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About Fiduciary Liability And Insuring It

Preamble

This content is independent of any content coming from insurance brokers, insurers, law firms, or other insurance lobbyists. Commercial insurance is rarely taught in schools, and when it is, it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Fiduciary Liability Insurance, like many other topics in commercial insurance, due to bad habits acquired through the over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has both an operational aspect and a legal aspect, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects your business right, based on operational data, and pays out fast on large losses).

Fiduciary Liability

It is a type of Liability Risk that stems from a relationship where one party is accountable legally and/or ethically to another party given their business relationship. The party that is in a position of trust to provide a certain service to another party is called a fiduciary, and their actions or inactions could make them liable accordingly. 

Fiduciary Liability Definition

It is a type of Liability Risk resulting from a fiduciary relationship where one party is in a trust position and accountable legally and/or ethically to another party. For example, a person managing money on behalf of others is considered to have a fiduciary responsibility towards his/her clients. The same applies to a person managing or administering pension plans for others, or a person representing another from a legal or professional capacity.

 

What Is Fiduciary Liability Insurance

It is a type of commercial insurance that specifically protects pension and health benefit plan managers and administrators against legal pursuits. Despite the name of the insurance, it does not offer coverage for all forms of fiduciary liability, but only that associated with the management and administration of pension plans and/or health benefit plans. Fiduciary liability insurance can be bought as a stand-alone insurance policy or as added coverage onto another policy such as a D&O insurance policy. Note that coverage for fiduciary liability is typically excluded under various liability insurance policies such as following:

-      Directors’ and Officers’ Liability (D&O)

-      Professional Liability, aka Errors & Omissions(E&O)

-      Commercial General Liability (CGL) 

Fiduciary Liability Coverage Explained

Please refer to the section above.

Fiduciary Liability Insurance vs ERISA Bond

They are different in that the ERISA Bond provides coverage against fraud of pension plan assets by the manager or administrator or their employees (and depending on the ERISA bond wording, it can also extend to fraud committed by service providers or other third parties). In essence, an ERISA Bond is a form of Fidelity Bond providing first party coverage. Whereas fiduciary liability insurance provides coverage in case of lawsuits and other legal pursuits against the manager or administrator of the pension or health benefit plans (ie. third party coverage).  

Misconceptions about Fiduciary Liability Insurance

The following is a list of misconceptions and misinformation that may be communicated by non-experts in the field:

-      Fiduciary liability insurance protects all individuals in their capacity as fiduciaries – this is incorrect because a fiduciary capacity may include many different business relationships, such as money management, board mandates, etc., whereas the fiduciary liability insurance specifically focuses on the management and administration of pension and health benefit plans.

-      Fiduciary liability insurance is included under the D&O coverage – this is incorrect and we urge you to read the policy wording of D&O insurance. Fiduciary liability is specifically excluded under D&O. It can however be added through an endorsement as a new policy section in addition to the D&O section, forming what is called a modular policy (a policy containing different coverage sections all under one document).

-      Fiduciary liability insurance is the same as a Fidelity Bond – this is incorrect as these are two very different types of commercial insurance.

-      One can purchase a fiduciary liability bond – there is no such a thing because a bond provides for first party coverage (coverage against theft of fraud) and is different than liability insurance.

Fiduciary Liability Claims

There are various and numerous cases of fiduciary liability claims, ranging from lawsuits against stock brokers for mismanaging their clients moneys to lawsuits against pension plan administrators for mismanaging the plan to the detriment of beneficiaries.  

How To Get A Fiduciary Bond

Contact us as our team would have insurance brokers compete for your business while rewording the Bond to meet your operational data for most effective results including cost effectiveness.

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