Expert Commentary

2000 Fiduciary Liability Survey

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.


Professional, D&O, and Fiduciary Liability
August 2001

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).


Exhibit 1

Median Total Limits by Business Class

(in millions)

United States
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
All U.S. Business Classes $10.00
Canada
Transportation & Communic. $20.00
Petroleum, Mining & Agric. 15.15
Other 15.00
Financial Services 7.50
Durable Goods Manufacturing
Nondurable Goods Manufac.
Utilities
All Canadian Business Classes $12.00

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.


Exhibit 2

Fiduciary Liability Claim Issues

United States

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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