Fiduciary liability insurance
Prudent person protection
As a fiduciary, you’re legally bound to put the interests of your plan holders first. At all times.
If you don’t, you’ll be held personally accountable.
But you’re a prudent person. So, how about looking after your own interests, too?
Protect your personal assets with fiduciary liability insurance.
What is fiduciary liability insurance?
A fiduciary liability insurance policy – FLIP, for short – protects individuals looking after employee benefit plans from breach of duty claims.
A breach of duty means you’ve failed to do something you’re legally responsible for. Including: unwisely investing pension funds; misinforming someone of their rights; failing to pay medical benefits; or mishandling plan records.
If an employee claims their plan’s been mismanaged and it’s cost them, a FLIP can care of the legal costs of defending the claim. And replace the money lost.
Even if the claim is groundless.
Why do I need fiduciary liability insurance?
Because looking after your company’s employee benefit plans, shouldn’t mean putting your private assets on the line. And without the right insurance, that’s exactly what you’re doing.
Whether it’s for retirement, health, profit share or disability, virtually all employer plans providing employee benefits are regulated by the Employee Retirement Income Security Act of 1974 (ERISA).
And ERISA says that if a plan isn’t managed properly and/or benefits are lost, fiduciaries are ‘personally liable’ to ‘make good’ any losses they’ve caused.
Yes. You read that right. Personally.
So, if one of your staff thinks their pension plan has been mismanaged. They can sue the individual looking after it. That could be you, or it could be one of your employees who’s acting as fiduciary.
And it doesn’t matter what their job title is – senior director, payroll manager – ERISA doesn’t care. The actions involved in operating a plan make someone a ‘fiduciary’. Not the hat they wear.
If that individual is found at fault, they will have to pay legal fees, settlements or awards, out of their own pocket.
Now, you may well have liability insurance in place. But fiduciary coverage is probably not included. And even if it is, it won’t be adequate.
For example errors and omissions insurance protects your relationship with your clients or customers. Not your employees. Unless, of course, your business is as a professional fiduciary.
And general liability insurance isn’t broad enough to cover the personal assets of employees acting as fiduciaries.
Fiduciary liability insurance is not required by ERISA. But as lawsuits can run to 5, sometimes 6 figures – it’s pretty prudent protection to have.
Don’t believe us? Here’s how much an imprudent investment decision recently cost the trustees of an employee stock ownership plan.
They were sued by the Department of Labor and the company employees who claimed the firm’s fiduciaries had made unwise investment decisions. The court found the fiduciaries failed to conduct impartial reviews of investment options and the suit finally settled for $1,000,000. Ouch.
The fiduciaries of another firm’s 401K Plan also ended up paying out a total of $250,000 for defense and settlement costs. Investigated by the Department of Labor they were found to have violated several ERISA provisions, including:
- failing to forward amounts withheld from employees on a timely basis
- improperly allowing the plan to make loans to shareholder-employees
- making illegal employer contributions to the plan
- failing to make timely payments to terminated employees
- filing annual 5500 reports which falsely indicated the plan was funded in accordance with ERISA’s minimum funding requirements
What does a fiduciary liability policy cover?
- claims made worldwide (as long as they’re filed in the U.S., a U.S. territory or Canada)
- any kind of employee benefit plan, including stock ownership plans
- any employee (including directors and officers) acting as a fiduciary for the firm, the organization itself and the option to extend to spouses and partners
- HIPAA and ERISA fines and penalty payments
- legal defense costs and damages
- no demand to settle a claim
The kinds of claims covered include:
- failure to administer the plan according to plan documents
- imprudent investment of assets/lack of investment diversity
- imprudent selection of third-party service providers (or failure to monitor them)
- wrongful denial or improper change in benefits
- improper enrollment or advice
- conflict of interest
Your policy won’t cover fraudulent acts (like stealing or deliberately defrauding). You need a fidelity bond for this.
Or outside advisors, consultants and administrators you’ve hired to look after your employee benefit plans. They should have their own policy.
Just do bear in mind you may still be liable for their fiduciary functions on your firm’s behalf. So make sure you monitor them.
What other insurance do I need?
- General liability insurance – is for when you’re out and about on business or have visitors to your office. It protects your company from the cost of claims of physical damage to property and people, plus personal injury (slander/libel).
- Errors and omissions insurance – if you offer a professional service, this is a must-have. It protects your firm from the cost of negligence claims. And your reputation from the damage they can do.
- Business personal property insurance – covers the moveable things in your office - from your furniture to your potted plants. It also provides protection for your mobile devices (like your cell and laptop) when you’re out and about on business.
- Cyber liability insurance – It’s not the attack itself that’ll shut down your business, it’s the recovery costs. Cyber insurance can’t stop you being hacked. But it can take care of these costs, so your business survives.
- Directors’ and officers’ insurance – protects your personal assets. Because being on the board shouldn’t mean putting your savings and home at risk.
- Employment practices liability insurance – protects you from the cost of claims brought for unfair dismissal, sexual harassment, discrimination and more.
- Workers’ compensation insurance – even if you only have one employee, most states require you to have this. But it’s good to have anyway. It protects your business from the cost of workplace injury claims. Which can financially crippling.
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