An organization that is entrusted with the pension plans and benefits of its employees has to be very cautious about how it invests those funds. Fiduciaries are held to incredibly high standards. So any claims of mismanagement can bring the company down. Sometimes, it can be difficult for fiduciaries to comprehend the extent of their duties. Consequently, that can open the door for any number of mismanagement issues. A fiduciary is required to act only in the interest of its beneficiaries. Such responsibility means the trustee has certain liabilities when executing duties. Fiduciary liability insurance becomes a necessary precaution for this reason.
When there is a breach of the duties of a fiduciary, whether intended or not, this insurance policy covers the resulting damages. The potential financial damages that can arise due to lack of proper management of benefits or retirement plans are astronomical, depending on the size of the company. It is why most companies opt to take out fiduciary liability insurance. You may be asking how much your organization needs this type of coverage. This guide explains it.
What is Fiduciary Liability Insurance?
Fiduciary lawsuits are not uncommon. This is because they can involve everyone tied to the management of your employees’ retirement plans and benefits from the legal advisers to the financial consulting firms. Such lawsuits can result in extensive damages to an enterprise’s financial well being and reputation. Fiduciary liability insurance is a policy that protects an organization against such lawsuits.
In the event of mismanagement by trustees, the liability insurance covers the losses. Fiduciary liability claims can cover a wide range such as:
- Improper advice or counsel;
- Failure to fund a plan appropriately;
- Denial of change of benefits;
- Imprudent investment of assets;
- Conflict of interest;
- Administrative error;
- Wrong choice of third party service provider.
Note that fiduciary liability insurance is not a requirement of any federal statute or the Employee Retirement Income Security Act.
Who Needs Fiduciary Liability Insurance the Most
Any company or individual with fiduciary responsibilities can take advantage of fiduciary liability insurance. As the trustee, you have to find the right people to advise you about investment opportunities and select the right instruments. Because many fiduciaries don’t grasp the scope of their duties, it is very easy to find yourself facing a mismanagement claim. Fiduciaries also have a host of funds to oversee, ranging from employee stock ownership to wellness plans. Over the years, courts have adopted a wider interpretation of fiduciary duties. That only increases liability.
Nowadays, beneficiaries can raise claims of discrimination or other HR issues. So anyone investing in fiduciary liability insurance should know that it does not extend to outside advisers or consultants. Additionally, trustees should be aware that the fidelity bond required by ERISA only covers fraudulent activities. That consist of deliberate theft or fraud. Breach of fiduciary responsibility such as poor oversight and negligence don’t fall under the category of intentional fraudulent acts, according to ERISA.
How Much is Usually Spent on Fiduciary Liability Insurance
It is difficult to put an exact figure on how much organizations spend on their fiduciary liability insurance policies. Fiduciary responsibilities vary from trustee to another. That determines the level of accountability present. This aspect dictates the type of policy an administrator should take out. The number of employees and size of funds involved are other factors that determine the suitability of an insurance policy. One element that should be clear is that a traditional fiduciary liability insurance policy doesn’t cover regulatory investigations. Insurers only cover claims, which must have notices of charges. The costs of investigating a claim of wrongdoing fall to the trustee. However, you can get pre-claim investigation coverage, which will increase the cost of your premiums.
When taking out fiduciary liability insurance, companies should ensure that they comply with the regulations of HITECH (Health Information Technology for Economic and Clinical Health Act) and HIPAA (Health Insurance Portability and Accountability Act). The Department of Health and Human Services can impose maximum yearly fines of up to $1.5 million for violations. So policies should provide sufficient coverage. If you are handling health plans, then your fiduciary liability insurance should cover the maximum penalties for the Affordable Care Act violations.
The Need for Fiduciary Liability insurance: 3 Answers
1. Holding Responsibility
Trustees are held personally responsible for mismanagement, administrative mistakes, and negligence of employee benefit plans. Without fiduciary liability insurance, an individual may have to pay for the defense expense, settlements, and judgment for their personal accounts.
ERISA violation claims can be quite expensive. Therefore, your employee benefits liability policy doesn’t cover them. With the right coverage for your fiduciary liabilities, you can rest easy.
2. Research on Coverage
One reason fiduciary liability insurance may not be very popular compared to other policies is that it is not ERISA-mandated. Some fiduciaries also fail to understand that their liabilities are not covered by all the other insurance policies a company may have.
Businesses carry a multitude of liability coverage from D&O policies. These range from commercial general liability to employee benefits liability. However, all these policies have their limitations, which may not extend to your fiduciary duties. Getting the right insurance ensures that you have appropriate protection in case of a claim.
Fiduciary liability insurance cushions your company against financial losses in the event of a claim. Anyone in an organization who is involved in fiduciary roles in whatever capacity can be sued for failing to deliver. So the financial losses resulting from a breach of duty can cripple the operations of a company.
With the proper coverage, you can pay for compensation without dipping into the enterprise’s coffers. Insurers provide an option to extend your coverage beyond the normal spectrum. This means that you can increase your level of protection.
As a fiduciary responsible for the management of employee plans, you have to work with consultants, advisers, and other third party services. The involvement of different entities increases the risks of making mistakes and consequently, a breach of your fiduciary duties.
A fiduciary liability insurance policy is the safety net that catches you in the case of failures. So any organization or individual tasked with overseeing employee benefit plans should invest in this type of insurance. Ensure that the policy you select for your fiduciary liability protection covers the different plans under your management.
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