Traps for the Unwary: ERISA Exposures and the Fiduciary Insurance Solution - Part 2

In the second of this two-part blog series, our guest blogger explains how fiduciary liability insurance can be used to transfer this serious risk away from a company’s Ds and Os. –Priya

In my most recent guest post, I addressed the exposures arising from the Employee Retirement Income Security Act of 1974 (ERISA) and employee benefit plans. This week, I’ll focus on protection from those exposures and, more specifically, transferring the risk to insurance.

Fiduciary liability insurance is readily available and comparatively affordable for companies with an acceptable risk profile. Generally, the same insurers that write D&O insurance write fiduciary liability insurance. Having said that, in practice, the pool of consistent, primary-layer fiduciary insurers with meaningful scale is no more than five.

Fiduciary liability insurance generally pays the insured(s)’ loss for a claim made during the policy period for a wrongful act. The bolded terms in the last sentence are defined terms in a fiduciary liability policy. Let’s discuss what those terms mean.

Who is an Insured?

An Insured under a fiduciary liability policy consists of Insured Persons, Insured Organization(s), and Employee Benefit Plans.

Insured Persons typically consist of employees and directors of an Insured Company to the extent they are serving in a fiduciary or administrative capacity in relation to a Benefit Plan. Recently, insurers have been willing to expressly cover those individuals acting in a settlor capacity. Settlor activities include the decision to have a plan in the first place as well as decisions to amend a plan.

The Insured Company consists of the Named Insured on the insurance policy and all of its subsidiaries. Benefit Plans consist of those plans sponsored solely by the Insured Company. Companies associated with multi-employer plans (created through an agreement between two or more employers and a union) or multiple employer plans (a plan maintained by two or more employers who are not related) will need to address those either via endorsement or a separate policy.

What is Loss?

Loss typically consists of defense expenses, settlements, judgments, compensatory damages, punitive, exemplary and multiplied damages (to the extent they’re insurable under the applicable law) and pre- and post-judgment interest.

Typically excluded from Loss are:

• Civil fines (with limited exceptions)
• Criminal fines
• Sanctions
• Liquidated damages
• Payroll or other taxes
• Damages uninsurable under the applicable law

Also excluded from Loss are the actual benefits due except to the extent they are payable as a personal obligation of an Insured Person. So, the portion of loss that consists of the actual medical, pension, severance or other benefit is excluded from Loss unless an Insured Person is held personally liable for payment of that portion of Loss. The rationale for this is that the insurance policy should not be a substitute funding device for a benefit that is due to a plan participant or beneficiary. A typical exception to the “benefits due” exclusion is a decrease in value of the investments held in a plan.

What is a Claim?

A Claim is typically:

• A written demand for monetary damages or non-monetary relief (e.g., demand letter)
• A civil proceeding commenced by service of a complaint (e.g., lawsuit)
• A criminal proceeding commenced by the filing of charges (e.g., indictment or information)
• A formal administrative or regulatory proceeding
• An alternative dispute resolution proceeding if the Insured is obligated to or agrees to participate

Claims must be noticed to the insurer(s) as soon as practicable after receipt of the claim. Typically, a fiduciary liability policy will specify that a claim is deemed to have been made upon the actual notice of an individual within the policy’s control group (e.g., the Insured Company’s General Counsel or Risk Manager.)

What is the Policy Period?

Yes…what is the Policy Period and why is it important? Fiduciary liability policies, like directors and officers liability policies, are claims-made policies. This means that the claim must be made within the policy period and it must be noticed to the insurance company(ies) within the policy period (or, in some cases, within an extended reporting period immediately following the policy period.) Fiduciary liability policies are typically written for an annual policy period. Insureds deemed a favorable risk may be eligible for a two-year policy period or a guaranteed renewal at a predetermined premium (provided no claims are noticed in the prior policy period.)

Why the discussion of policy period is important is that the failure to timely notice a claim causes that claim to be forever barred from coverage. It’s surprising how many times it seems that claims are made in the final days of a policy period. It’s likewise surprising how long claims can languish in someone’s inbox or on their desk prior to the realization that the insurance company needs to be notified. This doesn’t happen so much with formerly served lawsuits—service of process tends to grab the attention of those who need to know. The claim most at risk to be barred for a failure of timely notice is the written demand letter authored by a plan participant, beneficiary or their attorney.

