Fiduciary liability insurance protects businesses’ and employers’ assets against fiduciary-related claims of mismanagement of a company’s employee benefit plans. It is not required by the Employee Retirement Income Security Act (ERISA) or any federal statute. If a claim is made against the policyholder of this insurance, it covers the legal expenses of defending the claim, as well as the financial losses the plan may have incurred due to errors, omissions or breach of fiduciary duty.
The ERISA Act of 1974 holds that fiduciaries may be held personally responsible for the mismanagement of employee benefit plans.
ERISA regulates not just retirement plans, but virtually all employer plans that provide employee benefits, including health, life, profit sharing, disability, and employee leave. Although ERISA does not require employers to establish benefit plans for their employees, it sets out minimum standards for these plans, including a clear code of conduct for fiduciaries who are charged with managing and overseeing employee benefit plans and programs.
Under ERISA Section 409, both employers (the plan sponsors) and outside providers hired in a fiduciary capacity are potentially exposed to significant liabilities. If a plan is not managed properly and/or benefits are lost because employees were not given adequate information or instruction, fiduciaries can be held “personally liable” to “make good” any losses that they’re responsible for. The ramifications are broad, from legal claims arising from poorly invested pensions, to charges of failing to inform employees about their eligibility for coverage for medical procedures or other welfare benefits.
If you purchase fiduciary liability insurance for your company and employees engaged in fiduciary roles, the policy does not extend to any outside advisers, consultants, or administrators of your benefits plans. These providers are responsible for securing their own fiduciary coverage. Also, keep in mind that even if you hire outside advisers to take on your plans’ fiduciary functions, this doesn’t automatically exclude you from any associated liabilities. You are still responsible for monitoring these fiduciaries’ activities.