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Guest Article

Deloitte logo

(From the October 7, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

DOL Weighs In on Limitation of Liability and Indemnification Clauses in Contracts Between Plans and Actuarial Firms


ERISA plan fiduciaries may cause their plans to enter into contracts with actuarial firms and other service providers that include "limitation of liability" and "indemnification" provisions without necessarily violating ERISA's fiduciary standards, according to a recent Department of Labor advisory opinion. DOL Advisory Opinion 2002-08A (August 20, 2002). However, the advisory opinion cautions fiduciaries that it would be imprudent to agree to these provisions if they apply to fraud or willful misconduct by the service provider, and that in any case fiduciaries have a duty to "assess the plan's ability to obtain comparable services at comparable costs either from service providers without having to agree to such provisions, or from service providers who have provisions that provide greater protections to the plan."

Impact

A number of ERISA plan service providers frequently include limitation of liability and indemnification provisions in their engagement letters. The purpose of these provisions is to limit the service provider's potential liability to the plan and related third parties for any damages caused by the service provider's negligence. This advisory opinion indicates ERISA plan fiduciaries may agree to these provisions, but only in certain circumstances.

Advisory Opinion Summary

The limitation of liability and indemnification provisions at issue in the advisory opinion generally would have limited the service provider's potential liability to the plan to $250,000 and would have required the plan to indemnify the service provider for liability to any third parties in excess of $250,000. If the fiduciary had agreed to these terms, the plan's insurance company would not have covered any losses to the plan occurring by operation of these provisions.

The issue is whether a fiduciary that causes the plan to agree to these types of provisions satisfies its ERISA fiduciary duties. In general, ERISA section 404(a)(1) requires fiduciaries to discharge their duties solely in the interest of the plan's participants and beneficiaries, and with the care, skill, prudence, and diligence that a prudent person would exercise in similar circumstances. Additionally, ERISA's prohibited transaction rules forbid fiduciaries from contracting with service providers who are parties in interest with respect to the plan unless the arrangements are "reasonable." See ERISA sec. 408(b)(2).

According to the advisory opinion, when it comes to selecting service providers, the "responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided." The advisory opinion continues, "Soliciting bids among service providers is a means by which a fiduciary can obtain the necessary information relevant to the decision-making process, including information about contractual provisions such as those ... relating to limitations of liability and indemnification."

With respect to limitation of liability and indemnification clauses that apply to the service provider's negligence and unintentional malpractice, the Department of Labor said it does not believe most such clauses, in and of themselves, "are either per se imprudent under ERISA section 404(a)(1)(B) or per se unreasonable under ERISA section 408(b)(2)." Instead, the Department advised they must be "considered in connection with the reasonableness of the arrangement as a whole and the potential risks to participants and beneficiaries." Furthermore, the Department indicated fiduciaries must "assess the potential risk of loss and costs to the plan that might result from a service provider's act or omission subject to a proposed limitation of liability or indemnification provision. In making such an assessment, a fiduciary should consider the potential for, and outside limits of, such a loss, as well as any additional actions that may be available to the plan to minimize such a loss."

However, the Department of Labor takes a different view of limitation of liability and indemnification provisions that purport to apply in cases of the service provider's fraud or willful misconduct. According to the Department, these provisions "are void as against public policy" and "it would not be prudent or reasonable" for ERISA fiduciaries to agree to such provisions.


Deloitte logoThe information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances.

If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094).

Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207.

Copyright 2002, Deloitte.


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