Trends in Fiduciary Liability Insurance
Posted on 08.07.17
By Doug K. Nickerson, CPA, CGFM, CFE, CIA, Partner | Business Assurance & Advisory Services
Fiduciary liability insurance typically insures the plan against losses caused by a breach of fiduciary liability. Fiduciaries are personally liable for losses incurred by a plan due to their breach. Although fiduciary liability insurance isn’t required by the Employee Retirement Income Security Act of 1974 (ERISA), as is a fidelity bond, every fiduciary of an ERISA plan should seriously consider obtaining coverage. The coverages provided in a policy can differ significantly. The plan itself can purchase liability insurance for its fiduciaries or the employer and/or fiduciary can purchase. Executives who are expected to assume responsibility over the company’s benefit plans should consider incorporating fiduciary liability insurance as part of their overall risk assessment and mitigation plan.
Recent trends in fiduciary liability insurance polices now cover more than just breaches of fiduciary duties; they cover governmental voluntary correction programs, settlor and other nonfiduciary claims, regulatory penalties, and costs associated with cyber security attacks.
Cher Wynkoop, attorney member with Willcox Savage in Norfolk, Virginia, shares the following high level overview of recent trends in new coverages being offered under fiduciary liability insurance policies.
1. First Party Coverages
These coverages are payments made by the insurer before a third party makes a claim or a wrongful act occurs.
Pre-Claim Investigative and Interview Coverage
This type of coverage allows plans to transfer to their carrier the legal costs associated with monitoring an active regulatory investigation, including interviews, by governmental agencies. These investigations have become widely available in the past few years as the Department of Labor (DOL) has increased the number of fiduciary breach investigations. This coverage has many names such as Investigatory Expense, Gap Coverage and Interview Coverage. It is important for a plan sponsor to review the coverage to make sure it does not limit the types of governmental agencies investigating the plan. The typical policy provides coverage for investigations brought by the DOL. Other agencies that can investigate your plan include but are not limited to Health and Human Services (HHS), Pension Benefit Guarantee Corp (PBGC), Internal Revenue Service ("IRS") and the Securities and Exchange Commission (SEC). Most carriers are providing either full limits or a sublimit ranging from $50,000 to $250,000 for smaller plans.
Voluntary Compliance Programs
Both the IRS and DOL offer voluntary compliance programs to correct certain type of mistakes incurred in a retirement plan administration. The IRS Employee Plans Compliance Resolution System (EPCRS) allows plans to correct mistakes and prevent higher penalties if discovered by the IRS, or even the disqualification of the plan in case of egregious mistakes. Similarly, the Employee Benefits Security Administration (EBSA) of the DOL administers the voluntary fiduciary correction program (VFC Program) and delinquent filer voluntary compliance program. These expenditures are subject to a policy sublimit that is part of the aggregate limit of the policy, ranging from $50,000 to $250,000. Under this sublimit of coverage, the carrier allows the insured to make a claim against itself and to seek reimbursement from the policy. The voluntary compliance coverage should cover both the expenses of attorneys and accountants to evaluate and investigate the possible regulatory noncompliance as well as fees, penalties or sanctions paid to the governmental authority under an authorized voluntary compliance program. It is important for the plan sponsor to review the coverage to make sure it covers not only legal fees, but also accounting fees.
Under ERISA, fiduciaries are responsible to make the plan whole if there has been a miscalculation in benefits and a participant or their estate has been overpaid. Typically, trustees will withhold future benefit payments or sue the participant or their estate to recover these amounts owed to the plan. Some carriers are now offering a sublimit to make the plan whole if the trustees were not successful in collecting the amounts owed to the plan from the participant or their estate. This type of coverage is relevant to a defined benefit plan.
2. Regulatory Agency Investigations
Investigations are leading to penalties, fines and taxes from the DOL, IRS and HHS. These coverages are payments made by the insurer to a third party after a claim or wrongful act occurs.
IRS 4975 Penalties
Failure of a plan administrator to remit contributions to the plan on a timely basis results in a prohibited transaction subject to an excise tax under Code Section 4975. In addition, the failure to remit elective contributions may give rise to civil penalties under ERISA and, if the failure is willful, may give rise to criminal penalties. DOL's VFC Program allows plan sponsors to voluntarily correct late deposits of elective deferrals.
502(c) Reporting Violations
Under ERISA Section 502(c) a plan administrator who fails to respond to written requests for information is subject to penalties of $100 per day (indexed for inflation) from the date of the failure, with every violation being treated separately for purposes of calculating the penalty. Most carriers offer sublimits ranging from $50,000 to $250,000.
Affordable Care Act (ACA)
In general, ACA penalties are not covered under fiduciary insurance policy unless the penalty coverage is carved back from the general penalty exclusion. For example, failure to provide participants and beneficiaries with a summary of benefits and coverage can be fined with up to $1,000 per day. The penalty would be excluded from coverage under the common exclusion for "taxes, fines or penalties, including those imposed under the ..." This coverage is more relevant for self-insured group health plans.
This type of coverage protects a plan sponsor for a breach of protected health information. It reimburses health plans faced with HIPAA violations. This coverage is more relevant to sponsors of self-insured group health plans. HIPAA sublimits range from a low of $25,000 to the statutory maximum of 1,500,000.
3. Claims for Equitable Relief under ERISA 502(a)(3)
Section 502(a)(3) of ERISA generally authorizes a participant, beneficiary or fiduciary to sue for "appropriate equitable relief." In Cigna Corp. v. Amara, 131 S.Ct. 1866 (2011), the Supreme Court ruled that monetary relief is available under Section 502(a)(3). Since the Amara decision, courts continue to wrestle with the scope of equitable relief under Section 502(a)(3). The vast majority of fiduciary liability insurance policies do not address whether Amara-type equitable relief is covered. The uncertainty stems from the fact that a finding of equitable relief under Amara technically is not a benefit under the plan. A carrier would likely defend a claim for breach of fiduciary duty, but most likely it will not cover the monetary award, unless the policy specifically provides for this type of indemnity.
4. Cyber Insurance
Plans have access and ownership of the personal information, such as social security numbers and home addresses, of their participants. If this data is lost, most states mandate that the entity must respond in a timely manner by notifying potentially affected individuals, regulators, and the press. For this type of insurance it is important to differentiate between first-party and third-party claims. Third-party claims involves claims from participants, regulators related to alleged losses as a result of security breach or due to theft or misuse of data. First-party claims include paying the costs of providing notice to affected individuals and forensic investigation related to the breach. While many third-party claims are already covered under a plan's fiduciary liability insurance policy, first-party claims are not typically covered.
If your plan fiduciaries don’t have liability insurance or their current liability insurance policy has not been reviewed and updated in a while; you should consider doing so and ask your insurance broker about these new coverages for your plan’s fiduciaries.