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.