Fiduciary Liability vs. Employee Benefits Liability

If you’ve been reading up on getting the right insurance for your business, you might have noticed that fiduciary liability insurance and employee benefits liability insurance offer similar coverages. Despite similarities, the coverages provided by these policies are not identical. These are distinct types of policies, and it’s important to understand their differences. 

Employee benefits liability insurance will cover you for some of the same risks as a fiduciary liability policy, but only a fiduciary liability policy will protect you, your business, and your employees against expensive fiduciary insurance claims. A fiduciary claim is when an employee sues you, alleging that they’ve suffered losses because your company or an individual within it has mismanaged their benefits. Following a relevant fiduciary liability claim, you and certain other members of your company can be held personally liable, which means you need protection for yourself and other key officers of the company.

What is Fiduciary Liability Insurance?

Fiduciary liability insurance is a type of business coverage that can come as part of a management liability package or as a standalone policy. It protects you if an employee makes a claim alleging a breach of fiduciary duty.

You, your business as a corporate entity, and anyone involved in administering and delivering your employee benefits plans, such as health insurance or retirement savings plans, may be  considered fiduciaries under federal law. The 1974 Employee Retirement Income Security Act (ERISA) defines several key duties and responsibilities of a fiduciary. It states that “fiduciaries must act prudently” and “must diversify” when administering a retirement plan, and that they must “follow the terms of plan documents” and ensure these are appropriate under ERISA. In other words, fiduciaries have the burden of administering a compliant plan and ensuring that the plan is administered in a way that is consistent with how it was designed.  

For business owners who are not experts in the administration of retirement plans or other benefits, these requirements and responsibilities may not always be straightforward. And as we touched on earlier, fiduciaries may be exposed to significant personal risk in connection with the work they do for you in the event of a suit or allegation by an employee. If an employee sues claiming that plans have been mismanaged or that plan administrators have acted dishonestly, fiduciaries could be held personally liable for any resulting costs, defense expenses, and settlements. Even if you hire third party benefits plan administrators, the liability still ultimately sits with you and other fiduciaries of your business. A fiduciary whose employer doesn’t hold adequate fiduciary coverage could find themself unexpectedly at risk.

What Does Fiduciary Liability Insurance Cover?

Coverage varies from policy to policy. Fundamentally, a fiduciary liability policy covers you for claims that a fiduciary has mismanaged, been negligent, or acted wrongfully in delivering employee benefits plans. It may cover the costs of investigations, damages awarded against you, and settlement payouts.

Some common mistakes and alleged acts that this type of insurance may cover include:

• Administrative errors
• Misuse of funds paid into a plan
• Delayed transfer of employee contributions
• Denial of benefits to which an employee is entitled
• Wrongful changes or reductions to an employee’s benefits
• Provision of incorrect advice about a plan
• A conflict of interest regarding a plan
• Prohibited transactions
• Failure to invest plan assets wisely
• Failure to diversify plan investments
• Use of an unsuitable third-party service provider
• Inadequate monitoring of a third-party service provider
• Failure to provide automatic coverage under a new plan

If you’re unsure about the level of protection you have or you know you want more, you should speak to your broker.

What is Employee Benefits Liability Insurance?

As we said right at the start, employee benefits liability insurance is different from fiduciary liability insurance. It covers claims of error or omission relating to the administration of a plan. It protects your company and the individuals you employ to run its benefits program from the consequences of an honest mistake.

This coverage is usually provided as an endorsement (a type of add-on) to a general liability policy and is limited to the way in which a plan is managed rather than how the plan performs financially. It includes only genuine accidents and administrative oversights, and in general it specifically excludes claims based on a failure of fiduciary duty as defined by ERISA. 

Employment benefits liability will cover claims that benefits weren’t properly explained or incomplete counsel was given to enrolled employees. But it won’t cover claims over misleading advice on whether to join a benefits plan. Claims relating to alleged poor investment decisions, or insufficient funding, also aren’t covered. 

Even if they’re unjustified, allegations of deliberate wrongdoing, criminal acts, conflicts of interest, and dishonesty, aren’t covered by employment benefits liability policies. Employment benefits liability insurance also can’t be used to recoup taxes, fines, or penalties imposed by the IRS or other bodies related to an alleged breach of fiduciary responsibility.

Coverage Differences: Fiduciary Liability vs. Employee Benefits Liability

The key difference between these types of policies is that fiduciary liability insurance is narrow in focus (it’s just for claims of breach of fiduciary duty) but wide-ranging in the different scenarios it covers, whereas employee benefits liability covers only errors in administration. Fiduciary liability, on the other hand, applies to a wider range of  wrongful acts as defined by the ERISA code of conduct regarding employee benefits and retirement plans.

While a  comprehensive employee benefits liability policy may include coverage of some of the areas covered by a fiduciary liability policy, employee benefits policies typically exclude the kind of claims fiduciary liability is primarily intended to cover.  Most notably, employee benefits coverage always excludes liabilities imposed under ERISA related to the administration of retirement savings plans

In short, if you offer benefits to your employees but you don’t have fiduciary liability insurance in place, it’s possible that your coverage is insufficient for your needs and may leave you and other fiduciaries personally at risk.

The exact terms of coverage you’ll get will vary from policy to policy depending on your business’s needs, financial situation, and claims history. You should discuss these details with your broker or insurance provider.

As we’ve already said, employee benefits liability covers only accidental mistakes related to benefits administration, whereas the protection from a fiduciary liability insurance policy covers a wider range of scenarios related to benefits administration. Fiduciary liability insurance may also cover claims that a plan didn’t perform as it was represented to employees who enrolled in it. Lawsuits claiming imprudent investment, misrepresentation, poor advice, and failure to carefully select and/or monitor an outside provider may all be included, each of which is typically not included in employee benefits liability. 

There are, however, several important limitations of fiduciary liability policies that you should be aware of. While fiduciary liability policies do generally cover defense costs if you’re wrongfully accused of deliberated illegal or unethical behavior, you should expect that no fiduciary insurance policy will pay if you are found guilty of an intentional criminal act. 

Final Thoughts

Even though ERISA doesn’t legally require companies to provide employee benefits or retirement plans, it does demand that plans are run according to a strict set of standards once they’re in place. Subsequent legislation has imposed further codes of conduct on providers, which can make offering benefits plans to your employees complicated and demanding.

Furthermore, all those defined as fiduciaries can be held responsible for all elements of a plan. They must follow the plan’s documents to the letter and must always act in the interests of its beneficiaries rather than those of the company or their own. And, of course, with this responsibility comes legal liability. While employee benefits liability insurance covers you for basic errors and omissions, only fiduciary liability insurance offers truly comprehensive coverage.