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14th National Forum on ERISA Litigation
Fiduciary Liability Insurance
Alison L. Martin
Fiduciary Product Manager
Chubb
Brian Smith
Chief Operating Officer
Segal Select Insuring Services Inc.
March 1-2, 2017
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What is Fiduciary Liability Insurance
• An Insurance Policy
• Provides defense costs, and
• Pays damages
• Alleging a Wrongful Act• A Breach of fiduciary duty, or
• An Administrative error
• All subject to a Claim against a Named Insured
• A Plan or Trust
• A Trustee(s)
• An Employee(s)
• Coverage is subject to other policy terms and conditions
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Fiduciary Liability Insurance
• How broad is this insuring policy?
• Is Everyone Aware of its Scope?
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Why Fiduciaries Need FLI
• ERISA imposes upon plan fiduciaries the highest duty of care known
• ERISA § 409 imposes personal liability on fiduciaries
• Plans cannot• Indemnify or relieve fiduciaries of liability
• Completely delegate away responsibility to providers
• Claims can be extremely expensive to defend and/or settle
• Other insurances may/will not apply
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Why Fiduciaries Need FLI
The #1 reason why Fiduciaries need FLI:
Fiduciaries who don’t have fiduciary liability insurance are placing their
personal assets at risk
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Distinguishing Other Insurances
Type of Insurance Policy Scope of Coverage
ERISA/Fidelity Bond 1st Party Coverage
Directors and Officers Insurance Excludes ERISA liability
Commercial General Liability &
Property Insurance
EBL endorsement offers limited coverage
Professional Liability Insurance Employers’ own sponsored plans not
covered
Employer Practices Liability Insurance Excludes ERISA liability
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Who Does FLI Cover?
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Who Does FLI Cover?
• The Organization (Sponsor/Employer)• The Plan (enumerated in the declarations)
• Can be pension, health, welfare, etc.• Not limited to ERISA plans
• Executives (Directors, Officers, General Counsel) of the Organization and the Plan
• Employees (but not independent contractors)• Board of Trustees of any Plan or any committee
established by the Plan (optional wording)• Does NOT cover 3rd party service providers
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Covered Conduct/Wrongful Acts
• Breaches of Fiduciary Duties:• Imprudent investment• Prohibited transactions• Compliance with plan documents• Benefit calculations in violation of Plan• Reduction in benefits
• Administrative Errors• Giving advice to employees, handling records, mishandling of
routine administration• Change in beneficiary• Failure to enroll• Document processing
• Settlor functions may be optional• Creating, amending, or terminating a plan
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Remedies FLI May Cover
• Defense Costs• Insureds’ attorneys fees and expenses
• Damages • Settlements or judgments
• Certain Fines & Penalties – sublimits may apply
• 502(i) 5% for prohibited transaction• 502(l) 20% for breach of duty• 502(c)/507 notice issues• 4975 15% excise tax for prohibited transactions• HIPAA• Additional Miscellaneous fines & penalties sublimit
• Plaintiffs’ Attorneys Fee Award
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Remedies FLI Doesn’t Cover
• Taxes, fines & penalties not otherwise carved out (where insurable by law)*
• Benefits due • Can be found in exclusions or definition of Loss• Usually get defense costs only coverage• Covered if payable by individual insureds• Investment losses• Failure to enroll
• Disgorgement/non-loss• Profit, funding obligations, etc.
*Some policies now offer a blanket miscellaneous fines & penalties sublimit
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Common Coverage Issues• Negating Your Own Coverage - Late Reporting
• Know the policy’s notice provisions• Know how to identify a Claim • Raise awareness of the policy
• Who Picks Defense Counsel• Duty to Defend, versus• Reimbursement
• DOL Investigations• Claims versus Pre-claim
• Pre-Tender Fees• Consent to Settlement • Third Party Providers
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Dissecting claims
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Identifying a Claim or Reportable Event
• Written demand for monetary or injunctive relief
• Civil proceeding or criminal proceeding
• DOL investigation against an Insured for a Wrongful Act*
• Formal investigation by Enforcement Unit (not DOL)
• Service of Subpoena on an Insured Person
• Written request to toll statute of limitations
• Pre-Claim Investigations*
• Benefit Denial Appeals
• Interviews*
14*Are these a Claim or a Covered Event?
