Employee benefit liability, usually provided by an inexpensive endorsement to a firm’s CGL policy, is a valuable coverage, but employee benefit plans can generate many serious claims that do not fall within a CGL policy’s employee benefit liability coverage. (Employee benefit plans include not only retirement, pension, profit-sharing and 401k plans, but also plans that provide medical, disability, death, or other benefits for employees.) An example of the type of claim that might be covered by CGL employee benefit liability would be as follows:
John Clark, office manager for a small business, functions in a dozen different capacities ranging from purchasing agent to human resources manager. Due to other urgent problems, John forgets to enroll a new employee in the firm’s medical insurance plan. The error isn’t discovered until the employee is hospitalized with a lifethreatening brain tumor and the bills started to roll in—over $200,000 in all.
A situation like this is just what CGL employee benefits liability is designed to do: protect the insured against an administrative error in handling an employee benefit plan. Unfortunately, there are many serious exposures generated by employee benefit plans that are not covered by the CGL employee benefit liability endorsement. The classic ones involved 401k plans that invested contributions in the employer’s stock.
This was a multi-million dollar headache. Enron was the poster child for such claims,1 but searching “401k company stock lawsuits” in Google will turn up numerous other examples. Smaller firms don’t usually face this particular problem, but that doesn’t exempt them from claims. Examples of fiduciary liability claims that smaller and mid-size businesses can face include2:
An employee sued his employer alleging improper advice when his claim for expensive medical care was turned down. The case settled for over $500,000 plus attorneys fees.
• The outside administrator of a 401k plan skimmed funds from the plan. The Federal Department of Labor (DOL) ordered the firm to make good the shortage. The firm paid over $2,000,000 into the 401k; legal expenses exceeded $75,000.
• Employees sued the fiduciaries of a 401k plan alleging that investing 401k funds in guaranteed investment contracts (GICs) issued by an insurance company that became insolvent was imprudent. The case settled for $4,000,000 plus expenses of almost $750,000.
But there’s even worse news for smaller firms: The people who get sued when an employee feels that his or her benefit plan has been mismanaged are the fiduciaries. A fiduciary is someone who owes a duty of faithfulness to someone else. Black’s Law Dictionary defines a fiduciary relationship as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.” The DOL points out that employee benefit plan fiduciaries have important responsibilities because they act on behalf of participants and their beneficiaries.
“These responsibilities include:
• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
• Carrying out their duties prudently;
• Following the plan documents (unless inconsistent with the Employee Retirement Income Security Act, generally referred to as ERISA);
• Diversifying plan investments; and
• Paying only reasonable plan expenses.”3 In the case of employee benefit plans that are subject to ERISA4, a fiduciary is any person who:
1. exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets (whether or not named as a trustee in the plan);
2. renders investment advice for a fee or compensation with respect to any monies or other property belonging to the plan; or
3. has any discretionary authority or responsibility in administering the plan.5 Fiduciaries are personally liable for their actions or omissions without limit. In a small firm that means even if the principals aren’t named as trustees in the plan—they often are—-they can still be sued as fiduciaries based on their control of the firm. That’s a personal exposure that they shouldn’t retain; fiduciary liability insurance should be there to protect them. Fiduciary liability covers wrongful acts usually defined as:
• The breach of responsibilities and obligations imposed on fiduciaries by ERISA, by other statutes (federal, state, or local), or by common law;
• Any other claim against insureds solely because of their service as fiduciaries of an insured plan; and
• A negligent act, error, or omission in the administration of an insured plan. The third item duplicates employee benefit liability; the other two are not covered by employee benefit liability. Because of the small cost of the CGL administrative employee-benefit liability endorsement, many experts advocate continuing the coverage even when the insured purchases fiduciary liability coverage. The downside is possible arguments between the insurers about over-lapping coverage. The upside is additional limits and the possibility of having excess/umbrella coverage apply over the CGL coverage.
Claims arising from obligations under workers compensation, disability benefits, unemployment benefits, or similar laws are excluded, but there is usually coverage for claims arising under COBRA. Most standard management liability exclusions, such as bodily injury and property damage, fraud, and personal profit by the fiduciaries, are also contained in fiduciary liability policies. However, fiduciary liability policies often cover ERISA fines and Health Insurance Portability and Accountability Act (HIPAA) violation penalties.
Fiduciary liability is a coverage that should be discussed with every firm that provides any employee benefit plan. It can be easily added to a management liability policy offered by many leading insurers. If there is a claim, it may be one that is made personally against the CFO or CEO—do you want to tell them that they’re not covered?
1 “Gottesdiener Law Firm Announces Class Action Lawsuit Against Enron, Business Wire 11/26/01 www.encyclopedia.com/doc/1G1-80287933.htm (accessed 9/13/09)
2 “Private Company Fiduciary Loss Scenarios” Chubb Insurance http://www.chubb.com/ busi nesses/csi/chubb3825.pdf (accessed 9/22/09)
3 “What Is The Significance Of Being A Fiduciary?“ US Department of Labor http://www.dol.gov/ ebsa/publications/fiduciaryresponsibility.html (accessed 9/17/09)
4 ERISA (Employee Retirement Income Security Act of 1974) applies to almost every entity whether for-profit or not-for-profit with principle exception of churches, governmental entities, and public schools. However, churches, governmental entities, and public schools are not exempt from common law fiduciary responsibilities or the liability imposed by some state or local laws.
5 “Fiduciary Insurance—Frequently Asked Questions” http://www.fiduciaryinsurance.com/ faqs.htm#Who%20is%20considered%20a%20Fid uciary%20under%20ERISA%20law?(accessed 9/17/09)
