Fiduciary Insurance: Why Your Business Needs Fiduciary Coverage?

Fiduciary insurance, despite its unyielding significance, is still unknown to many businesses. However, fiduciary coverage is a must-have for companies with employee benefit plans.  

A fiduciary is a person or entity that is legally responsible for managing the employee’s or organization’s assets. From top executive to front desk clerk, anyone who handles the employee benefit plans can be liable for breach of fiduciary duties. 

Businesses formulate retirement or health plan for employees. Those plans can attract potential employees to work for your business. But if fiduciaries fail to provide the benefits as promised, then your employees can drag your business to court. 

The risks associated with the fiduciary duty will impact both your employees and your business as a whole. The Employee Retirement Income Security Act (ERISA) charges personal liability on plan fiduciaries who breach their duties. So, the legal settlement costs are hefty enough to jeopardize your personal assets. The state regulations or ERISA does not mandate any companies to own fiduciary insurance. However, your business should hold a fiduciary insurance policy to survive the monetary loss.  

Fiduciary insurance protects your business from the claims arising out of mismanagement of the fiduciary duties. Thus, this policy is right, especially for: 

  • Private companies    
  • Public companies    
  • Financial institutions    
  • Non-profit organizations  

Common Fiduciary claims

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The fiduciary risk can cost your business millions of dollars even though there is no proof of your wrongdoings. Employee benefit plans are generally complicated, and mistakes can happen in any step of the process. Some of the common claims related to fiduciary duties are as follows: 

  1. Poor handling of employees’ investment fund  
  1. Errors in administration activities, such as improper enrollment or termination  
  1. Delayed balance transfer 
  1. Wrongful denial of or improper change in benefits  
  1. Providing poor consulting services  
  1. Failure to disclose retirement plans properly 
  1. Conflict of interest  
  1. Failure to administer the plan according to the plan document  
  1. Negligence while counseling retirement and health plan  

Insurance Information Institution suggests that professional liability policy protects your business from lawsuits arising from failure to meet the professional standards. Similarly, investopedia mentions that employment liability policy can protect from claims that is not covered under workers’ compensation policy. Nonetheless, fiduciary insurance is the only policy that can provide coverage to settle lawsuit claims related to the fiduciary breach.   

Fiduciary insurance coverages

Here are some of the coverages that fiduciary insurance provides: 

  1. Attorney’s fee: Fiduciary insurance covers the expenses to appoint an attorney to settle the claim.  
  1. Investigate the wrongdoing: Any employee can sue your business for breach of fiduciary duty without any evidence. If you have fiduciary insurance, then the policy indemnifies the cost to investigate the incident. 
  1. Claim settlement costs: The fiduciary insurance policy compensates for the legal claim settlement. It includes punitive damages, judgments, settlements, and defense costs.   

Keep in mind that a fiduciary coverage does not include criminal activities or intentional wrongdoing, such as fraud and embezzlement. The errors in the investment plan committed by the third-party investment manager are also excluded from a fiduciary liability policy.  

As a business owner, you should always analyze the cost and benefits of any insurance policies. Thus, it is crucial to understand the limits and deductibles of the fiduciary insurance that you require to combat the risks. 

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