Management liability insurance or fiduciary liability insurance protects businesses and employees against claims that come from a breach in fiduciary duty. A fiduciary is used to describe a person, bank, or financial manager who is trusted by an investor to handle financial decisions like investment and brokerage. It is the adjective used to describe the relationship between the investor and a trusted party who administers his finances.
A fiduciary is responsible for managing the assets of an investor or a group of investors to act in their best interests. There are many legal obligations to a fiduciary in managing finances in a way that directly benefits the investor.
Travelers Insurance Company addresses a fiduciary as the administrator whose job it is to select advisors and investments, minimize expenses, and follow the plan documents exactly as prescribed. The fiduciary must act solely in the interest of plan participants and beneficiaries and not the company. A fiduciary has a great deal of responsibility and is often open to liability.
Consider the Employee Retirement Income Security Act of 1974 or ERISA. Anyone in a company that has decision-making authority, administration, or management of the retirement plan or its assets is a fiduciary. Fiduciaries include employers or the plan sponsors, plan administrators, directors, and officers, and internal investment committees.
ERISA was passed in 1974 to make sure that employees who held company benefit plans like pension or welfare plans received the benefits promised in legal documents at the appointed time. ERISA is the guardian of the plans that are set up by companies.
ERISA created fiduciary liability for employers that offer employee benefit plans to make sure these employers kept their promises. If an employer offers employees retirement plans that include defined benefit pension plans, profit sharing plans, stock options, and employee stock ownership plans, they are required by law to keep their promises. The same requirements include welfare plans like medical benefits, dental, life, and disability insurance.
With high position comes high responsibility and the possibility of mishandling the plans. To this end, fiduciary liability insurance was designed to protect the company, and the employees engaged in fiduciary roles. Fiduciary liability insurance does not cover outside advisers, third-parties, or administrators of benefits plans.
ERISA is strict, and the Hartford Insurance Company reports, “Any outside advisers, consultants, or administrators of your benefits plans … are responsible for securing their own coverage. Also, keep in mind that even if you hire outside advisors to take on your plans’ fiduciary functions, this doesn’t automatically exclude you from any associated liabilities – you are still responsible for monitoring these fiduciaries’ activities.”
If a fiduciary breaches their responsibilities in taking care of retirement plans, that person can be legally held responsible if anything goes wrong. Examples of wrongdoing, intentional or not, include:
- Errors in administrating plans. These errors include improper enrollment or terminations that result in lost benefits,
- Mistakes in counseling when managing health or welfare plans that result in a lose of or incorrect administration of benefits,
- Giving poor or negligent advice on investing retirement plans,
- Making risky investments regarding a benefit pension plan,
- Wrongful denial or improper change in benefits,
- Ill-advised selection of or monitoring of third-party service providers.
Any company that offers benefit plans has the potential of being exposed to mistakes and ill-advised investments regarding retirement plans. Larger companies probably have experienced personnel dedicated to employee benefits and keep a close “eye” on their fiduciaries. Smaller companies may not know the laws, and this makes these companies highly subject to litigation.
Companies may believe that the ERISA bond they are required to hold under section 412(a) protects them from litigation, but this is not so. Bonds protect the plan and its participants from misappropriation of funds or property.
Employee Benefits Liability Insurance
Employee benefits liability insurance allows coverage for employee plan claims and is limited to administrative errors. It does not extend to breaches of fiduciary duties.
Fiduciary Liability Insurance
Fiduciary liability insurance has a vital role in protecting against claims that result from a breach in fiduciary duty or the duties of financial responsibility from one party to another.
Any breach of fiduciary obligation like handling salaries, retirement, healthcare, and other finances for an employee – including IRS requirements, can cause harm to a company or employees. Fiduciary liability insurance protects companies and employees from this type of harm. Insureon labels fiduciary liability insurance as a type of errors and omission insurance. Companies do need to investigate this type of coverage to ensure that they and their employees are protected. Contact Risk Managers LLC for more information about Fiduciary Liability Insurance.