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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.
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.
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.
Rates for Fiduciary Liability insurance vary, with one of the largest variables being the amount of coverage you choose. Fortunately, rates have come down in recent years, often making a Fiduciary Liability insurance policy more affordable than ever. Lawsuits can come at any time but getting a quote and binding coverage is a fast process to be sure you’re covered. Just reach out to your trusted agent to get started.
Fiduciary bonds are a type of insurance that protects a beneficiary when a fiduciary fails to act in their best interests. For example, let's say a fiduciary is guilty of stealing money from a beneficiary. The fiduciary bond will protect the beneficiary and either partially or fully "make them whole" so they don't lose all the money that was stolen.
Fiduciary bonds can be required by law, especially in cases where a beneficiary feels as if the trustworthiness of the fiduciary leaves something to be desired and thus asks for a fiduciary bond as insurance.
While the two terms are sometimes used interchangeably, fiduciary bonds and ERISA bonds are not the same. ERISA (Employee Retirement Income Security Act) bonds are required by law for any individual who manages the funds of an employee benefits plan. The fiduciary must be covered for at least 10% of the money they manage.
Fiduciary responsibility insurance (or bonds) covers the plan in the event of a breach of responsibility by the fiduciary. While fiduciary insurance is not a legal requirement, many fiduciaries choose to purchase the coverage as they can be held personally responsible for losses incurred by a plan during a breach. Additionally, the scope of coverage can be different between an ERISA bond and a fiduciary bond.
A fiduciary is any individual who has a legal responsibility to act solely in the best interests of another person. The fiduciary must make sure to not violate the beneficiary's trust or act in a manner that does not keep the beneficiary's best interests at heart.
An example of fiduciary responsibility is the relationship that exists between an attorney and a client. The attorney accepts the role as a fiduciary and agrees to act only in the client's best interests.
Put one way, all executors are fiduciaries, but not all fiduciaries are executors. An executor is a specific kind of fiduciary who manages the affairs of an individual after their death in accordance with their will.
An executor does not have to be an individual; trust companies and banks can also serve as executors.
Many incorrectly assume that all financial advisors are required to be fiduciaries. This is not true. While many financial advisors serve in a fiduciary role, some do not. It is up to those seeking out financial advisors for their services to determine whether or not they require someone who will act as a fiduciary.
The more involved a financial advisor is in the money management process, the more important it is for them to take on a fiduciary role.
"Fiduciary" is a broad word used to describe a legal relationship between a responsible party and a beneficiary where the responsible party must act in the best interests of the beneficiary. Some financial advisors act as fiduciaries, but others do not.
There are many examples of fiduciaries and fiduciary-beneficiary relationships. A lawyer has a fiduciary responsibility to a client. A doctor has a fiduciary responsibility to a patient. A CEO has a fiduciary responsibility to a company's shareholders. Even spouses have fiduciary responsibilities to each other.
There are lots of relationships that fall under the "fiduciary" category, but it is important to not assume. The best way to know if an individual or entity will serve in a fiduciary role in their relationship with you is to ask.
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