Fiduciary
Liability
Insurance

What is Fiduciary Liability Insurance?

When choosing which company they want to work for, employees tend to favor companies that offer a wider variety of benefits. Health insurance, stock options, and 401(k)s are just a few things that can be attractive to a potential employee.

If your company offers these types of benefits, you most likely have a department of people overseeing them. But did you know that your company could be held liable if one of them makes a mistake?

Fiduciary liability insurance is the best form of risk management for protecting the interests of your company and your employees’ interests in these situations. Fiduciary liability insurance is designed to protect the business from claims of mismanagement and the legal liability arising from its role as fiduciaries. A fiduciary liability policy covers associated legal costs to defend against claims of errors and a breach of fiduciary duty. One of the reasons why some businesses don’t know much about fiduciary liability is the fact that the Employee Retirement Income Security Act (ERISA) does not legally require it.

There are many different types of employer liability coverages. Still, only fiduciary liability insurance will protect both the company and the individuals against fiduciary-related claims of negligence, mismanagement, or actions that are not in the best interest of the plan participants.

What does Fiduciary Liability Insurance cover?

A) Making improper changes in plan benefits

B) Wrongfully denying benefits to employees

C) Providing wrong or incorrect advice or counsel to the plan holder (employer) or participants (employees)

D) Giving advice that benefits the fiduciary but harms the plan holder (conflict of interest)

E) Making a poor decision regarding hiring plan service providers

F) Failing to supervise service providers properly

G) Making errors while administering the plan

H) 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 and any settlements or judgments arising from legal action.

How does Fiduciary Duty apply to small businesses that provide benefits to employees?

Small businesses that provide retirement plans or other employee benefits are subject to a federal regulation called the Employee Retirement Income Security Act of 1974 (ERISA). This rule imposes 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? First, ERISA explicitly imposes liability on any person or entity that violates fiduciary duty. This means the plan fiduciary may be held responsible for reimbursing 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 tremendous personal liability for their mistakes.

For this reason, fiduciary liability insurance is necessary to mitigate risk 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 Liability 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 benefits, you should consider protecting yourself with a fiduciary insurance policy.

Why do you need Fiduciary Liability Insurance?

The main reason businesses invest in fiduciary liability insurance is the fact that claims are almost always very costly. Not only are the costs of going to court and defending yourself high, but the chances of losing or settling with the plaintiff are also significantly high. So if you’re a growing business, one fiduciary liability claim can cripple your business financially.

Also, as mentioned earlier, employee benefit plans are generally very complex, and mistakes can be made anytime, even if you have an entire team working on them. If the fiduciary does not follow the benefits plan precisely as it is laid out, they could be sued.

Furthermore, even if you’re hiring outside vendors to run your employee benefit plans, your employees with fiduciary responsibility or oversight of employee retirement plans will more than likely be named alongside the vendor in an employee’s complaint.

The scope of fiduciary liability insurance has broadened over the years as claims activity has increased. Talk to us to know more!

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