What is a Wrongful Act?

A Wrongful Act is any actual or alleged breach of fiduciary duty in relation to a Benefit Plan or any actual or alleged negligent act, error or omission by an Insured in the administration of a Benefit Plan.

Other Items of Note

 The overview, above, is just a summary. Here are a few more items of note:

• Fiduciary liability insurance does not insure acts or omissions related to social security, unemployment insurance, workers' compensation, OSHA, NLRA, WARN, or FLSA.
• Like D&O insurance, fiduciary liability insurance does not cover intentionally dishonest or fraudulent acts or omissions or willful violations of statute, rule or law. Allegations of such are typically covered by the policy up and until the point where a final adjudication is entered establishing that the objectionable conduct has occurred.
• The Department of Labor and the Internal Revenue Service both have voluntary compliance programs. These programs encourage companies to self-report violations regarding their plans purportedly for a more lenient outcome. Sub-limited (less than the full limit of liability under the policy) coverage may be available for companies that participate in these programs (e.g., $250,000).
• Modest sub-limits of coverage (e.g., $50,000-$250,000) may also be available to cover penalties awarded under ERISA 502(c) as well as civil money penalties awarded under HIPAA.
• One of the primary reasons that fiduciary liability insurance exists as a separate insurance product is because standard D&O policies exclude claims arising out of ERISA. Side-A/DIC D&O policies (designed exclusively to cover non-indemnifiable loss), however, generally do not include ERISA exclusions. In non-indemnifiable loss scenarios (e.g., corporate insolvency), Side-A/DIC policies may provide coverage excess of your fiduciary limits if the D&O program is properly noticed.
• Retentions (a/k/a deductibles) are generally low, with many being set at $0. Companies that have their own stock in their benefit plans should expect to have a separate, higher retention for claims arising out of their own stock.

Reimbursement vs. Duty to Defend Policies

Fiduciary liability policies may be available as either a reimbursement or a duty to defend policy. In a reimbursement policy, the Insured(s) has the duty to retain counsel and defend the claim. The insurance company will retain the right to approve of your choice of defense counsel to ensure you are hiring qualified counsel in this highly specialized area of the law. Some insurance companies on their reimbursement policies will require you to choose from their Panel Counsel list (a list of pre-approved attorneys with whom the insurance company has pre-negotiated rates.) Insurance carriers that do not have a pre-approved list will still expect that insureds select an attorney with reasonable rates (as defined by the insurance company.)

In a duty to defend policy, the insurance company selects and retains counsel to defend the claim on the insured’s behalf.

Duty to defend policies and Panel Counsel requirements sometimes have a bad connotation that they arguably don’t deserve. Fiduciary liability is a very specialized field of law and the exposures are typically significant. No fiduciary liability insurer wants your defense and the policy limit of liability hinging upon the performance of a sub-standard attorney. To the contrary, established fiduciary insurers see hundreds of new fiduciary liability claims made every year and they are in as good of a position as anyone to know who the best ERISA counsel is. And that is exactly who they want representing you. Furthermore, they have leverage to negotiate lower hourly rates than most companies can achieve. This is important to you, the insured, because these policies have an aggregate limit of liability inclusive of defense costs and every dollar they save on defense costs is another dollar available to pay for settlements and judgments.

So, while you may have your preferred law firm(s), when it comes to selection of counsel your interest is likely more aligned with your insurer than you may initially realize.

Best Practices for Fiduciaries and Sponsor Organizations

As I discussed in my earlier post, the stakes are high when it comes to ERISA liability. Here are some good next steps when it comes to transferring your risk:

1. Retain a skilled insurance broker to scope your risk and to place a comprehensive fiduciary liability insurance program that is thoughtfully crafted to address your specific exposures.
2. Analyze your current procedures used when the company receives a written demand to ensure that all claims are noticed to the applicable insurance program(s) on a timely basis.

ERISA fiduciary exposures are significant and unlikely to decrease in the future. Fiduciary liability insurance is sometimes an afterthought in a management liability insurance program. That’s a mistake. Fiduciary liability insurance can be a key component of your D&O liability risk management plan.