What Is Fiduciary Liability Insurance?

When you have a responsibility to serve the best interests of another, you have big shoes to fill. For example, does your company offer retirement or other benefit plans to employees that you manage? If the answer is yes, there's a good chance you are acting as a fiduciary and could be on the hook for legal liability. 

Fiduciaries encounter risk when overseeing employee benefit plans, such as 401(k) or 403(b) plans. Your company may carry insurance, but is it the right kind to protect you? So, what is fiduciary liability insurance, and is it the right choice for your company?    

What Is Fiduciary Liability Insurance?

Fiduciary liability insurance provides crucial protections for individuals and organizations acting as fiduciaries, such as when managing employee benefit plans, trusts or investments. It usually covers fiduciaries from financial losses and legal defense fees they may incur resulting from alleged financial mismanagement, breaches of fiduciary duty, and errors or omissions in administering and managing these plans.

How Does Fiduciary Liability Insurance Work? 

A fiduciary is an individual or entity entrusted to manage assets on behalf of others. They are held to a higher standard of care and are expected to prioritize the other party's interests over their own. If they fail to exercise appropriate care, the fiduciary could suffer personal financial loss.

A fiduciary liability insurance policy (FLIP) protects a plan fiduciary against allegations of mismanagement of plan assets. Without FLIP coverage, a fiduciary's personal assets could be exposed.

The Employee Retirement Income Security Act (ERISA) is a federal law that governs private-sector employee benefit plans, such as pensions and retirement plans. ERISA aims to protect plan participants by establishing standards for fiduciaries to follow.

Under ERISA, you cannot indemnify a fiduciary. So, in the event of a breach of fiduciary duties, you cannot use the plan's assets to pay for legal fees or settlement costs on behalf of the fiduciary.

Even if a company wants to shift the responsibility of alleged mismanagement claims away from its fiduciary, it may be legally or financially barred from doing so. 

Employee benefits liability coverage (EBL) typically covers claims involving administrative errors or omissions. EBL insurance typically covers recordkeeping mistakes, such as failing to add or cancel employees on the benefit plan. EBL may also offer coverage if you make a mistake interpreting the plan's benefits. While a FLIP policy typically covers similar administrative errors, it provides added coverage for breach of fiduciary duty. 

An ERISA bond provides coverage for losses incurred due to the theft of plan assets, while a FLIP policy does not. 

Who Is a Fiduciary Policy For? 

A fiduciary liability policy protects the fiduciary managing the employee benefit plan against allegations of mismanagement. Fiduciaries may include the individual tasked with overseeing the plan and its assets and the company sponsoring it.

Additionally, the fiduciary insurance policy extends to the company's officers and directors and members of its benefit or investment committees.

A company's fiduciary liability policy would not cover third parties, such as outside consultants, service providers or advisors. Instead, these third parties should protect themselves with their own coverage. 

Pros and Cons of a Fiduciary Policy

Adding fiduciary insurance coverage may be necessary if your company offers benefit plans, such as retirement or health insurance, to its employees. Below are some of the benefits and drawbacks of fiduciary insurance policies:

What Does Fiduciary Liability Insurance Cover?

FLIP coverage can be tailored to address specific risks associated with fiduciary responsibilities, such as:

• Breach of financial duty
• Improper investment decisions or lack of investment diversity
• Imprudent selection and failure to monitor outside service providers
• Errors and omissions in plan administration
• Conflicts of interest
• Legal defense costs
• Settlements and judgments
• Regulatory penalties and fines levied by the DOL and IRS under a voluntary settlement plan
• Improper use of retirement funds
• Civil penalties for inadvertent ERISA violations
• Excessive fees charged

What Is Not Covered?

Fiduciary liability protects against fiduciary mismanagement; however, it does not offer coverage for fraudulent or intentional acts, including:

• Criminal acts
• Intentional wrongdoing
• Embezzlement
• Intentional violations of law
• Plan asset losses due to theft
• Failure to fund the plan in accordance with ERISA requirements 

In addition, fiduciary liability coverage does not extend to outside consultants, advisors or service providers who manage a benefit plan.

How Much Does a Fiduciary Liability Policy Cost?

The average cost of a fiduciary liability policy typically falls between $500 and $2,500. However, insurance companies consider many factors when determining premiums, such as the type and complexity of the benefit plan and claim history.

Entities with robust internal controls and governance practices may attract lower premiums, as they are often viewed as less risky. Premiums may also be less if you opt for a higher deductible. 

Find the Best Fiduciary Liability Insurance From Benzinga’s Top Providers

If your company sponsors an employee benefit plan, you may need fiduciary liability insurance. Below are some of the best options.

Protect Yourself with Fiduciary Liability Insurance

Fiduciary liability insurance can be a key factor in managing risk for companies by offering financial protection for claims of fiduciary mismanagement, errors and omissions, and breach of duty. A fiduciary liability insurance policy helps a company safeguard its interest when fulfilling fiduciary responsibilities. 

Frequently Asked Questions