Fiduciary liability insurance protects individuals or entities who oversee employee benefit plans from claims they mismanaged those plans in breach of their fiduciary duty.
What is fiduciary liability insurance?
Fiduciary liability insurance is a specialized form of insurance that protects employee benefit plan fiduciaries against claims they mismanaged plans or assets. A policy can help pay for a legal defense or losses that arise when fiduciaries:
- Make poor investment decisions
- Mishandle plan records
- Negligently hire plan service providers
When plan administrators make such mistakes, they can be held personally liable for any losses that plan participants (i.e., employees) suffer. Fiduciary liability insurance serves as a financial buffer when employees file lawsuits to recover the losses they suffered as a result of a problem with their company retirement or health and welfare plan.
What is a fiduciary?
A fiduciary is a person or entity that is responsible for managing a person’s or organization’s assets. A fiduciary has a legal duty to serve that party’s best interests, upholding the highest standards of good faith and trust.
Fiduciaries who fail to uphold their fiduciary duty leave themselves open to legal action from those they harmed.
How does fiduciary duty relate to small businesses that provide employees with benefits?
Small businesses that provide retirement plans or other types of employee benefits are subject to a federal regulation called the Employee Retirement Income Security Act of 1974 (ERISA). This rule imposes what it calls the “highest duty known to law” (i.e., a fiduciary duty) on those who manage retirement savings and other benefit plans.
Why is this significant for small business owners? ERISA explicitly imposes liability on any person or entity that violates fiduciary duty. This means the plan fiduciary may be held responsible to reimburse employee financial losses.
ERISA does not allow pension or health and welfare plans to reimburse plan fiduciaries for their legal expenses, settlements, or judgments. As a result, fiduciaries involved with employer plans bear a tremendous amount of personal liability for their mistakes.
For this reason, fiduciary liability insurance is a crucial form of risk mitigation for plan fiduciaries. It protects them from going personally bankrupt after their professional mistake financially harms plan participants.
What type of small business needs fiduciary insurance?
If you’re a solopreneur or have only a few employees for whom you don’t provide employee benefits, you probably don’t need fiduciary insurance.
However, if you have a significant number of employees and provide them with benefits, then you should consider protecting yourself with a fiduciary insurance policy.
What does fiduciary liability insurance cover?
Fiduciary liability insurance covers a wide range of fiduciary mistakes, including:
- Making improper changes in plan benefits
- Wrongfully denying benefits to employees
- Providing improper or incorrect advice or counsel to the plan holder (employer) or participants (employees)
- Giving advice that benefits the fiduciary but harms the plan holder (conflict of interest)
- Making a poor decision regarding hiring plan service providers
- Failing to properly supervise service providers
- Making errors while administering the plan
- Managing plan assets imprudently or failing to diversify those assets
When these and other problems occur, fiduciary liability insurance will pay for the fiduciary’s defense costs as well as any settlements or judgments that arise from legal action.
What doesn’t fiduciary liability insurance cover?
Fiduciary liability insurance does not cover crimes or other acts of intentional wrongdoing. It also does not cover embezzlement of a benefit plan’s fidelity bonds or other small business funds.
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