Are your clients adequately protected from their specific set of risks? Fiduciary Liability Insurance Policies (FLIPs) are a commonly misunderstood insurance product. However, it may be the only policy that properly protects individuals from liability associated with the management and administration of employee benefits for executives, such as hiring managers or payroll clerks that process enrollment forms.
Litigation and regulatory efforts in today’s evolving legal environment are costly and time-consuming. Employers and plan fiduciaries are increasingly being held accountable for their actions or lack thereof regarding employee benefit plans. Fiduciary liability is a crucial component to any comprehensive risk management program.
Why Fiduciary Liability so Important
This policy protects executives from claims that they mismanaged an employee benefit plan or plan assets; examples include:
- Making bad investment decisions
- Negligently handling plan records
- Negligently selecting plan service providers.
FLIP is a useful risk transfer tool and secures fiduciaries’ personal assets for the following reasons:
- The Employee Retirement Income Security Act of 1974 (“ERISA”) mandates the”highest duty known to law” on employee benefit plan fiduciaries.
- The act imposes personal liability on plan fiduciaries who breach their fiduciary duties; therefore, fiduciaries could potentially have to pay for any losses they cause out of their private assets.
- ERISA prohibits plans from indemnifying plan fiduciaries, so policies cannot cover defense costs, settlements or awards for fiduciaries that breached their fiduciary duties.
- Even if a business wants to indemnify its fiduciaries, it may not be financially able to, or it may be barred by law from doing so.
ERISA encompasses an extensive range of liability that deems individuals to be fiduciaries based on their conduct, such as functional fiduciaries, even though they are not named fiduciaries. As a result, many people are a plan fiduciary and do not even know it.
Fiduciary liability is the only policy out there on the market that has a broad enough protection against fiduciary exposure. Other policies, such as RISA bonds, D&O insurance and Employee Benefits Liability coverage, are traditionally offered under general liability coverages, but are inadequate for these risks and do not provide enough ERISA liability coverage. It is often excluded altogether.
Fiduciaries are legally bound to their fiduciary duties by delegating them to third-party service providers. Fiduciaries hold the responsibility to select and monitor these service providers prudently. As a result, a fiduciary’s personal assets could be at risk, unless they carry adequate protection such as Fiduciary Liability Insurance.
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