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Defense Provisions
• Duty to Defend
• Panel Counsel
• 100% Predetermined Allocation
• Expertise and rates
• Reimbursement Option
• Advancement of defense costs
• Allocation
• Defense within limits
• Litigation management guidelines15
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Market Innovations
•Settlor Conduct
•Pre-Claim Investigations
•Benefit Claim Denials
•Better Defense Counsel Options
•Broadening of Fines & Penalties Coverage
•Voluntary Settlement Programs
•Benefit Overpayments
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Considerations When Purchasing FLI
• Carrier• Financial Security
• Commitment
• Scope of Coverage• Keeping up with the market
• Quality of Claims Administration
• Limits of Liability
• Premium
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Dissecting Fiduciary Claims
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What to Expect
• Broker engaged and proper notice tendered
• Acknowledgement/Coverage letters received
• Carrier works to get defense counsel in place
• Litigation Management Guidelines• Fees• Expectations regarding budget, communication frequency, etc.
• Carrier evaluates & works with counsel and insured on defense and
resolution strategy
• Possible motions practice and/or settlement - must loop in carrier and
inform in order to get consent
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Lessons to be Learned*
• Know the Scope of Coverage offered by the FLI policy
• Report Claims on a timely basis
• Communicate with the claims adjustor
• Do not settle without the consent of the carrier
* On large, massive or class actions type claims,
these are self-evident. It is on the smaller claims
that these issues can be most important.
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Typical ERISA Claims
• Failure to Enroll• Improper Advice on Eligibility• Prohibited Transaction• Imprudent Investment/Diversification• Improper Benefit Calculation• Reduction in Retiree Benefits• Failure to Comply with Plan Documents• Wrongful Termination• False or misleading statements• Actuarial Insolvency (DB Plans)• Regulatory investigations
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Failure to Enroll
Following the birth of his child, an employee immediately submitted all necessary paperwork to add the child to his health coverage. Insured employer failed to submit the paperwork to its health carrier on a timely basis and the child was not insured. The child developed serious medical complications and the health insurer denied coverage for the bills. Fiduciary liability insurance settled the matter by paying over $350K to cover the medical bills plus plaintiffs attorneys fees, in addition to defense costs.
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Service Provider Dishonesty
The investment manager for a privately held company was skimming money off the top of employees retirement fund contributions. (He was also a relative of the company’s plan administrator.) The DOL discovered the scheme and demanded that the company and investment manager make the plan whole (including paying lost investment income the funds would have earned.) The Insured employer settled with the DOL, contributing more than $2,000,000 towards the loss. Legal expenses topped $75,000.
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Failure to Follow Employee Investment Instructions
Employee who participated in his employer’s 401(k) plan issued instructions to the plan administrators to revise his 401(k) investments to decrease his concentrations in an specific investment fund that was heavily concentrated in sub-prime lenders. The plan administrator did eventually execute the transfer, but did not do so in a timely fashion. In the interim, the bottom fell out of the sub-prime market and the subject employee suffered resultant investment losses of $150K and sued for breach of fiduciary duty.
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Duped by a Fraudulent Fund
The fiduciaries of a pension plan, seeking to shield themselves from liability for investment decisions, retained the services of a third party investment manager. The investment manager invested with a fund that turned out to be a Ponzi scheme. Plan participants sued the fiduciaries for negligently selecting and monitoring the investment manager. The participants and the fiduciaries sued the investment manager for negligently investing in the Ponzi scheme. The investment manager countersued the fiduciaries for negligence. Millions were incurred in defense costs and indemnity. Contemplate the results if the service provider were named as an additional insured on the fund’s fiduciary insurance.
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Creation of an Private ESOP
Company founder sold his private company to a newly created ESOP for over $500M in a leveraged transaction. Recession hit and company value of declined. Participants allleged: stock price was overvalued; company was handicapped by leverage; interest rate on notes carried by founder were excessive; & deal called for unreasonable consulting contract with seller. Defense costs over $10M. Settled for millions in cash payment and debt forgiveness.
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Questions
Brian Smith
Chief Operating Officer
Segal Select Insuring Services
Alison L. Martin
Fiduciary Product Manager
Chubb Insurance
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Thank You
This presentation is for informational purposes only. This document is advisory in nature and is offered as a resource to be used together with your professional insurance advisors in maintaining a loss prevention program. The information provided should not be relied on as legal or insurance advice or a definitive statement of the law in any jurisdiction. For such advice, an applicant, insured, listener or reader should consult their own legal counsel or insurance consultant. Actual coverage is subject to the language of the policies as issued. Coverage may not be available in all jurisdictions. No liability is assumed by reason of the information contained herein.