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Fiduciary Liability Insurance (FLI) coverage protects against liability for managing or administering an employee benefit plan - from top corporate executives that hire investment managers to payroll clerks that process enrollment forms. With the rising frequency of expensive and time consuming litigation and regulatory efforts in today's evolving legal environment, employers and plan fiduciaries are increasingly being held accountable for their actions (or failure to act) with respect to employee benefit plans. Thus, FLI is an important part of any comprehensive risk management program.
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.
What is Considered to be a Plan? Employee benefit plans fall into two broad categories - retirement plans and welfare plans. Retirement plans include a wide gamut of plans, including but not limited to defined benefit pension plans, profit sharing or savings plans such as 401(k)s, 403(b) plans, stock purchase plans, and employee stock ownership plans (ESOPs). Welfare Plans include medical, dental, life and disability plans.
Why Your Company Needs Fiduciary Liability Insurance? FLI protect 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, FLI is a vital means of protecting fiduciaries' personal assets as well.
The Myth of Coverage under Employee Retirement Income Security Act of 1974 (ERISA) Bonds and Employee Benefit Insurance (EBL) Insurance.
The Fiduciary Liability Insurance Policy (FLIP) is designed to protect fiduciaries against breach of fiduciary duty claims and more. It is the only type of insurance that does so. Contrary to popular belief, ERISA bonds and employee benefits liability (EBL) coverages do not fully cover fiduciary exposures.
ERISA bonds, which are required under Section 412(a) of ERISA, differ from fiduciary liability coverage. ERISA bonds provide first party coverage that is designed to protect the plan and its participants by ensuring that any employee who handles funds or other property of the plan are bonded. This protects the plan from risk of loss due to fraud or dishonesty on the part of the bonded individuals.
EBL coverage, which is provided via an endorsement to a general liability policy, also provides limited protection. It covers errors in plan administration only (e.g. failure to enroll or improper eligibility advice), and not breaches of fiduciary duty (e.g. imprudent investment, negligent selection of service providers, etc.). Moreover, EBL coverage for errors in administration is often more restrictive than the errors in administration coverage afforded under FLI.