Fiduciary Liability Coverage: A Comprehensive Guide

Fiduciary liability coverage protects the employees and the business involved in the management of employee benefit plans. If an individual or entity breaches their fiduciary duty, they can face lawsuit claims. Moreover, such claims can be expensive enough to jeopardize even your personal property.  

Who is a fiduciary?  

If an employee is responsible for the employee benefit plan, he/she is known as fiduciary. A fiduciary can work at any level within an organization. A top manager who formulates the pension or retirement plans to a lower-level employee who disburses the payment is held liable for fiduciary duty.   

They should work in the best interest of their employees and build trust. If your business outsources the fiduciary duty, make sure that the third-party also holds fiduciary liability coverage.   

fiduciary liability coverage

Why do businesses need fiduciary liability coverage?  

Typically, companies implement employee benefit plans to attract potential and skillful employees. Furthermore, the state regulations may also mandate firms to adapt benefit plans. While implementing such plans, firms may succeed in employee skilled human resources. According to FindLaw, breach of fiduciary duty can give rise to legal action in civil court.

Some of the common claims of fiduciary insurance are as follows:  

  • Improper changes in plan benefits  
  • Giving the wrong advice to plan holder  
  • Conflict of interest  
  • Errors while administering the plan  
  • Hiring an unfit service provider  
  • Wrongfully denying benefits to employees  

The legal defense cost for the above claims can worth millions of dollars to the business. Thus, fiduciary policy provides coverage for the following expenses:  

  • Legal defense   
  • Claim settlement   
  • Attorney’s fee  

Keep in mind that errors and omissions insurance, directors and officers insurance cannot cover for claims related to breach of fiduciary duty. But if you opt for fiduciary coverage, the policy will also cover for errors in routine administrative duties such as adding or removing beneficiaries or enrolling plan participants. It is because the policy automatically includes employee benefits liability insurance.   

fiduciary liability coverage

What not to expect from fiduciary liability coverage?  

Although the policy covers for wrongful doing, such as failing to hire a proper service provider or changing the plan without permission, it does not cover for fraud and embezzlement. A fiduciary liability policy will only cover for losses caused by perils specified in the policy. Thus, Any other damages beyond the perils should be addressed through different coverage plans.   

You should not expect fiduciary liability coverage to cover for:  

  • Theft  
  • Intentional wrongdoing  
  • Intentional embezzlement of corporate funds  
  • Breach of duty by the third party  
  • Any coverage above the policy limits  

Tips to mitigate breach of fiduciary duty  

As mentioned earlier, businesses need to face a high penalty for breach of fiduciary duty. Finra has stated that as of May 2020, there are 701 cases related to breach of fiduciary duty. Therefore, you should try to minimize the mismanagement risk through proper training. As a business owner, you should make sure that your employees, as well as fiduciaries, are well aware of the benefit plans. Moreover, the total amount that employees will receive as a benefit should be stated clearly. You can also schedule a meeting to discuss any changes in the benefit plan to avoid confusion.   

Key Takeaway  

Even if you try to mitigate the mismanagement claims, things can still go wrong. Thus, to protect your business from financial burden, opt for the right amount of fiduciary coverage.