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Adequate Fiduciary Liability Insurance?


khn

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What does everyone suggest to clients as a guideline for the appropriate amount of fiduciary liability insurance? I know there are many factors to consider, but for a fairly standard $8 million plan we would usually suggest a policy for about 10% of assets. Having a hard time finding any opinions on the 'right' amount of coverage. Seeking opinions!

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Assuming that the fiduciaries have sufficient fidelity-bond insurance (which sometimes should be more than the ERISA-required coverage), one has difficulty imagining a likelihood of a fiduciary breach so bad that it causes a loss of the whole plan assets in one breach (or one series of breaches).

So consider starting with a coverage limit of a round $1 million. That could help resolve a loss of $800k and $200k of attorneys' fees and expenses.

If the employer (rather than the plan) bears the premium expense, consider a bigger retention (deductible) if the employer is confident that it will have enough cash flow.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Maybe I am having brain freeze, but can a plan pay for a fiduciary's fiduciary liability insurance (for a fiduciary who is not allowed to be compensated by the plan)?

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My brain unfroze. Now I remember that you can have the plan pay for the fiduciary liability insurance, but only if proceeds are payable to the plan AND the insurance company has recourse against the fiduciary. However, I never understood how any fiduciary would consider that to be insurance that protects the fiduciary, so what would be the point?

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ERISA expressly permits each of (1) an employee-benefit plan, (2) a fiduciary, or (3) an employer or an employee organization to buy insurance to cover losses that result from a fiduciary’s act or omission. ERISA § 410(b)(1)-(3).

An employee-benefit plan may buy fiduciary-liability insurance “if such insurance permits recourse by the insurer against the fiduciary in case of a breach of a fiduciary obligation by such fiduciary[.]” ERISA §410(b)(1). If the insurance contract “permits” the insurer’s recourse against a breaching fiduciary, the “premium” can be paid by the plan.

If an insurance contract precludes recourse against a breaching fiduciary, an employee-benefit plan cannot pay the portion of the insurance price that is attributable to the non-recourse provision. Interpreting the ERISA provisions that allow a fiduciary “from and for his own account” [ERISA § 410(b)(2)], an employer, or an employee organization to buy fiduciary-liability insurance, an insurer might allow more than one payer to pay the insurance price, and might, for the payers’ convenience, allocate the overall price into portions – a price attributable to the incremental value of the non-recourse provision, which is the price to be paid by a person other than the plan; and a price that is the difference between the total price and the price of the non-recourse provision – that is, the portion of the price that can be paid from a plan’s assets without violating ERISA.

An insurer considers it smart business to do the math that helps a premium get paid. An insurer's figuring of the portion of the premium that is attributable to the non-recourse provision often results in a small amount. One imagines that the insurance company has some claims experience from which the actuaries can estimate that the probability of a plan both proving (or settling) its claim against a breaching fiduciary and collecting from him or her is relatively small.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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