Insurance coverage can be a confusing thing. Coverage for employee benefit plan fiduciaries sometimes adds a wrinkle to the process that can be overlooked. Depending on the type of claim asserted, there are a variety of "coverage" options that may apply. I think the new fee disclosure rules are likely to increase claims for breach of fiduciary duty in the future, but even without that development, it makes sense to at least know whether you have coverage and what your options are. So let’s take a look at some of the options.
- The ERISA Bond. Generally, plan’s have to have an ERISA bond that applies to anyone who handles plan assets. The presumption is that handling the assets equates to "discretionary authority" which is the hallmark of fiduciary status. The bond can be very narrow (covering only fiduciaries and employees) or broad (extending to vendors and person who do not necessarily handle plan assets), but the bond will only provide protection for claims for "fraud and dishonesty." It does not generally provide insurance coverage for other claims, particularly claims for breach of fiduciary duty not involving fraud or dishonesty.
- Fiduciary Liability Insurance. Unlike a bond, Fiduciary Liability coverage pays for claims arising out of the administration of a benefit plan without requiring "fraud" or "dishonesty." Often it is combined with Employee Benefits Liability Coverage. This type of coverage is designed to insure fiduciaries acting specifically in their capacity as benefit plan fiduciaries which include claims for breach of duty or mistake in administration of the plan. Some policies can even be expanded to include coverage for penalties and fines (for a price).
- Directors and Officers Liability Insurance. D&O policies generally provider coverage for directors and officers of a company in the event they are sued in conjunction with the performance of their official duties as they relate to the company. But many D&O policies exclude claims arising from administration of benefit plans. Others require a specific rider that includes employee benefits coverage (likely for an additional premium). Don’t assume that because you have a D&O policy that it automatically provides coverage for claims arising from plan administration.
- Errors and Omissions Insurance. E&O polices rarely provide coverage for ERISA claims (unless the company with the coverage happens to be in the business of providing service to ERISA plans). Unless specifically included in an E&O policy, this coverage will not likely protect a fiduciary from a claim arising from administration of a benefit plan.
- Employment Practices Liability Insurance. EPLI coverage is typically bundled with D&O coverage and generally insures against claims that allege misconduct by the officers of a company in an employment setting. These claims are typically for things like harassment, discrimination and wrongful discharge. EPLI coverage does not typically provide protection against claims arising from plan administration unless specifically included (usually with a rider and usually for an extra premium).
Why be concerned? Frequently I find myself in a position of defending a fiduciary (or an officer or owner of a company alleged to be a fiduciary) who finds him or herself in a position of being "uninsured." They assume that their general commercial liability policy or D&O policy covers them for ERISA claims, only to find out the carrier has denied coverage. Depending on the nature of the claim, the size of the claim or the breach alleged, ERISA claims can be very expensive to defend and can result in some hefty damages.
Of course, insurance is not free and balancing the cost of coverage versus the risk of exposure is a business decision that plan sponsors and fiduciaries have to evaluate on their own. I certainly recommend that anyone in a fiduciary position have coverage, but it is not required. However, I do think it is very important for you to check to see if you do or do not have coverage for employee benefit claims. Look at your policies to see whether or not you have coverage. If you don’t have coverage, maybe you should look at the cost of adding it. But better to know now whether or not you do than to be surprised later to find out you don’t. And ask if you are not sure.