Fiduciary Liability: CGL Policy Enough or Not?

Fiduciary Liability: CGL Policy Enough or Not?

The Department of Labor and the Securities and Exchange Commission have been considering a change in the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) and its amendments. In the light of this possible change, an insurance question arises: Who qualifies as a fiduciary and who needs to have fiduciary liability insurance?

This question often comes up when agents do exposure reviews with commercial clients and prospects. Firms that provide employee benefits and retirement accounts are accountable for ensuring that employee premiums and investments, along with contributions pledged by the employer, are all dutifully managed and invested. They owe a fiduciary duty to handle such investments properly, with the best interest of the employee in mind. But does that make these employers fiduciaries in the strictest sense? Should the employer purchase fiduciary liability insurance, or is employee benefits liability coverage on the CGL (commercial general liability) policy good enough?

The basic difference between the two coverages is that the employee benefits liability endorsement only covers administrative mistakes, such as failing to add an employee to a health insurance plan or failing to provide information when an employee becomes eligible to participate in a retirement income plan. It specifically excludes poor investment performance and damages, for which any insured is liable as a fiduciary as defined by ERISA.

In terms of fiduciary liability, the insurance coverage form covers claims arising from “wrongful acts.” The wrongful acts are negligent acts, errors, or omissions that result in an actual or alleged breach of fiduciary duties as imposed by ERISA and in the administration of employee benefit programs. It also applies to any claim against a fiduciary solely because of the fiduciary’s service in such a role.

The distinction is between administrative mistakes, such as failing to add an employee to the health insurance plan, and fiduciary mistakes, which can involve investment advice, choice of plans and “discretionary authority or discretionary control with respect to the management of an ‘employee benefit program’ or the disposition of its assets.” (From ISO Fiduciary Liability Coverage Form MP 00 07 10 06)

Whether or not to buy fiduciary liability coverage can be a difficult question for some firms to even understand, let alone answer. ERISA is one of the most complicated of federal laws. Fiduciary liability raises questions about such employer decisions as choosing a management company, selecting the funds of a 401(k) plan, and in conducting educational employee meetings. Do these kinds of efforts make employers vulnerable to having to at least pay defense costs if sued as a fiduciary— even if the suit is eventually dismissed?

Employers who provide employee benefits — retirement plans in particular— should seriously look at their potential vulnerabilities in these areas and the choices between an employee benefits liability endorsement and actual fiduciary liability coverage.

The Department of Labor and the Securities and Exchange Commission have been considering a change in the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) and its amendments. In the light of this possible change, an insurance question arises: Who qualifies as a fiduciary and who needs to have fiduciary liability insurance?

 

This question often comes up when agents do exposure reviews with commercial clients and prospects. Firms that provide employee benefits and retirement accounts are accountable for ensuring that employee premiums and investments, along with contributions pledged by the employer, are all dutifully managed and invested. They owe a fiduciary duty to handle such investments properly, with the best interest of the employee in mind. But does that make these employers fiduciaries in the strictest sense? Should the employer purchase fiduciary liability insurance, or is employee benefits liability coverage on the CGL (commercial general liability) policy good enough?

 

The basic difference between the two coverages is that the employee benefits liability endorsement only covers administrative mistakes, such as failing to add an employee to a health insurance plan or failing to provide information when an employee becomes eligible to participate in a retirement income plan. It specifically excludes poor investment performance and damages, for which any insured is liable as a fiduciary as defined by ERISA.

 

In terms of fiduciary liability, the insurance coverage form covers claims arising from “wrongful acts.” The wrongful acts are negligent acts, errors, or omissions that result in an actual or alleged breach of fiduciary duties as imposed by ERISA and in the administration of employee benefit programs. It also applies to any claim against a fiduciary solely because of the fiduciary’s service in such a role.

 

The distinction is between administrative mistakes, such as failing to add an employee to the health insurance plan, and fiduciary mistakes, which can involve investment advice, choice of plans and “discretionary authority or discretionary control with respect to the management of an ‘employee benefit program’ or the disposition of its assets.” (From ISO Fiduciary Liability Coverage Form MP 00 07 10 06)

 

Whether or not to buy fiduciary liability coverage can be a difficult question for some firms to even understand, let alone answer. ERISA is one of the most complicated of federal laws. Fiduciary liability raises questions about such employer decisions as choosing a management company, selecting the funds of a 401(k) plan, and in conducting educational employee meetings. Do these kinds of efforts make employers vulnerable to having to at least pay defense costs if sued as a fiduciary— even if the suit is eventually dismissed?

 

Employers who provide employee benefits — retirement plans in particular— should seriously look at their potential vulnerabilities in these areas and the choices between an employee benefits liability endorsement and actual fiduciary liability coverage.