Most agents provide or recommend to their commercial insureds, who have a pension or 401k, benefit plans coverage for employment benefits liability and the required statutory ERISA Bond. However, there is a third and equally important voluntary coverage that many agents may be aware of but which they may not push as vigorously as this article argues they should. This coverage, fiduciary liability, covers exposures to managers, officers, and owners of businesses who have control of pension or employee welfare plans subject to The Employee Retirement Income Security Act of 1974.
Placing a fiduciary liability policy will protect personal assets
The Employee Retirement Income Security Act of 1974, ERISA for short, is a federal law just over 45 years old. The purpose of ERISA is to set minimum standards for retirement plans and other employee welfare plans in private industry. One of the most important ways that ERISA maintains those minimum standards is by making certain people, defined as “fiduciaries” by ERISA, personally liable to reimburse retirement plans for breaches of their fiduciary duties under ERISA.
The liability that ERISA has created for fiduciaries administering plans subject to ERISA spawned a specific coverage “fiduciary liability” that some or most agents may offer in passing to their commercial insureds. However, more agents should explain to commercial insureds who do not carry fiduciary liability coverage that their managers, officers, and owners may have their personal assets at risk because of a coverage gap in their existing insurance program.
Fiduciaries, as defined by ERISA, have personal liability to carry out their duties with “skill, prudence, and diligence”
Most managers, officers, or owners of businesses are surprised to learn that:
- ERISA applies not only to any “employee pension benefit plan”, such as 401k plans but ERISA also applies to any “employee welfare benefit plan” including medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or daycare centers, scholarship funds, or prepaid legal services.”
These same managers, officers, and owners, though are even more surprised to learn that:
- If they have discretionary authority or control over either of these types of employee benefit plans (pension or welfare) management or assets, they are considered a “fiduciary” under ERISA with non-delegable statutory duties and personal liability to reimburse the plans for any losses resulting from their failures to perform these duties “prudently.”
Once these managers, officers, and owners become, perhaps unwittingly, fiduciaries their non-delegable duties in relation to the the pension or welfare plans under ERISA are to:
- Act solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them;
- Carrying out their duties with skill, prudence, and diligence;
- Follow the plan’s lawful terms and conditions
- Diversifying plan investments for pension ;
- Pay only reasonable expenses in administering the plan and investing its assets; and
- Avoid conflicts of interest.
The personal liability exposures that result from these standards of conduct to persons defined as fiduciaries under ERISA many times may have no coverage under a company’s standard coverages.
An ERISA bond and a CGL’s employment practices liability endorsement do not cover all ERISA exposures by a longshot
The two most common insurance coverages that insurance agencies provide their commercial insureds that have an ERISA exposure are the ubiquitous employment benefits liability coverage endorsement and the mandatory ERISA Bond.
Employee benefits liability coverage provides defense and indemnity for administrative errors and omissions for public or private benefit plans that a commercial insured may administer. These errors could be in enrolling an employee in a group insurance plan or in transmitting employee instructions for changes to benefits to an insurer that result in an employee failing to receive the benefits they should have received.
In most cases, employee benefits liability coverage forms contain an exclusion that states that the coverage does not apply to any: “Loss for which the insured is liable because of liability imposed on a fiduciary by the Employee Retirement Security Act of 1974, as now or hereafter amended.”
The only coverage mandated by ERISA is the so‑called “ERISA Bond”. This bond, required under federal law, is mainly to protect the assets of an ERISA plan, such as a 401k or pension plan, from defalcation. The amount of coverage required by statute is 10 percent of the assets of each plan, subject to a minimum amount per plan of $1,000.00 and a maximum amount per plan of $500,000.00.
An ERISA bond also does not provide coverage directly for ERISA fiduciaries, for example, if an officer of a company stole $2 million from a pension or 401k plan. The ERISA bond would pay only $500,000 of the $2 million dollar loss.
Absent other applicable fidelity or crime insurance, the beneficiaries of the pension plan or 401k might well sue other managers, officers, or owners, who had “discretionary authority or control” over the plan’s assets to make up the remaining $1.5 million of the loss. Such a suit would likely allege that these other managers, officers, or owners were ERISA fiduciaries who did not carry out their duties to protect the plan’s assets with skill, prudence, and diligence, thereby allowing the defalcation to occur.
If no fiduciary liability policy was in place, these defendants would have to defend the suit using their personal assets. Likewise, if the suit resulted in any settlement or judgment, the settlement or judgment amounts would have to come out of personal assets.
The following schematic tries to graphically display where fiduciary liability coverage fits between employment benefits liability coverage and the ERISA bond.
An opportunity for independent agents to advise and protect commercial insureds
The latest available report on ERISA pension plans showed that in 2012 there were over 590,000 401k Plans with fewer than 100 Participants. Each of these plans has fiduciary exposure under ERISA. Any person within entities sponsoring these plans, with the right to control these plans, has personal liability under ERISA that fiduciary liability can reduce or eliminate.
The cost and frequency of fiduciary liability suits under ERISA are surprisingly high. While there are no recent statistics relating to fiduciary liability, in 2000 and 2004 Tillinghast Consulting conducted two fiduciary liability surveys and found:
- The average defense costs per claim in 2004 were $365,000.00. Average defense costs were up $121,000.00 since the year 2000.
- The average indemnity costs were just under $1,000,000.00, down slightly from 2000’s indemnity costs of just over $1,000,000.00.
- The most frequent claim was “denial of benefits,” followed by “misleading representations” and “communications of plan benefits”.
- The study noted that there existed more fiduciary liability lawsuits than employment practices liability lawsuits.
In short, an independent agent will do any manager, officer, or owner of a commercial entity a big favor by making them understand that they may have personal liability under ERISA for the prudent management of employee pension or welfare plans and that the purchase of a fiduciary liability policy can extinguish that personal exposure.
