|Plan sponsors are often concerned with the prudence and process of obtaining insurance covering ERISA retirement plan fiduciaries. While fiduciary insurance is an important aspect in mitigating the financial impact of fiduciary litigation, there are a number of additional, important activities that are prudent for fiduciaries to embrace.
ERISA fiduciaries are well advised to follow a comprehensive strategy to optimize fiduciary risk mitigation. Other important risk mitigation steps include identifying who the plan’s named fiduciary is, delegating fiduciary responsibilities to co-fiduciaries (e.g., steering committee) as appropriate and allowable, implementing a sound fiduciary structure (via committee charter with ancillary paperwork), consistently practicing procedural prudence as defined by ERISA for all fiduciary-level plan decision making, hiring experts as needed to fulfill ERISA’s prudent expert requirement, documenting all fiduciary decision-making processes and results, and auditing administrative procedures periodically to ensure compliance with ERISA and the plan document (this is a source of many unintentional fiduciary breaches). Ask your plan consultant to provide a more complete explanation of this important topic.
Returning to the specific topic of fiduciary insurance, please note that typically, most corporate-level liability insurance policies (directors and officers liability insurance (D&O), employee benefit liability coverage) do not address ERISA fiduciary breaches. If ERISA-specific language is not included in a liability policy, ERISA breaches are most likely not covered. Comprehensive fiduciary insurance is relatively affordable and typically does cover all plan fiduciaries. ERISA fiduciary coverage can be obtained as an addendum to an existing liability policy, or as a separate policy, depending upon the issuer.
Not all fiduciary liability policies are created equal, and some issuers are more astute about this coverage than others. It is prudent to confirm that the issuer you are considering to provide coverage has experience and expertise in providing ERISA fiduciary coverage. A few areas to focus on, other than what would normally be considered in reviewing any insurance policy, are:
Do review all language contained in the contract, especially in areas of coverage exclusions and limitations, provisions for legal representation in event of a claim, and specific and aggregate dollar limits of coverage.
Another important area of concern in terms of policy language is the application for coverage. As with most insurance contracts, the signed application for coverage is considered part of the contract. We have noticed many applications that ask the fiduciaries to affirm that there has never been a fiduciary breach associated with the plan. In our opinion, this is an affirmation that is not practicable to assert, as many unintentional fiduciary breaches (by far the most frequent category of breaches) may not be identified upon occurrence or until years after its occurrence. The affirmation can and may be used to nullify the insurance protection at time of a claim. It would be prudent to have the issuer insert, “to the best of my knowledge” language to this question. We believe that this is typically not an intentional attempt by the issuer to avoid a claim, but is often due to the issuer’s naivety concerning ERISA law.
To summarize, here are some steps you might follow in evaluating ERISA fiduciary insurance: