Ins and Outs of Fiduciary Liability Insurance
Today, we will explore the ins and outs of fiduciary liability insurance. As a crucial aspect of risk management for plan sponsors, understanding this insurance is essential in today’s evolving landscape of fiduciary responsibility.
Recently, at the ERISA 403(b) Conference in Washington, D.C., experts highlighted the growing importance of fiduciary liability insurance. Panelists, including Daniel Aronowitz from Euclid Fiduciary, discussed the alarming rise in lawsuits stemming from the “weaponization” of ERISA regulations.
What Is Fiduciary Liability Insurance?
Originally designed to protect individuals, fiduciary liability insurance has evolved into a form of malpractice insurance for fiduciaries. It now serves to safeguard plan sponsors and fiduciaries against potential claims arising from their management of retirement plans. Typically, this insurance provides protection in four critical areas:
- Breach of Fiduciary Duty: Covers claims related to failures in fiduciary responsibilities, such as not acting in the best interests of plan participants.
- Management Negligence: Protects against claims arising from errors or omissions in the administration of the plan.
- IRS and Department of Labor Penalties: Offers coverage for fines and penalties levied by regulatory bodies.
- Voluntary Compliance Sanctions: Addresses costs associated with voluntarily correcting plan failures before they become a legal issue.
Trends in Fiduciary Liability Claims
Milless noted a notable surge in lawsuits, with annual claims rising from 10-14 between 2000 and 2013 to approximately 60 per year by 2016. This dramatic increase has significantly impacted premiums and deductibles, prompting plan sponsors to reassess their insurance strategies.
Aronowitz warned that many lawsuits are based on insufficient evidence, such as a plan’s performance lagging behind the S&P 500. Historically, company stock was a primary target for litigation; however, contemporary claims are increasingly focusing on issues like:
- Investment underperformance
- Healthcare fees
- Cybersecurity breaches
- Environmental, Social, and Governance (ESG) practices
Navigating the Complexity of Fiduciary Liability Insurance
The complexity of fiduciary liability insurance has grown, reflecting the evolving challenges facing plan sponsors. Although plan assets can be utilized to fund these policies, experts advise caution. Insurers may pursue claims against other insurers through subrogation, which can complicate claims processing.
In conclusion, fiduciary liability insurance has become a vital tool for plan sponsors to mitigate risks associated with fiduciary duties. As the landscape continues to shift, staying informed about the intricacies of this insurance will be critical for effective risk management.
