Are 3 Fiduciary Insurance Policies Enough?

While plan sponsors often fail to obtain the proper insurance coverage, a recent court decision highlights why it’s important to read the fine print.

The decision, from the Louisiana Second Circuit Court of Appeals, came in a case where plan fiduciaries had been sued by the U.S. Department of Labor following a formal investigation for selling stock to an Employee Stock Ownership Plan (ESOP) at an inflated price. The plaintiff-fiduciaries had three separate policies they thought would provide them with legal defense costs and cover any awards assessed against them. However, an analysis by Osler Hoskin & Harcourt LLP1 notes that the court ruled that the policies didn’t cover the plaintiffs for the following reasons:

  • The policies didn’t cover actions taken before the effective date.
  • The D&O policy didn’t cover ERISA claims at all.
  • Plaintiffs failed to give notice of the claims during the policy period, where the claim was specifically defined as including an investigation by the Department of Labor or the Pension Benefit Guaranty Corporation.

The article’s author notes that they regularly speak with competent employee benefits professionals who confuse the required ERISA bonding coverage, which provides recovery to the plan, not the fiduciaries, with fiduciary liability insurance, or who think D&O policies cover their ERISA plan committee actions, many such policies either don’t cover ERISA claims at all, or don’t cover lower level committee members. Moreover, he explains that while they are frequently told that a plan sponsor maintains fiduciary liability insurance, they are instead sent the ERISA bond when they ask to see a copy of the policy. “In many of those cases, we have to deliver the bad news that the fiduciaries have no personal coverage at all,” he says.

 We suggest four points to consider before a plan sponsor needs the coverage:

  • Don’t assume that employer indemnification obligations are a substitute for coverage or will cover any gaps in coverage. There may be legal constraints, for example, under state corporate law, on the company’s ability to provide full indemnification and the commitment may become worthless in the event of bankruptcy or other financial distress.
  • Understand the exclusions in your policy and find out whether endorsements are available to eliminate some of them.
  • Consider whether your policy limits should be increased, since courts seem to be awarding ever increasing damages in fiduciary breach cases.
  • Understand and follow the notice requirements in your policies.

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This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.