What is Fiduciary Insurance?

Almost every business and employee in the United States has some type of contract or agreement with a company which controls and manages benefit plans. Whether we are talking about pension and investment plans, health insurance or any other type of employer-based benefit, there is an entity, usually a company, which manages these assets.

Fiduciary insurance is a type of insurance which protects businesses and employers against possible claims of mismanagement coming from a fiduciary. The fiduciary, in this case, is a person or company (an entity) which manages the benefit plans and accounts of a company.  Generally, a fiduciary insurance is not required by law in the United States, but experts agree that it is particularly important, especially because the financial losses can be quite large. Fiduciary insurance covers legal expenses of defending against the claim as well as various financial losses caused by omissions, errors, mismanagement and breach of fiduciary duty. Experts suggest that these claims often exceed $1 million and may take years to resolve.


Is fiduciary insurance required?

As previously discussed, fiduciary insurance is not required by any local, state, or federal law in the United States. ERISA (Employment Retirement Income Security Act) is the main organization that regulates pension, health, disability benefits, and employee leave across the country, but it does not specifically require fiduciary insurance. While ERISA acts as a regulator in the industry, it does not impose a minimum benefit plan for employees. However, it sets out a minimum standard for these plans which must be respected by all service providers (fiduciaries). ERISA also released a code of conduct for fiduciaries across the country where it specifically sets out rules for managing and overseeing employee benefits plans.

What if a benefit plan is mismanaged?

According to ERISA’s codes, both the employer (the sponsor) and the provider (fiduciary) can be held responsible if something goes wrong. If an employee loses his or her benefits because they weren’t properly informed or the plan was poorly managed, the legal implications can affect the fiduciary. In this case, both the employer and the employee can hold the fiduciary responsible for the financial damages produced. The legal ramifications can become even more complex, and may extend to poorly invested pension plans, failing to inform employees about their accounts or failing to cover medical expenses.

Fiduciary insurance does not cover any outside advisers, consultants or secondary administrators of benefit plans. For instance, if your company bought a benefit plan through a third party seller, the fiduciary insurance does not extend to them. What’s more, if you hire outside consultants or advisers, the fiduciary is still liable in case of mismanagement. Also, fiduciary insurance does not cover frauds or embezzlement from a benefit plan; these cases are covered only by a fidelity bond. However, claims of negligence, poor oversight or fiduciary responsibility breaches are covered.

Who needs to carry fiduciary insurance?

Insurance experts suggest that every employer should purchase fiduciary liability insurance to protect their employee’s benefits. Although fiduciary insurance specifically excludes inadequate performance of investments, fraudulent activities and damages, the insurance covers most issues regarding access to information, omissions,  acts of negligence and errors. Basically, fiduciary insurance is a great way to protect your employees, but also your business, from disastrous legal cases which can be caused by a simple error or omission. The legal consequences of a benefits-related trial are complex and the possible financial problems may destroy your business. Considering that most of these claims hover around the $1 million mark, the choice is obvious: fiduciary insurance is something that will protect your interests in the long run. Contact Oros Risk for assistance with selecting a policy that will best suit your business’ needs and protect your employees.