Turning A Blind Eye To Fiduciary Liability Leaves Room For Unprecedented Risks

Fiduciary liability coverage can be easily misunderstood, resulting in costly lawsuits. Fiduciary liability insurance provides cover for liability exposures arising from the administration and management of employee benefit and pension plans by trustees and administrators, who are required to adhere to certain duties and standards by law 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 invest pension plan assets in a prudent manner. Employers are responsible for their employees’ financial future and benefits. If their duty of care is compromised, trustees and administrators can be held personally liable. 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 claimed 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 $365 million.¹

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. The matter settled for more than $29 million.²

Here are six reasons to make fiduciary liability coverage part of your 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 acquisitions 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.³ 

CNA Epack 3

Epack 3’s Fiduciary Liability coverage part addresses exposures involving fiduciary duties arising from the administration and management of employee benefit and pension plans. Some of the enhancements built into this new modular form include:

• Dedicated covered penalties section on the Declaration Page, which includes sublimits for Section 502(c), Pension Protection Act, Health Insurance Portability and Accountability Act (HIPAA), Section 4975, Patient Protection and Affordable Care Act (PPACA) as well as civil or administrative penalties imposed upon an insured under Canadian pension laws
  • 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
  • Compliance Costs coverage (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
  • Broad loss definition, including civil fines or penalties under Canadian Pension Laws and various listed U.S. laws, each with $100,000 sublimits

For more information on Epack 3 and CNA’s Fiduciary Liability policy, visit cnacanada.ca.

_{¹  Enron Agrees to $365M Settlement of Lawsuits. https://compensation.blr.com/Compensation-news/Retirement-Planning/Retirement-Savings-401k/Enron-Agrees-to-356M-Settlement-of-Lawsuits/
²  Judge OKs $29M deal to end class action vs Ascension Health over Wheaton Franciscan pension claims https://cookcountyrecord.com/stories/511317844-judge-oks-29m-deal-to-end-class-action-vs-ascension-health-over-wheaton-franciscan-pension-claims
³  Health Insurance Portability and Accountability Act of 1996. https://www.cdc.gov/phlp/publications/topic/hipaa.html}