare |
5.00 |
| Education |
3.00 |
| Nonbanking Financial Services |
3.00 |
| Transportation & Communic. |
$20.00 |
| Petroleum, Mining & Agric. |
15.15 |
| Other |
15.00 |
| Financial Services |
7.50 |
| Durable Goods Manufacturing |
— |
| Nondurable Goods Manufac. |
— |
| Utilities |
— |
The amount of coverage carried aligns closely with the size of the sponsoring
organization and with sponsored plan size. A noticeable increase since our 1993
survey was recorded in average policy limits across all size groups, as about
18 percent of U.S. survey participants and 12 percent of Canadian participants
obtained greater limits at their last renewal, and none decreased limits. The
average amount of coverage carried by insured participants in the 2000 survey
was $20.8 million in total limits for U.S. participants and $29.2 million for
Canadian participants. In Exhibit 1, we show the median limits purchased by
business class.
About 29 percent of insured U.S. participants reported no deductible or retention
on their fiduciary liability coverage. This is a continuing reduction in the
percentage reporting no deductibles from 31 percent in our 1993 survey, 41 percent
in 1987, and 56 percent in 1984. Nearly 13 percent of insured Canadian survey
participants reported no deductible or retention. The median nonzero deductible
was $25,000 for U.S. and Canadian insureds; for the U.S. insureds, this finding
is similar to our 1993 survey.
The majority of insured survey participants renewed their fiduciary liability
insurance with no change in coverage limits, deductibles, exclusions, or enhancements.
Among the 10 percent (50) of U.S. participants that did not have fiduciary
liability insurance, the main reasons given for not buying coverage were: see
no need for it (16), advice of counsel (8), cost too high (8), coverage too
limited (7), unable to obtain coverage (1), plus various other reasons (10).
The 13 Canadian nonpurchasers (25 percent) gave as their main reasons for not
buying fiduciary liability insurance: see no need for it (5), advice of counsel
(2), cost too high (2), coverage too limited (1), unable to obtain coverage
(1), and other reasons (2). Notably, 16 of the U.S. nonpurchasers and three
of those from Canada reported that they were considering the purchase of fiduciary
liability insurance.
Claims Experience
Approximately 12 percent of U.S. survey participants reported 1 or more claims
against the fiduciaries of their employee benefit plans over a 10-year experience
period; Canadian participants reported only 1 claim. The frequency of fiduciary
liability claims has doubled since our 1993 survey, with most of the increase
reported by organizations that sponsor very large benefit plans.
Organizations with a history of merger, acquisition, or divestiture activity
and public companies were more than twice as likely to experience a claim against
the fiduciaries of their employee benefit plans. We note that ownership and
merger activity are correlated with size, since larger organizations are more
likely to be publicly traded and more likely to merge or acquire.
| Benefits disputes, incl. denial |
47% |
| Civil rights, incl. discrimination |
9% |
| Reduction of plan benefits |
9% |
| Communication of plan benefits |
7% |
| Misleading representations |
6% |
| Administrative error in benefit plan |
5% |
| Imprudent investments/services |
4% |
| Other issues |
13% |
Firms in the transportation and communications industry and durable goods
manufacturers reported the highest claim incidence of the U.S. business groups
analyzed in this survey. This result is consistent with our 1993 survey.
Benefits disputes, including denial of benefits, were the most frequently
cited fiduciary liability claim issue (47 percent of claims) among U.S. survey
participants. This is consistent with our prior surveys on this subject, as
is the fact that more than 90 percent of the claims were from employee benefit
plan participants. Exhibit 2 shows the distribution of fiduciary liability claim
issues reported.
Of the 143 claims reported as closed by U.S. participants, 13 were dropped
by the claimant, and the majority of those not dropped were closed without an
indemnity payment being made. In the case of closed claims where an indemnity
payment was made, the indemnity paid (court award or settlement) to the claimant
by U.S. survey participants averaged at an all-time high of $1.2 million, up
36 percent from $0.9 million in our 1993 survey.
Some claims reported included costs of plaintiffs' legal fees. Such fees,
when paid, typically cost about $20,000, though a few very large amounts were
reported.
The average defense cost on all closed claims reported by U.S. participants
(excluding those in which no defense costs were given) was about $124,000, down
from $405,000 in our 1993 study. This decrease is due to a few claims with very
large defense costs that were reported in 1993 from organizations that did not
return our 2000 survey questionnaire. We believe that a more relevant trend
analysis—less influenced by sampling variation—compares this year's result with
the average defense cost of $70,000 for closed claims in our 1987 survey.
Note that these amounts for indemnity paid to claimants, plaintiff legal
fees, and defense costs have not been trended or adjusted to current economic
conditions.
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