Companies purchase fiduciary liability policies to mitigate against financial loss in the event of litigation involving employer-sponsored benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA), as amended.[1] Unfortunately, plan sponsors often are unaware that the scope of coverage under a fiduciary policy typically is not coextensive with the company’s potential liability under ERISA. Rather, fiduciary policies generally provide coverage for claims alleging specific “wrongful acts”—a defined term that usually means a breach of fiduciary duty, liability of an insured because of its fiduciary status and, in some instances, negligent administration—all with respect to an employee benefit plan sponsored by the named insured.
Even if the named insured is both the plan sponsor and a fiduciary of one or more plans, the company’s fiduciary liability policies rarely cover the company’s liability for plan sponsor decisions and activities—that is, actions taken by the company in its “settlor” capacity. In some situations, this makes a certain amount of sense; for example, where the insured is sued for its failure to provide continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).[2] In theory, it might be argued that an insured should not be able to shift financial responsibility for its failure to discharge its corporate obligations. In other circumstances, an insured’s liability for non-fiduciary ERISA violations is more closely akin to other conduct commonly covered under an insurance policy—for example, age discrimination.[3]
This article provides an overview of the roles and responsibilities of plan sponsors, fiduciaries, and administrators, as well as an overview of insurance coverage for conduct associated with employee benefit plans. The article then examines the coverage provided by a standard fiduciary liability policy and several recent cases highlighting the apparent confusion regarding the typical limitations on coverage under a fiduciary policy. There are common gaps in the coverage, and insureds must understand the boundaries of the coverage they have in place as part of a well-managed risk portfolio. Although at least one insurer offers an enhanced fiduciary policy, insureds should seek the advice of their brokers and coverage counsel to understand the benefits and uninsured risks under any fiduciary liability program.