Fiduciary insurance refers to insurance protection against claims for mishandling or misappropriating funds of other for which the company is maintains control over. A common fiduciary responsibility could be the management and control over a company’s 401K and pension plans. Directors and Officers can be held individually responsible for the mismanagement or misappropriation of assets held on behalf of others.
Why Companies Need Fiduciary Insurance
- To Avoid Personal Liability – ERISA sets forth personal liability for fiduciaries. In other words, the fiduciary’s personal assets (house, bank accounts, etc.) are at risk. (In the case of Barker v. American Mobil Power Corporation, the court held an individual to be personally liable for losses to a plan, and stated, “While we are not unsympathetic to his burden, we note that fiduciaries may be insured for this type of liability. It would appear that prudent fiduciaries would have their plan or employers secure such insurance.”)
For fear of personal liability, many D&O‘s won’t sit on a company’s board of directors or take on responsibility for the company’s plans unless there is insurance in place.
- To Avoid Loss of Corporate Assets – Without fiduciary liability insurance, a company will have to pay defense costs and possibly damages in the event of any ERISA litigation – a waste of corporate assets when fiduciary liability insurance is so readily available and at such reasonable rates. In theory, such misuse of corporate assets could trigger a D&O lawsuit.
- To Avoid Loss of Plan Assets – Using plan assets to defend ERISA litigation is a very questionable use of plan assets, and potentially a breach of fiduciary duty. Another potential breach is for the plan to lose money that could have been paid by a fiduciary liability policy, had one been in place. ERISA explicitly allows for the purchase of fiduciary liability insurance
- Because There is No Immunity from Fiduciary Liability Lawsuits – You think small businesses are exempt from fiduciary liability lawsuits because “they only have a 401(k) plan” for their employees? Think again. Even “self-directed” 401(k) plans, those where the participants choose from a number of investments for their plan portfolios, are subject to suits. While there are certain steps that fiduciaries of 401(k) plans can take to prevent suits alleging breaches of fiduciary duty arising from the plan participant’s exercise of control, there is no protection against claims alleging misrepresentation, or failure to monitor investments or investment managers, or failure to prudently choose the investments offered to insureds, or failure to take steps to prevent loss to the plan, or failure to provide enough information to participants to allow them to make sound investment decisions, or failure to timely deposit participants’ funds, or failure to diversify investments so as to minimize the chance for loss, etc.
- Because There is an Inherent Conflict of Interest Between the D’s&O’s Duties to the Company and to the Plan – The people running the company are almost always the same people who are responsible for running the plans. And what’s good for the company (e.g. selling company stock to a plan or reducing retiree medical benefits) isn’t always good for the plans or their participants.
- For Protection in the Event of Merger or Acquisition – M&A activity is one of the most frequent triggers of ERISA lawsuits. Plan participants sue to obtain severance benefits, to access the excess cash in defined benefit plans, because they feel that their plan distributions were incorrectly calculated, because they feel that their new benefits aren’t as generous as their old benefits, because not enough money was transferred to their new employers’ plans, or for a myriad of other reasons. And often companies don’t anticipate these suits – employee benefit plans are often given little consideration in a merger or acquisition negotiation.
- Because the Stock Market Will Not Always Move Up – Plans that have been high flyers for years because of their heavy weighting in equities might suddenly take a steep hit in the event of a market reversal. Overfunded defined benefit plans could suddenly become underfunded. Employee Stock Ownership Plans (ESOPs) and 401(k) plans with matching contributions in employer stock (KSOPs) are especially vulnerable to market fluctuations.
- Because Many D’s&O’s Don’t Realize that they are Fiduciaries – While many directors and officers know that they are fiduciaries, because they sit on plan investment or administration committees, many others don’t recognize that they are fiduciaries, and do not act appropriately. “Fiduciary” is a functional title – in other words, if you are performing fiduciary functions, then you are a fiduciary, regardless of your title. Therefore, if an officer without the title of “fiduciary” does something that has an effect on a plan, then that officer may be considered a fiduciary of that plan and become personally liable for any damage he may have caused to the plan.
- Because the Plaintiff’s Bar is Looking for New Sources of Revenue – We have seen law firms typically associated with shareholder litigation bringing ERISA-related suits.
 Sec. 409. (a) of the Employee Retirement Security Act of 1974
 Sec. 410. (b) of ERISA
 Some recent suits against 401(k) plans that offered many investment choices include Meinhardt v. Unisys Corp. and Franklin v. First Union Corp.
 In the case of LoPresti v Terwilliger, the corporate officer did not deposit pension funds into the plan, and instead used the money to help shore up the company.
We will be happy to have one of our licensed representatives analyze your policy and provide recommendations accordingly. Please feel free to call and speak with one of our licensed representatives at 201-847-9175.