Fiduciary Liability: What it is and Why Your Clients Need it

August 11, 2020

Financial institutions that offer employee benefit plans to their workers face significant risks. As the regulatory landscape of banking corporate governance shifts, risk exposures also shift. Litigation related to the management liability of employee benefits programs is growing; as a result, the need for fiduciary liability insurance coverage has become extremely important. In this guide, we will present an overview of fiduciary duty and discuss the ramifications of management liability exposures as they relate to protecting your insurance clients in the financial sector from liability claims.

An Introduction to Fiduciary Duty in Employee Benefits

Companies and organizations of nearly every structure often provide their employees with benefits plans. Banks and other financial services firms are some of the many business operations that extend benefits to employees; these benefits plans may include:

• Healthcare and welfare insurance policies
• Profit-sharing structures
• Savings and retirement plans
• Pension plans
• Stock options

The teams of people tasked with managing and administering benefits plans have what is called fiduciary duty, which is defined as “acting in a way that will benefit someone else financially.” In other words, benefits administrators must act with good faith, prudence, and care on behalf of the employees who receive these benefits.

Unfortunately, fiduciary and management liability issues arise when fiduciary duty is breached or benefit plans and programs are mismanaged. Legal claims may also be centered on errors and omissions in the administration and management of benefits plans. In 1974, the concept of fiduciary liability was made even more complex by the passage of ERISA, the Employee Retirement Income Security Act. In Section 409 of the Act, fiduciaries may be held personally responsible for mismanagement of employee benefits plans, putting personal and corporate assets at risk. Under ERISA, employee benefits plan participants have the right to sue their employers for any breaches of fiduciary duty.

Protecting Clients with Fiduciary Liability Insurance Solutions

Management liability exposures can cost companies millions of dollars in judgments and settlements as well as the expenses associated with defending against claims of fiduciary mismanagement. Faced with rising claims, more employers are taking hard looks at their existing liability insurance coverages.

The foundation of any liability risk management program is insurance. For employee benefits, fiduciary liability insurance policies serve as the “security blanket” which protects business assets and the personal assets of directors and officers tasked with administering and/or managing benefits plans. Any company that offers benefits plans such as healthcare, dental, retirement, or pension programs to their employees must consider fiduciary liability coverage. The reason for this insurance protection is simple: no matter how carefully benefits are administered, mistakes can be made. Even false claims of breach of duty made by employees can result in expensive litigation. Fiduciary liability coverages include protection against claims like:

• Conflicts of interest
• Prohibited financial transactions
• Wrongful denial of benefits
• Failure to administer plans according to plan documents
• Improper advice or counsel
• Failure to monitor third-party benefits service providers
• Mismanagement of investments
• Errors and omissions in plan administration/management

Most management liability insurance plans also include coverage against legal expenses and the penalties or fees imposed by the U.S. Department of Labor for breaches of fiduciary duty. Sharing the advantages of these insurance solutions with your clients can help to reinforce business relationships. Risks associated with fiduciary duties can devastate any business operation, so it makes sound financial sense to implement risk management programs backed by comprehensive insurance policies. ◼