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Fiduciary Liability Insurance: What Is It?

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Fiduciary liability insurance is one of the best forms of risk management to protect your organization and employees from liability due to mismanagement of your employee benefits plans. In addition to the initial question of what is fiduciary liability insurance, your clients may be curious what it entails and why they need it. Read on to learn what defines this liability policy, what’s covered under fiduciary liability insurance, what’s not included, and how it can benefit your clients.

What is a fiduciary?

A fiduciary is a person or organization that acts on behalf of someone else in their best interest. As a fiduciary for employees, an employer is required by law to responsibly manage employees’ money, which includes health benefits and pensions. Importantly, anyone who participates in the administration of a benefits plan is considered a fiduciary.

What is fiduciary liability insurance?

Fiduciary liability insurance provides financial protection against claims related to mismanagement of employee benefit plans, including legal defense costs, settlements, court-ordered damages, investigations into wrongdoing, and covered penalties. Typically, fiduciary liability insurance lives under the umbrella of management liability and executive risks category, along with directors and officers (D&O) insurance, employment practices liability (EPL) insurance, and crime insurance, among other coverages. Some of your clients may also mistakenly think of fiduciary liability insurance as similar to errors and omissions (E&O) insurance. This type of insurance covers breaches of contract and warranty, misrepresentation, copyright infringement, and other inadequate or negligent work resulting in financial losses. Fiduciary liability insurance differs in that it applies solely to benefits administration. 

Why is fiduciary liability insurance beneficial?

Fiduciary liability insurance can benefit your clients by protecting them from any claims that may stem from violations of fiduciary duty. Given the amount of paperwork and room for unintended error in administering a plan, it’s a good idea to err on the side of safety. Implementing a fiduciary liability policy can financially protect your clients should any fiduciary-related claims arise. The policy may cover any legal fees incurred, settlements negotiated, and damages awarded if wrongdoing is confirmed. 

What types of small businesses need fiduciary liability insurance?

Any small business that provides benefits for its employees could make the sort of errors that result in fiduciary liability claims. Small businesses may be especially vulnerable to these claims, as larger organizations often have more resources.  For example, larger organizations may have more capacity to hire in-house HR experts who may be more experienced with ERISA law. As such, fiduciary liability insurance is critical for protecting your SMB clients from the financial challenges that can result from any benefits plan mismanagement claims.  Organizations that outsource benefits management can still be impacted by fiduciary claims. If a third party that manages a plan makes a mistake, business owners can still be found liable and may have to pay out claims from both business and personal assets.

What does fiduciary liability insurance cover?

Fiduciary liability insurance provides financial protection against claims related to the mismanagement of employee benefit plans, including legal defense costs, settlements, court-ordered damages, investigations into wrongdoing, and covered penalties.  Fiduciary liability policies cover benefits plans, such as medical, dental, vision, or disability insurance and retirement plans like 401(k)s. Some potential oversights your small business clients could make as fiduciaries include the following. 

  • Errors while administering the plan

Administrative errors, such as enrollment in the wrong benefit plan or incorrect termination, are typically covered under fiduciary liability insurance. Additionally, any mistakes made in advising a benefit recipient are often included under this type of insurance policy. 

  • Giving info that results in financial damages

Your small business clients who operate in fiduciary roles likely field employee questions on selecting benefit plans or making retirement investments. If a fiduciary gives poor guidance that results in financial damages to a benefit recipient, fiduciary liability policies can cover the costs of any claims. 

  • Making improper changes to benefits

As employees experience life changes, they’ll need to make adjustments to their benefits plan. Sometimes, this responsibility falls to small business owners. A fiduciary liability policy would cover the SMB owner’s errors when, for example, adding a new spouse to a plan. This may also include mistakes in regard to retirement plans, such as failing to diversify investments. 

  • Wrongful denial of benefits

It’s possible that your small business clients’ employees will erroneously be denied coverage for something they qualify for — like an individual not being granted long-term disability leave. In fact, this is one of the most common fiduciary mismanagement claims, particularly with medical or disability benefit plans. A fiduciary liability plan can protect your SMB clients if the employee decides to pursue legal action. 

  • Errors resulting from third parties 

Fiduciary liability insurance can protect your clients against lawsuits stemming from errors that may have resulted from their work with a third party. This is important since employee benefits administration often involves third-party providers. Covered errors can include your client’s poor selection of an outside provider or any error resulting from failure to supervise the third party. 

  • Excessive fees 

In the event an administrator fails to thoroughly examine the fees associated with certain plans and those fees could’ve been otherwise earmarked for investments, an employee might decide to file a lawsuit against their employer. Defending such legal claims is a costly and complicated endeavor, with attorneys charging an average of $1,200 an hour for these kinds of cases. While many business owners think they might not need this type of coverage, smaller businesses are increasingly the target of excessive fees lawsuits. In fact, nearly half of all excessive fee lawsuits filed between 2018 and 2020 targeted plans with less than $1 billion in assets.

What does fiduciary liability insurance not cover?

The ERISA stipulates that fiduciaries are legally obligated to act in good faith when administering any benefits plans. Fiduciary liability insurance is therefore meant to safeguard against unintended oversight — the key word being “unintended.” Fiduciary liability insurance does not cover individuals who violate their fiduciary duty by committing embezzlement or other crimes associated with benefits administration. Additionally, a fiduciary liability policy does not cover third parties involved in benefit plans. This includes consultants or outside advisors, all of whom should have their own liability insurance policies. Your clients may want to ask these parties for a certificate of insurance to confirm that they’re covered before working with them.

Why your clients should invest in fiduciary liability insurance?

Any business that offers benefits to its employees is at risk of committing fiduciary errors and incurring the associated liability. If a client is unconvinced, data from Coalition's 2022 Executive Risks Report details exactly why they shouldn’t disregard the need for a fiduciary liability plan.  Coalition surveyed 1,000 senior executives and found that only 25% of small businesses currently have Fiduciary Liability insurance (though 72% said they intend to purchase it).The good news is that many businesses recognize the importance of fiduciary coverage — they may just need a nudge when it comes to securing a policy. Yet, among those with no intention of purchasing, there appears to be a lack of understanding of who Fiduciary Liability insurance is for and why it’s vital:

  • 45% said they’re too small to need it

  • 35% said they’re not at risk

  • 21% said they’ve gotten by without it

As a broker, you have a clear opportunity to educate clients and help them protect their businesses before it’s too late. Coalition offers Active Fiduciary Liability Insurance that protects your clients with up to $250 million in plan assets against any claims that stem from disputes over employee benefits. With Coalition’s Active Fiduciary Liability Insurance, clients also gain access to Coalition Control, which gives them a clearer picture of their organizational risk. To learn more about how Coalition can help your clients proactively safeguard themselves against excessive fees and civil penalties, check this out.