How fiduciary liability insurance can help Plan sponsors guard against future member litigation.
The current economic turbulence, combined with increasing numbers of retirees, is creating what could be the perfect storm of liability claims for plan sponsors. With the economic downturn, many retirees will be looking at their decreased retirement savings with increased scrutiny—and, perhaps, greater inclination toward litigation. Unemployment numbers are also increasing. Thus, the funding base of pension and employee benefits plans is decreasing, despite the increasing numbers of retirees entitled to these benefits.
Employers that provide benefits to employees are exposed to liability for the way these benefits are handled. To address this concern, they can consider a fiduciary liability insurance policy to protect themselves from future employee pension and benefits claims.
Legal Liabilities
Looking at the specific risks to plan sponsors, possible exposures include:
• failure to enrol the employee in a plan;
• mishandling of the account, resulting in investment losses;
• selection of providers, if they are expensive or inadequately qualified;
• investment risk, if the employer is involved in any of the investment decisions;
• errors in combining benefits coverages when a firm is acquired and employees are transferred to the new company’s payroll and programs; and
• excessive focus on the company’s business strategy at the expense of plan details.
Trustees of employee benefits plans have a legal duty to act in the best interests of the plan members and plan sponsor. A pension and/or health and welfare plan liability policy provides protection for losses that the insured is obligated to pay on claims for damages resulting from wrongful acts.
A fiduciary liability policy is particularly useful when the entity has some discretion in overseeing employee benefits—for example, when the president or treasurer names himself or herself as the fiduciary.
Coverage Considerations
Typical requirements to apply for fiduciary liability coverage include the latest audited financial statements of the plan sponsor organization; details such as the year the plan was created; a three-year summary of assets, contributions and participant numbers; and information on the plan’s service providers. To facilitate the application process, insurers may ask the following questions.
• How often are investment manager guidelines and performance reviewed by the fiduciaries?
• If the plan is not adequately funded, when will funding be restored?
• Is a plan merger, transfer or termination anticipated within the next 12 months?
• Has written documentation been maintained for any meetings and discretionary decisions made by the plan’s fiduciaries?
• Has any fiduciary been denied a fidelity bond in the past?
Underwriters and brokers must realize that the application cannot contain all key underwriting information. Flexibility is key as the underwriter works with the broker to highlight important considerations.
In approaching insurers about this coverage, plan sponsors should remember to specify any concerns and fully disclose contingencies such as previous litigation or the possibility of plan changes in the near term. There are also cost considerations, in terms of both premiums and the time and resources required during the application process. However, the peace of mind that comes with having such a policy in force could outweigh the costs.
Safeguarding Sponsors
Fiduciary liability policies are evolving with the volatile environment surrounding pension plans today. In these challenging times, it is more important than ever for the broker and the underwriter to work together to fully understand and quantify all considerations. It is then up to the broker, working with the plan sponsor fiduciary, to create a solid shield of insurance to protect against potential liability exposures.
Rob Bickerton is a senior underwriter, corporate risk division, with The Guarantee Company of North America.
rbickerton@gcna.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.