6 Reasons fiduciary liability coverage should not be overlooked

Fiduciary liability coverage can be easily misunderstood and, as a result, may not be considered by insurance buyers when addressing their management liability exposures.  In today’s litigious society, that could be a costly misstep.

Fiduciary liability insurance provides cover for liability exposures arising from the administration and management of employee benefit and pension plans by plan trustees and administrators. 

Similar to directors and officers of companies, trustees or administrators of these plans are expected to adhere to certain duties and standards by law. There is a required duty of care to act loyally and in good faith while avoiding conflicts of interest. There are also requirements to follow the prescribed pension plan documents, ensure that a pension plan is funded in accordance with relevant solvency tests and standards, and to invest pension plan assets in a prudent manner. 

The Pension Benefits Standards Act, 1985 provides the following standard of care: “in the administration of the pension plan and pension fund, the administrator shall exercise the degree of care that a person of ordinary prudence would exercise in dealing with the property of another person.”¹ 

Employees’ financial future and benefits are important responsibilities for employers to bear. If their duty of care is compromised, trustees and administrators can be held personally liable -- and costly lawsuits are not uncommon. Consider these scenarios: 

• Failure to disclose: A company filed for bankruptcy following financial hardship and a significant decline in its stock value. As a result, employees who participated in the employer’s pension and stock option plans filed a class-action lawsuit claiming that management had filed materially false information about the company's financial condition by overstating its earnings. The plaintiffs said they relied on the company’s disclosures when deciding to invest in the plans. They alleged that the company breached its fiduciary duty by failing to disclose this information to plan participants and beneficiaries. The company settled for more than $80 million.² 
• Underfunded plan/error & omission: A company faced a class action lawsuit alleging it had misclassified the company plan as a church plan, which allowed it to be exempt from the Employee Retirement Income Security Act’s (ERISA) protections. In so doing the company was accused of breaching its fiduciary duty by underfunding the pension plan by over $444.5 million, freezing the accrual of pension benefits for members, and failing to give 45 days’ notice (as required by ERISA) of the reduction in benefits. Settlement was more than $29 million.³ 

Here are six reasons to make fiduciary liability coverage part of a management liability insurance risk mitigation strategy:

1. Administrators’ personal assets at risk – Companies may not legally be able to indemnify or defend fiduciaries for alleged wrongful acts pertaining to the administration of benefits in the same manner in which directors and officers are indemnified. This could put at risk the personal assets of plan fiduciaries, executives with discretionary authority and plan administrators.
2. Civil fines and penalties – Civil fines and penalties are often not covered under a standard management liability form. The right fiduciary liability coverage can protect insureds from certain civil fines or civil or administrative penalties, as well as certain claims alleging that a wrongful act has been committed.
3. Other company decision-makers may be liable – Company individuals who have decision-making authority could be considered partially liable for fiduciary claims even if they are not named plan fiduciaries. 
4. Mergers and Acquisition activity – Mergers and acquisitions may cause employers to wind down, change or consolidate pension and welfare benefit plans. A business could be at risk of litigation if proper care is not taken in communicating and implementing the changes.
5. Defined benefit plans – Companies with defined benefit plans have great administrator responsibility because they set higher expectations regarding the money that will be available to employees at retirement. Extra caution is required in investing the assets and remaining compliant with government regulations.
6. U.S. privacy exposures – Canadian companies with U.S. subsidiaries may have U.S. privacy exposures in addition to those present in Canada. One example is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), a U.S. law requiring the creation of national standards to protect sensitive patient health information from being disclosed without the patient’s consent or knowledge. When offering health benefits to employees, employers must consider their responsibility for protecting their health information.⁴ 

CNA Epack Extra is a Market-Leading Solution

CNA’s Epack Extra is a market-leading and flexible package of Management and Professional Liability coverages, including Fiduciary Liability.

Epack Extra’s coverages give policyholders the option of combining two or more coverage parts in a multiline package, or they can choose a policy with a single coverage part. Besides Fiduciary Liability, coverages include Crime,  Directors & Officers (D&O) Liability, Employment Practices Liability (EPL), Miscellaneous Professional Liability, Media Liability, Technology & Telecommunications Liability and more. Epack Extra coverage highlights include:

• Claims Made and Duty-to-Defend form with Advancement of Defence Costs
• Pre-claim inquiry costs for investigation costs related to reported circumstances
• 100% coverage for newly created or acquired entities or plans
• Severability of application and exclusions
• No hammer clause
• Non-rescindable for non-indemnifiable loss and non-cancellable except for non-payment of premium

CNA’s Fiduciary Liability coverage addresses exposures arising from the administration and management of employee benefit and pensions plans. Coverage highlights include: 

1. Three extensions, no sub-limits:
   • Disproven Allegation Protection: Insurer will not seek recovery of loss paid where later determined allegations are disproven and outside coverage
   • Settlor Capacity: Covers business judgement type decisions (as opposed to fiduciary decisions) regarding a plan
   • Fact-Finding Investigation: Triggers cover at early stage for a claim where no wrongful act has yet been alleged
2. Compliance Costs (sublimited): Covers consulting fees paid to third-party actuaries, benefits consultants, accountants or legal counsel for correction of an actual or alleged non-compliance by a plan
3. Broad loss definition, including civil fines or penalties under Canadian Pension Laws and various listed U.S. laws, each with $100,000 sub-limits.

For more information on Epack Extra and CNA’s Fiduciary Liability policy, visit cnacanada.ca.

To access all other 2019 blogs: https://www.cnacanada.ca/web/guest/cnacanada/about/listofauthors

Abena began her insurance career in 2008 and has since gained diverse experience across personal, commercial and specialty lines of business. In her current role, she is responsible for underwriting renewal and new business for Private/Not for Profit and public companies seeking Management Liability coverages. She also oversees a co-op program designed to provide business students with hands-on management liability underwriting training.

Abena is a graduate of the Global Professional Master of Laws Program and holds the Canadian Risk Management and Registered Professional Liability Underwriter Designations.