Fiduciary liability insurance is a common way to protect those responsible for creating and managing employee benefit plans within business organizations. Fiduciary liability arises from the obligations established by the Employee Retirement Income Security Act (ERISA) of 1974. The purpose of ERISA is to regulate how pension and benefits programs must operate once put into place. For instance, pension plans are required to provide vested benefits for employees after a certain number of years. This act was designed for employees participating in employee pension benefit plans and welfare benefit plans. The law led to many fiduciary liability exposures for employers that offered these plans. As a result, fiduciary liability insurance coverage became available on a widespread basis.
Fiduciary Liability Scenarios
Claims involving company stock
A business will typically encourage employees to invest 401(k) in company stock. If bankruptcy is declared and its stock is rendered worthless, employee 401(k) plan balances are decimated, and the employees can bring lawsuits.
Claims from fees associated with 401(k) plans
Employees bring a class action claim asserting that the fees charged to administer the company’s 401(k) plan were higher than the average rate for such services. Even if this is a very small amount, it can vastly reduce an employee’s 401(k) balance over a long period.
Claims involving healthcare plan administration
A company offers its employees healthcare insurance coverage and then is sued when it fires an employee who comes across a hefty medical expense and is no longer able to obtain their coverage. Employer-provided healthcare plans are also exposed to claims alleging that the plans have incompetent medical providers in their network and/or wrongfully withheld treatment for specific conditions.
Claims from the selection of risky investments
A company’s employees are covered by a “traditional” defined benefit pension plan. Employees can sue if a manager invests a large proportion of the pension’s funds in highly risky securities such as “junk” bonds or “penny” stocks. If the risky investments fail, the plan will be unable to pay promised benefits.
Employee Benefits Liability
The employee benefits liability coverage encompasses errors and omissions associated with nondiscretionary functions of employee benefit programs.
Scenarios:
Failure to enroll
The human resources (HR) department forgets to enroll a new employee in the company healthcare plan and they become injured in an auto accident that they no longer have medical coverage for.
Failure to change the beneficiary designation
An employee requests to change his life insurance policy beneficiary from his ex-wife to his son, but HR forgets to do so. Say the employee dies and the ex-wife receives the policy’s proceeds, instead of his son, which was not the deceased employee’s intention.
Erroneous benefits advice
The HR department recommends a doctor that is out of network and the employee receives a large bill rather than a small fee they expected to pay, or,
An employee makes a decision to retire based on HR’s advice that their pension will be a specific amount, but it ends up being significantly lower.
Fiduciary Liability Insurance Policies
The policies contain a single insuring agreement covering both fiduciary liability and employee benefits liability and incorporate a second insuring agreement for “settlement programs.” For instance, rather than litigate a claim against one or more fiduciaries, your client and the employee may voluntarily agree to settle the lawsuit to avoid the time and expense of formal litigation and are administered by federal agencies.
Those protected by fiduciary liability insurance policies fall into the following categories:
- Assets of the named insured organization
- Assets of the benefit plans scheduled in the policy
- Personal assets of the individuals serving as fiduciaries of the insured’s firm
- Personal assets of any additional persons named on the policy
Covered losses that an insured would have been legally obligated to pay on account of a claim:
- Damages
- Judgments
- Settlements
- Defense costs
The policies are usually written on a “duty to defend” basis, which puts responsibility for managing the defense of a claim on the staffing fiduciary insurance agent rather than the insured. Also, the expenditure of defense costs reduces policy limits, and the policy deductible applies to both indemnity and defense costs.
About World Wide Specialty Programs
For the last 50 years, World Wide Specialty Programs has dedicated itself to providing the optimal products and solutions for the staffing industry. As the only insurance firm to be an ASA commercial liability partner, we are committed to that partnership and committed to using our knowledge of the industry to provide staffing firms with the best possible coverage. For more information about Staffing Professional Liability Insurance or any other coverage, we have available to protect your staffing business, give us a call at (877) 256-0468 to speak with one of our representatives.