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Technology Insurance
Loss Scenarios for IT Firms
  Missed deadlines cause a breach of contract.
A firm outsources to an information technology and management service company for the replacement of hardware, software and infrastructure as well as telecommunications and related services in order to upgrade its ability to serve customers. The information technology services firm fails to meet deadlines due to a high turnover of staff.
Indemnity Paid: $2,000,000
Defense Cost Paid: $500,000
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Fiduciary Liability and Employee Benefits Liability

 

When it comes to fiduciary liability, and employee benefits liability coverages, there are two schools of thought on how the coverages should be handled, assuming both are necessary. The first is that both coverages should be combined into one policy. The second school of thought is that they should be handled separately.

Whether one method is more advantageous over the other is something that cannot be determined until the facts involving a given insured are considered, even though each of these coverages serves different purposes. This is an important point to remember, particularly since there is a tendency of insurers to combine both into one fiduciary liability policy.

 

Employee Benefits Liability

Employee benefits liability insurance typically is a component of fiduciary liability coverage. Employee Benefits Liability Insurance covers claims involving administrative errors pertaining to pension and benefit plans, such as failing to name an intended beneficiary on a life insurance policy.

It was the 1962 court case of Gediman v. Anheuser Busch that is said to have prompted the need for employee benefits liability insurance. In this case an employer was held accountable to the estate of a former employee for providing incorrect information. Employee benefits liability coverage appeared on the market shortly after that case was decided.

The intent of Employee benefits liability insurance coverage, is to protect entities, their officers, directors, stockholders, partners and partnerships, as well as employees who are authorized to act in the administration of any plan, in the event of a claim against them by former, present, or future employees, their beneficiaries, or legal representatives. The damages, if they are to be covered, hinge in part on negligent acts, errors or omissions in the administration of various plans.

Two of the typical exposures that would be considered an object of employee benefits liability coverage are the following: When an benefits administrator

  • erroneously calculates the amount of pension program and an employee elects early retirement only to find out that the amount is considerably less; and
  • forgets to enroll an employee for the company's hospitalization program and the employee finds out about this omission following a serious illness.
 

Fiduciary Liability Claims are on The Rise

It's better to evaluate your Fiduciary Liability Insurance coverage in the boardroom than in the courtroom. Retirement plans and fiduciaries are prey for litigation, which has increased in significantly in severity in recent years.

In its most recent, 1993 study of fiduciary liability insurance, Watson Wyatt Worldwide reported fiduciary liability lawsuits involving 23% of the studied companies-nearly triple the 8.7% that reported suits in 1987. And the average indemnity payment grew to more than $875,000 over the same period, from $715,000 in 1987.

 

Fiduciary Liability Coverage is Nonstandard in Nature

Although it has been available for many years, it still contains enough differences among policies so as to warrant fine-tooth-comb inspection. About the only similarity in these policies is that most (but not all) are on a claims-made basis and may combine employee benefits liability coverage, thereby dispensing with the need for the endorsement commonly added to the CGL policy.

The fiduciary liability limits selected also need to be handled with care because fiduciary liability coverage is seldom subject to umbrella liability coverage. If there are exceptions whereby an umbrella policy applies as excess, they would be rare.

InsureCast specializes in risk assessment, the ERISA act 1974 and Fiduciary Liability Insurance. Please go to our online CoverageCoach questionnaire to get a free no obligation Fiduciary Liability Insurance quote and risk assessment analysis.

 
 

Fiduciary Liability Insurance

 

What is Fiduciary Liability Insurance?

Fiduciary Liability Insurance pays, on behalf of the insured, the legal liability arising from claims for alleged failure to prudently act within the meaning of the Pension Reform Act of 1974. “Insured” is variously defined as a trust or employee benefit plan, any trustee, officer or employee of the trust or employee benefit plan, employer who is sole sponsor of a plan and any other individual or organization designated as a fiduciary. Group life and medical expense plans, as well as pension and retirement plans, are within the scope of the law.

Two other types of coverage are related to fiduciary liability insurance.

