Fiduciary Liability

When offering employee benefits, you can be held personally liable from claims of mismanagement

Fiduciary liability coverage helps protect companies from claims of mismanagement and the legal liability related to serving as a fiduciary. If your company sponsors a retirement or health plan for employees, and if you are involved in any way with the management of that plan, you are likely considered a fiduciary.

Under ERISA law, fiduciaries can be held personally liable for a breach of fiduciary duties. As a fiduciary, it is your job to select advisors and investments, minimize expenses and follow plan documents exactly. You have a duty to act solely in the interest of plan participants and beneficiaries – not the company. That is a lot of responsibility and it comes with potential for fiduciary liability claims, so you need the right protection.

What does fiduciary liability insurance cover?

For many employers, offering an employee benefit plan is a way to attract and retain workers. However, administering an employee benefit plan can present liability risks, including staggering litigation costs if your company is sued for errors or omissions in the administration of the plan. In addition, the individual fiduciary can be held personally liable and their assets may also be at risk if they do not carry out their obligations. That is why fiduciary liability coverage is important for the well-being of any company and its fiduciaries.

Who is considered a Fiduciary?

Any individual included in the plan document by name or title, along with anyone who has discretionary decision-making authority over the administration or management of a plan or its assets may be considered a fiduciary under ERISA. Fiduciaries commonly include the plan sponsor (which is typically the employer), the plan trustee and the plan administrator, directors and officers (including when they appoint other fiduciaries or retain third party service providers) and internal investment committees.

Why you may need Fiduciary Liability Insurance

Fiduciary Liability Insurance protects plan fiduciaries against claims alleging that they mismanaged an employee benefit plan or plan assets. This includes, but is not limited to, making bad investment decisions, negligently handling plan records, and negligently selecting plan service providers. In addition to being an effective risk transfer tool for companies, Fiduciary Liability Insurance is vital for protecting fiduciaries’ personal assets for the following reasons:

The Employee Retirement Income Security Act of 1974 (“ERISA”) imposes the “highest duty known to law” on employee benefit plan fiduciaries, which is arguably even higher than the standard of care placed on corporate directors and officers.
ERISA Section 409 expressly imposes personal liability on plan fiduciaries who breach their fiduciary duties. This means that fiduciaries might have to personally pay for any losses they cause out of their own private assets.
ERISA prohibits plans from indemnifying plan fiduciaries, which means plans cannot pay defense costs, settlements or awards on behalf of fiduciaries that have breached their fiduciary duties.
Even if your company wishes to indemnify its fiduciaries, it may not be financially capable of doing so, or it may be barred by law from doing so.
ERISA casts a wide net of liability that ensnares people by deeming them to be fiduciaries based on their conduct (i.e. functional fiduciaries), even though they are not named fiduciaries. This means you could be a plan fiduciary and not even know it.
Fiduciary Liability Insurance is the only insurance that offers broad protection against fiduciary exposure. ERISA bonds, D&O insurance and Employee Benefits Liability coverage (offered under traditional general liability policies) are inadequate and provide little to no ERISA liability coverage or exclude it altogether.
By law, fiduciaries cannot escape their fiduciary duties by delegating them to third party service providers. Fiduciaries retain the duty to prudently select and monitor these service providers.

As a result, a fiduciary's personal assets may be exposed unless they carry Fiduciary Liability Insurance.

Highest Duty Known to Law + Personal Liability + Legal and/or Financial Inability to Indemnify = Exposure of Personal Assets

What is Highest Duty Known to Law?

The "highest duty known to law" refers to the combined fiduciary duty of loyalty and duty of utmost good faith. Under this standard, a fiduciary must act with undivided loyalty, completely free of conflicts of interest, prioritizing the beneficiary's interests above their own and exercising the prudence and diligence of a knowledgeable expert.

Breakdown of the Highest Legal Liability:

Duty of Loyalty (The Punctilio of Honor): Fiduciaries are required to act with "single-minded loyalty" to the beneficiary. There can be no self-dealing, usurping of opportunities, or prioritization of personal financial gain. As famously articulated by Justice Benjamin Cardozo in Meinhard v. Salmon regarding fiduciary ties: "Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior." The Florida Bar
Duty of Utmost Good Faith: Fiduciaries must act honestly and with full transparency in all their dealings. This requires the full, affirmative disclosure of any material facts or potential conflicts of interest so the beneficiary can provide fully informed consent. The Florida Bar
Duty of Prudence: Fiduciaries must make decisions with the "care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity... would use". In many fields, particularly under laws like ERISA, this translates to the standard expected of a professional expert. ASPPA

Implications for Fiduciary Liability

Because this standard is so strict, any failure to uphold it results in severe legal consequences for the fiduciary:

Personal Liability: Fiduciaries can be held personally liable for their breaches, meaning plaintiffs can pursue the fiduciary's private, personal assets (such as personal savings, investments, or property) to recover damages.
Disgorgement of Profits: If a fiduciary profits from an improper use of assets, the court can legally require them to restore all profits, effectively handing ownership of those profits to the principal. LII Legal
Equitable Relief: Courts have broad powers to issue injunctions, reverse transactions, or outright remove a fiduciary from their position. LII Legal

Under the Employee Retirement Income Security Act (ERISA), a corporate officer who acts as a plan fiduciary is held to the highest duty known to law.

This standard shifts your legal allegiance entirely. In standard corporate operations, your primary allegiance is to the profitability of the company. However, the moment you handle an ERISA plan, your corporate role is completely legally separate from your fiduciary role, and you must prioritize plan participants above all else, including the company's financial health.

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