Fiduciary Liability: Obtaining Effective Insurance

As discussed in part one of this series in the Feb. 7 issue (page 34), fiduciary liability is one of the most misunderstood of management exposures. However, once one grasps the concept of personal liability embedded in the ERISA legislation and the historical development of exposure, one can then turn to finding appropriate insurance coverage.

There never were as many insurers interested in underwriting the fiduciary liability exposure as were interested in providing, for example, directors and officers liability insurance, which is a good view into the profitability mindset of insurers willing to underwrite both D&O and fiduciary liability insurance. In the past few years, several large settlements involving fiduciary liability have sent shock waves through the underwriting community.

In 2001, First Union settled allegations of fiduciary liability from a reported 100,000 current and former employees for an amount in the $30 million range. In 2004, Enron’s fiduciary liability insurers reportedly agreed to a settlement in the $80 million range with a variety of former employees and retirees. Prior to these, very large fiduciary liability settlements were unheard of.

There is plenty of fiduciary liability limits capacity for smaller employers, and underwriters will routinely make available individual insurer capacity of up to $15 million. For larger employers, total market limits capacity of up to $75 million or $100 million is possible, but is seldom utilized. The higher the limits desired by purchasers, the greater per claim deductible mandated by underwriters.

The first insurer to effectively market fiduciary liability insurance was Aetna Casualty & Surety Co., now absorbed into St. Paul Travelers Group. Other prominent insurers offering this coverage would include Chubb, AIG, Zurich, Ace, Aegis, CNA and XL. Pricing for fiduciary liability insurance is based upon individual benefit plan assets, annual contributions, past loss experience and funding practices of employers.

Important provisions
It is important that fiduciary liability insurance be more than just “ERISA liability” insurance. Good insurance coverage will cover all employee benefit plans, and not just plans subject to ERISA.

Most benefit plans are subject to ERISA, notable exceptions being nonqualified plans, such as executive deferred benefit plans. The best coverage will encompass any conceivable discretionary judgment action, and will not provide for a claims retroactive date. Almost any fiduciary liability underwriter will offer a HIPAA extension, as well as an extension to protect the employer’s managed care liability exposure.

Unlike other types of specialized liability insurance coverage, the necessity for an affirmative coverage statement for allegations of punitive damages is lessened, since ERISA makes no specific provision for punitive damages. However, in the vein of having fiduciary liability insurance broader than just to address ERISA benefit plans, having an affirmative coverage grant for punitive damages would be a wise idea.

Since the claims propensity is rising, private companies choosing to combine aggregate limits for fiduciary liability insurance with aggregate limits of employment practices liability and D&O liability insurance, might consider an increased overall aggregate limit.

The misunderstood coverage
Why is fiduciary liability exposure and insurance so misunderstood? It is difficult for many employee benefit plan decision makers to grasp the personal liability concept.

“Surely there must be some insurance coverage within the corporate portfolio which will respond to this exposure,” is the thought, but the reality is that not only is there no other insurance coverage available, but unlike D&O liability insurance, which almost always carries a specific exclusion for liability arising out of the ERISA legislation, there is no provision for utilization of corporate bylaws indemnification provisions, within the liability imposed by ERISA.

There is also confusion with the ERISA-mandated insurance for employee dishonesty, which is satisfied by ERISA bonds, or more simply, an endorsement to existing employee dishonesty insurance coverage. Such coverage has no bearing on any allegations of liability for mismanagement of benefit plan assets, or the decision to utilize a third party administrator, for example.

Additionally, until recently, large fiduciary liability claims were unheard of, and perhaps not really thought possible. Also, with the demands of employees relating to benefit plan options, enrollment periods and continuous changes in individual coverage details, many human resources managers are just too busy to dwell on possible liability scenarios.

We learn our best lessons through our shortcomings, and this is undoubtedly true with understanding the liabilities of being a fiduciary.

Many sellers of liability insurance products do not understand the nuances of ERISA and fiduciary liability insurance. As generalists, many otherwise well-qualified insurance agents are just too busy taking care of business to get involved with coverage details of fiduciary liability insurance. As a result, many organizations purchase and maintain relatively low limits, without any detailed thought toward limits benchmarking or individual employer exposure aspects.

So, for many employers fiduciary liability insurance largely remains a mystery, both with respect to exposures as well as appropriate insurance coverage.

The ERISA legislation–with all of its nooks and crannies and impending changes, such as medical savings accounts–continues to increase and compound the liability exposures of corporate executives. And yet, many of them remain blissfully unaware of the depth of these exposures and how they put their personal assets at risk.

Dick Clarke is a senior vice president in the Atlanta office of J. Smith Lanier & Co. He is has authored numerous articles and two books,
including The Three Faces of Executive Liability.

Topics Legislation Underwriting