If an employee of your company filed a lawsuit against your management or company, claiming that there was a mistake in the benefits calculation, how would your insurance respond? You may be held personally accountable if you violate your fiduciary duty or make an alleged mistake, omission, or loss to a benefit plan. Your benefit programs, your privately held business, and its fiduciaries are all intended to be protected by fiduciary liability insurance.
A lawsuit against the employer or certain directors and officers may arise from a fiduciary obligation error. Many companies purchase fiduciary liability insurance to mitigate this risk. To assist businesses in determining if they require this protection, we will elucidate the operation of this liability insurance.
What is Fiduciary Liability Insurance
Fiduciary liability insurance is also known as management liability insurance. It is a type of business insurance that guards your organization from claims made by employees over improper handling of benefit plan funds. This policy offers both financial security and legal advice. This is if your company is found to have behaved improperly in its role as fiduciary for the retirement plan.
For example, a corporation has an employee pension plan and uses the funds to invest in high-risk funds to grow the plan rapidly for the benefit of the employees. Unfortunately, as more workers get closer to retirement, this choice leads to significant swings in the value of the pension fund. Employers have a fiduciary duty to select more conservative solutions and reflect the risk tolerance of their workforce.
Who Is a Fiduciary
A fiduciary is somebody who is listed in a benefit plan document or who is thought to have decision-making authority over the assets and management of the plan. Employers, directors, and officials of the business, as well as trustees and administrators of plans, are examples of typical fiduciaries.
What Does it Cover
Offering an employee benefit plan is a common strategy used by businesses to draw in and keep talent. However, managing an employee benefit plan carries some potential concerns. If your business is sued for mistakes or omissions in the plan’s administration, the cost could be prohibitive. If a fiduciary fails to fulfill their responsibilities, they may potentially be held personally accountable and risk losing their assets. Fiduciary liability coverage is crucial for the health of any business and its fiduciaries.
How Much Does Fiduciary Liability Insurance Cost
A nonprofit organization or limited liability Company’s (LLC) fiduciary liability insurance premium may differ based on several variables. In general, the annual cost might vary from several thousand to tens of thousands of dollars.
The following are a few variables that affect this insurance cost:
- The type and size of the organization: Riskier and larger organizations could need more coverage and pay higher prices.
- The extent of the coverage: The insurance cost may also depend on the required extent. An organization that oversees multiple employee benefits plans, for instance, might need more coverage than one that oversees just one.
- The insurance provider: Depending on the insurance provider and the particular policy, the cost of insurance may change.
The organization’s claims history, the industry’s level of risk, and the deductible and liability limits selected. Other variables may also have an impact on the price of fiduciary liability insurance. Also, businesses engage with a knowledgeable insurance broker to evaluate their unique requirements and get quotes from several insurance companies to locate the best coverage at a reasonable cost.
What Does Fiduciary Liability Insurance Not Cover
A fiduciary who knowingly engages in fraudulent activity is not covered by fiduciary liability insurance. Crimes that have an impact on the benefits plan are among them. It is just not possible for this kind of insurance to cover crimes. Fiduciary liability coverage excludes crimes such as embezzlement, theft, and fraud. It does not cover mismanagement or underfunding of a benefits plan. In addition, third-party fiduciary service providers are not covered by this kind of insurance policy if they mismanage the plan.
Who Needs Fiduciary Liability Insurance
Fiduciary liability insurance should be carried by any company that provides an employee benefits plan in addition to other insurance coverage. Employers are required by ERISA to assume administration responsibilities for plans and to act responsibly. Employers are not required to offer benefits plans, but if they do, they are in charge of all associated policies and procedures. The fiduciary insurance coverage offers protection by covering the costs of litigation, prospective settlements, and judgments related to a benefits plan administration error; it does not absolve liability.
Why Do You Need Fiduciary Liability Insurance
Fiduciary liability insurance is primarily purchased by businesses due to the high expense of claims. The expenses of appearing in court and defending oneself are exorbitant, as is the likelihood of losing or having to settle with the plaintiff. One fiduciary responsibility claim has the potential to financially ruin a thriving company.
Furthermore, employee benefit programs are often highly complex, and even with a full team working on them, errors can happen at any time, as was previously indicated. The fiduciary may face legal action if they deviate from the benefits plan’s specified course of action. Employees with fiduciary responsibility or control over retirement plans are likely to be mentioned alongside vendors in employee complaints, even when using outside vendors to manage benefit programs.