  • Fidelity bonds are required by law (ERISA bonding). This is a form of insurance for dishonesty situations. When dishonest administrators or trustees have financially harmed an employee benefit plan, these bonds may be used, but only for the benefit of the plan and the plan's beneficiaries. This bonding insurance will not protect the trustees themselves from liability claims and is completely distinct from fiduciary liability insurance.
  • Employee Benefit Liability Insurance. Employee Liability Insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, including the failure to enroll an employee in the plan as well as the administration of improper advice as to benefits.

Employee benefits liability coverage often is combined with fiduciary liability insurance policies, subject to the single limit. This is a distinct disadvantage because fiduciary liability presents an exposure that is infrequent but severe. The purpose for purchasing a fiduciary liability insurance policy, therefore, can be wiped out with frequent employee benefits liability claims.

 
 

When do I need Fiduciary Liability Insurance? And what is ERISA act 1974?

Are you a fiduciary? Are your personal assets at risk? Are you subject to lawsuits, fines, and penalties? Many people are and don't know it.

If you are an owner or officer who makes decisions about your company's 401(k) plan or other qualified employee benefit plan(s), odds are, your personal assets are at risk! Under the ERISA act of 1974 (Employee Retirement Income Security Act), fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of their alleged errors, omissions, or breach of their fiduciary duties.

Employment Liability Insurance does not cover all situations of fiduciary responsibility, especially those regarding imprudent investment of funds.

 
 

Why do I need Fiduciary Liability Insurance?

Under ERISA, fiduciaries may be held personally liable for breach of their responsibilities in the administration or handling of employee benefit plans. Fiduciary Liability Insurance is not required by ERISA. However, it is strongly recommended if you are a fiduciary of a welfare and/or pension plan because your personal assets are at stake. Many fiduciaries believe incorrectly that their ERISA fidelity bond protects their personal assets.

Furthermore, many think that this type of coverage is included in their D&O policy. Most D&O policies exclude fiduciary liability exposures as well as those exposures pertaining to the Employee Retirement Income Security Act (ERISA).

ERISA also broadly defines the types of employee benefit plans for which fiduciaries are responsible. This extensive list can include pension plans, profit sharing plans, employee stock ownership plans (ESOPs), and even health and welfare plans.

Moreover, designated fiduciaries are not the only targets of such lawsuits; targets can also include the employer and even the plan itself. Claims can be brought by plan participants, participants’ legal estates, the Department of Labor, and the Pension Benefit Guaranty Corporation. Such claims may include allegations of:

  • Improper advice or disclosure
  • Inappropriate selection of advisors or service providers
  • Imprudent investments
  • Lack of investment diversity
  • Breach of responsibilities or fiduciary duties imposed by ERISA
  • Negligence in the administration of a plan
  • Conflict of interest with regard to investments

A private company can help mitigate the personal liability of its fiduciaries by following the advice of outside experts and by selecting diverse, financially sound investments. But, it cannot entirely eliminate their personal liability .

In order to help protect private companies, their fiduciaries and the benefit plans they manage, against fiduciary liability claims, InsureCast offers Fiduciary Liability Insurance coverage. Please go to our online CoverageCoach questionnaire to get a free no obligation Fiduciary Liability Insurance quote.

 
 

Typical Fiduciary Liability Insurance coverage highlights:

  • Broad definition of insured including the company, its benefit plans and its fiduciaries
  • Optional $100,000 sublimit for qualifying voluntary settlement fees
  • Optional coverage for defense outside the limits of liability
  • Coverage for 502(i) and 502(l) civil penalties
  • Broad employee benefit plan language including plans outside the United States of America and any excess benefit plans
  • Broad wrongful acts definition includes allegations of breach of fiduciary duty and errors and omissions
  • No deductible will apply for most risks
Actual coverage is subject to the language of the policies as issued.
 
 

Who is considered a Fiduciary?

Any individual included in the plan document by name or title, or any one who has discretionary authority over the administration or management of a plan or its assets. The term is intentionally loosely defined to hold accountable all individuals who may be responsible for misuse of plan assets or a loss to plan participants.

Any employee who has discretionary authority over a plan or who assists in its administration can be exposed to liability. This list of individuals might include an appointed fiduciary, a plan administrator, a human resources employee, or anyone who helps to administer a plan.

 
 
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