What Is Fiduciary Liability?

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When assuming a fiduciary or trustee role for a benefit plan, it’s common to think that a fiduciary bond or a fidelity bond, required by law, will protect you against lawsuits. These bonds protect other entities, including ERISA-governed plans themselves, such as health, pension, or retirement plans, but still, leave the fiduciary or trustee open to liability lawsuits due to the actions you take as a fiduciary — or the lack of action.

The risk associated with fiduciary roles is elevated by the fact that a lawsuit can be filed against a fiduciary or trustee without full proof of any wrongdoing, leading to a potentially expensive court battle which can put your personal assets at risk. Win or lose, your house, savings, or even your future earnings may be at stake without proper coverage.

Do I Need Fiduciary Liability Insurance?

Unlike fidelity bonds and similar surety instruments, a Fiduciary Liability insurance policy isn’t required by law. However, the liability exposure stemming from fiduciary responsibilities can be massive, creating a risk that can put a lifetime of assets in jeopardy.

Another common thought is that a Business Liability Insurance policy, an Errors and Omissions insurance policy, Directors and Officers coverage, or even an Employee Benefits Liability policy will provide protection against any liability related lawsuits. Each type of policy has limits to its coverage. A Fiduciary Liability Insurance policy provides specific coverage for liability due to fiduciary actions (or inactions) and extends that coverage to personal liability due to a breach of fiduciary duty.

What Does Fiduciary Liability Cover?

The risks due to fiduciary liability can range from administrative errors, including records handling and enrolling or terminating employees within an ERISA-governed plan, to interpreting plan benefits, but can also extend to personal liability for actions regarding the plan.

Scenarios such as delayed balance transfers, failure to monitor investments, lack of plan diversification, not following plan documents, and similar issues can be causes of personal liability lawsuits. Fiduciary liability provides coverage for these risks, extending coverage to fiduciaries as opposed to a Benefits Liability policy that does not provide personal liability protection.

Employee Benefits Liability policies also do not cover certain risks, particularly risks associated with the imprudent investment of funds. Most Directors and Officers liability policies exclude coverage for ERISA-related claims, making a Fiduciary Liability policy a must-have policy to ensure personal coverage where other types of policies don’t address your risk.

In most cases, a Fiduciary Liability policy will cover the cost of your legal defense as well as any claims for covered risks, subject to the chosen limits of your policy.

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What Are the "Limits" of a Fiduciary Liability Policy?

If you operate in a fiduciary or trustee capacity, a Fiduciary Liability policy is the only choice for effective personal liability coverage. Your coverage limits can vary based on the amount you choose. A detailed discussion with your trusted agent can help you to understand the risks and choose an appropriate level of coverage. In an industry study, average coverage limits were found to be over $4 million with a median coverage limit of $5 million. A smaller group purchased coverage for up to $10 million.

An important consideration is whether your policy limit is structured as an aggregate limit — because many are — and this can reduce the amount of coverage available for subsequent claims if you have a prior claim during the coverage term. A higher coverage limit provides better protection for multiple claims.

Once you’ve established an appropriate coverage limit, it’s important to review your coverage regularly with your trusted agent to ensure that your coverage keeps pace with plan growth and associated personal liability exposure.

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