Fiduciary Liability Coverage Is Not What Your Company Benefit Plan Needs

Fiduciary liability and cyber liability may not be essential for fiduciaries who manage employee benefit plans. A fiduciary's responsibility is to manage the plan and ensure the plan is protected for the benefit of its beneficiaries and participants. Liability coverage is not required insurance and what most insurance carriers are offering only provides coverage for legal expenses and losses due to internal errors or omissions. How often is that a risk for the fiduciary?

Why Fiduciary Liability Is Not Essential

Fiduciary liability reduces the personal liability for fiduciaries against mismanagement or breach of their fiduciary duties. The individual fiduciary can be held personally liable if they do not carry out their obligations. A fiduciary would  be sued by the business who hired that fiduciary. What are the chances that you, the fiduciary, are sued by your employer for embezzlement?  The fiduciary liability would only cover legal expenses to defend the fiduciary. That can be expensive, but not complete to protect against what was stolen or mismanaged.  

At best, violations would be misguided investments, undisclosed conflicts of interests, excessive plan fees and failing to perform their administrative duties and at worst intentional acts of fraud. Insurance is never intended to cover certain acts, especially of nefarious intent. So if you get offered Fiduciary Liability be wary of what coverage you are getting. It may be an unnecessary cost to provide coverage for an act you will never commit and only be used to recoup legal fees.

Why Cyber Liability May Not Be Worth the Cost

Cyber liability insurance helps cover costs associated with cyberattacks on your business. Those costs can include such things as lost income due to a cyber event, costs associated with notifying customers affected by a breach, costs for recovering compromised data, costs for repairing damaged computer systems and more.Plans managed by third-party providers, like Fidelity or Charles Schwab, often include cybersecurity protections, reducing the fiduciary responsibility in terms of cyber risk. Cyber risks are often the fault of the service provider, not fiduciaries, and those service providers (like Fidelity or Schwab) have their own policies to protect against any cyber losses to your plan. Only if you have unique data stored on your side should you consider this plan and that is only if there is a gap in your company’s business owner policy.

What is Needed

The Employee Retirement Income Security Act of 1974 (ERISA) mandates that a fidelity bond is in place to protect employee benefit plans from acts of fraud or dishonesty committed by the fiduciary of the plan. It has to be required, otherwise who would purchase the coverage for a risk that protects others from themselves? The Department of Labor tracks this requirement for each employer plan through the 5500 filing each year. The bond typically covers 10% of the plan assets from loss. The premium paid for the ERISA bond is a fraction of a percent of the required bond limit (very inexpensive) and often provides coverage for the risk that is actually present.

Other Types of Business Insurance

Errors and Omissions coverage (E&O) is a type of coverage designed to protect businesses and professionals from claims of negligence, mistakes, or failure to deliver promised services. It covers financial losses caused by errors or omissions in services, such as advice, design, or consulting, rather than physical injuries or property damage. This differs from fiduciary liability as it is coverage for business to business activity rather than an inhouse fiduciary. 

Business Owner’s Policy (BOP) is a type of coverage designed for small to medium sized businesses. It is a type of liability that covers third-party claims for bodily injury, property damages, or personal/advertising injury caused by operations of the business. It also covers lost income and expenses if the business has to temporarily close due to a property damage event.