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Fiduciary Liability Exposures

Firms that sponsor and manage employee pension, benefit, and health and welfare plans are exposed to liability claims arising from these activities. This exposure actually existed years before the passage of the 1974 Employee Retirement Income Security Act. However, "ERISA" as it is more commonly known, substantially increased the potential liabilities of fiduciaries, thereby fueling the need for fiduciary liability insurance coverage.

Broad ranges of pension and benefit plans are subject to the requirements set forth by ERISA. They include Profit-Sharing Plans, 401(k) Plans, ESOP’s, Life Insurance, Medical Insurance, Dental & Vision Care Insurance, Accident Insurance, Disability Income, Supplemental Unemployment, etc.

ERISA set forth a broad scope of fiduciary obligations and created numerous liability exposures for individuals and companies of all types. The purpose of ERISA was to develop guidelines for administering such plans so that the interests of employee beneficiaries would be safeguarded. In effect, ERISA is designed to assure that those entitled to pensions and benefits are able to collect them.

A fiduciary is charged with the duty of discharging all duties solely in the best interest of participants in and beneficiaries of covered plans.  As is the case with other professionals, fiduciaries must exercise the care, skill, prudence, and diligence of a person who is ordinarily charged with managing pension and employee benefit plans. This duty has become known as the "prudent expert" rule, under which a fiduciary must diversify investments to minimize risks and at the same time comply with the documents governing the plans.

It is important to note that under ERISA, a fiduciary may also be held liable for the acts, errors, or omissions of a co-fiduciary. Thus, firms sponsoring employee pension and benefit programs are exposed to claims produced by the actions of outside entities and organizations that provide administrative services for the plans they sponsor.

Claims against fiduciaries generally fall into one of the following categories:

• Claims produced by mergers/termination of plans
• Claims involving some form of negligence
• Claims involving plan disclosures
• Claims alleging imprudent investment of assets
• Claims alleging failure to pursue delinquent contributions

Expanding disclosure duties pose significant new challenges to employers. Increasingly, the courts are holding employers and their fiduciaries responsible for making prudent, accurate and timely plan disclosures. Courts have held that fiduciaries have an obligation to provide information that is not requested to the extent that it is relevant to a participant’s interests.

The strong nature of this legislation and court rulings have inferred significant liability exposures for fiduciaries. Like the exposure facing directors and officers for corporate decision making, the liability of fiduciaries is a personal liability. Personal assets are exposed in exchange for making increasingly more complicated decisions involving employee benefit plans.

Today’s fiduciary and/or party at interest faces more significant and more varied liability exposures than in the past. The person with fiduciary responsibility today must have much more respect for actual and potential litigation, as he/she deals with the expanding exposures that continue to evolve and plaintiffs that are much more willing to bring suit. With personal assets being exposed in exchange for functioning as a fiduciary, care must be taken with internal procedures and decision making.

Fiduciary Liability Insurance Coverage is designed to respond to liability arising from discretionary judgement in addition to allegations of administrative errors, or errors and omissions in communication or administration of employee benefits. This coverage is important because questions about the prudence of investment decisions by fiduciaries, the diversification of portfolios, and the reasonableness of fees charged by administrators and investment managers have been major sources of litigation in recent years.

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