Fiduciary Liability Insurance – Insurance Protecting Against Claims of Mismanagement
Picture this: A member of your nonprofit board makes a faulty decision about your organization’s employee benefit plans—now you face a costly lawsuit. Here are the essentials on fiduciary liability insurance:
TL;DR
- Fiduciary liability insurance covers decision-making related to employee benefit plans.
- Helps independent agencies help clients—especially nonprofits—manage risks associated with managing employee benefits.
- A common misunderstanding is mixing it with employee benefits liability (EBL) coverage.
- Best practice: Encourage clients to review its coverage against changing regulations.
What Is Fiduciary Liability Insurance in Insurance?
Simply put, fiduciary liability insurance is coverage that protects organizations and individual plan fiduciaries against claims related to the mismanagement of employee benefit plans. It’s a safety net for organizations when an unintentional error has high costs.
In technical terms, fiduciary liability insurance is designed to cover legal expenses, damages, and defense costs incurred as a result of a breach of fiduciary duties under ERISA. This insurance is crucial to protect against fiduciary liability resulting from errors or omissions in the administration of employee benefit plans such as health and welfare plans, retirement plans, defined benefit plans, and defined contribution plans.
Key Related Terms to Know
- Employee Retirement Income Security Act (ERISA): A federal law that sets standards for most voluntary established pension and health plans in private industry.
- Employee Benefits Liability (EBL): Liability insurance for errors or omissions in the administration of an employee benefits program.
- Directors and Officers (D&O) Insurance: Liability insurance payable to the directors and officers of a company, or reimbursable to the organization itself.
- ERISA Bond: A type of insurance policy that protects a plan against losses caused by acts of fraud or dishonesty.
Common Questions About Fiduciary Liability Insurance
What does fiduciary liability insurance cover?
Fiduciary liability insurance covers the personal assets of plan fiduciaries from litigations related to administering employee benefit plans. It also covers the legal defense fees, settlement costs, and any judgments.
How much does fiduciary liability insurance cost?
The cost of fiduciary liability insurance varies widely depending on the size and nature of the organization, the types of benefit plans offered, and the amount of assets involved.
What is the difference between fiduciary liability and employee benefits liability?
Unlike fiduciary liability insurance, employee benefits liability only covers administrative errors or omissions, such as failing to enroll a new employee in a benefit plan. It does not cover mismanagement or unsound investment decisions.
Who needs fiduciary liability insurance?
Any organization that offers employee benefits can benefit from fiduciary liability insurance. This includes businesses of all sizes, nonprofit organizations, and even government entities.
Fiduciary Liability Insurance vs. Employee Benefits Liability
The primary difference between fiduciary liability insurance and employee benefits liability is the types of exposures protected. While fiduciary liability protects against claims related to the mismanagement of employee benefit plans, employee benefits liability only shields against administrative errors and omissions, such as mistakenly removing a covered employee.
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Fiduciary Liability Insurance |
Employee Benefits Liability
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Primary Use Case |
Mismanagement Claims |
Administrative Errors |
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Coverage/Concept Type |
Errors & Omissions |
Errors & Omissions |
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Typical Exclusions |
Fraud, Profit |
Inadequate Funding |
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Most Affected |
Plan Administrators |
HR Departments |
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Common Mistakes |
Buying limited coverage |
Overlooking Coverage |
Real Claim Examples Involving Fiduciary Liability Insurance
Scenario 1: An investment committee makes a questionable decision that results in significant loss for the pension plan. The plan participants sue for the loss.
Scenario 2: An HR employee forgot to enroll a new hire in the health insurance plan. When that employee’s spouse had a medical emergency, the new hire discovered the omission and sues for out-of-pocket costs.
Limitations and Common Mistakes
- Fiduciary liability insurance does not cover criminal acts or profit.
- Organizations often confuse fiduciary liability insurance with employee benefits liability coverage.
- Fiduciary liability insurance does not replace ERISA bonds, which cover losses due to dishonest acts.
How to Explain Fiduciary Liability Insurance to Clients
For a small business owner: Fiduciary liability insurance protects your business when someone claims that your management of employee benefit plans was mishandled, costing them money.
For a nonprofit board member: This coverage protects you as an individual from personal liability if a decision you participated in is challenged.
For a CFO/Risk Manager: Fiduciary liability insurance safeguards the company and its management from the high costs of litigation stemming from your duty to manage your employees’ benefits responsibly.