Imagine managing an employee benefit plan and being sued over your decisions. Many HR professionals and business owners face this reality.
Consider fiduciary liability insurance as soon as you start providing employee retirement or health plan benefits. This insurance can be your safety net, protecting you from the financial risks associated with managing these plans.
What is Fiduciary Liability Insurance?
Fiduciary liability insurance provides coverage for claims that arise from errors or omissions in the administration of employee benefit plans. It protects fiduciaries—those responsible for managing these plans—from personal liability. This insurance is crucial because it covers legal fees, settlements, and other costs associated with defending against claims.
Understanding Fiduciary Roles
Fiduciaries are individuals or entities that manage benefit plans, such as retirement funds or health insurance. They must act in the best interest of the beneficiaries and adhere to a high standard of care. However, even the most diligent fiduciary can make mistakes, making insurance an essential safety net.
Common Risks Faced by Fiduciaries
Fiduciaries are vulnerable to various risks, including administrative errors, breach of duty, and mismanagement of funds. These mistakes can lead to costly lawsuits and financial losses. Fiduciary liability insurance mitigates these risks by covering litigation expenses and potential settlements.
Why Standard Insurance Isn’t Enough
Many business owners mistakenly believe that general liability or directors and officers (D&O) insurance will cover fiduciary claims. However, these policies typically exclude claims related to the management of benefit plans. Fiduciary liability insurance provides specialized coverage for these unique risks.
The Importance of Fiduciary Liability Insurance
Fiduciary liability insurance isn’t just a good idea—it’s necessary for businesses managing employee benefit plans. Here’s why:
Legal Requirements and Compliance
The Employee Retirement Income Security Act (ERISA) imposes stringent standards on fiduciaries. Failure to comply can result in severe penalties and legal action. Fiduciary liability insurance ensures that your business remains compliant and protected against claims.
Protecting Personal Assets
Without fiduciary liability insurance, fiduciaries risk their assets in the event of a claim. This insurance shields individuals from financial ruin, providing peace of mind and security.
Safeguarding Company Finances
Legal battles over fiduciary breaches can be financially draining for companies. Fiduciary liability insurance covers the costs of litigation, settlements, and judgments, preserving your company’s financial health.
Recent Real-world Example
A new lawsuit is shining light on health plan fiduciaries and their obligations.
In February, a class action lawsuit was filed against drug manufacturer Johnson & Johnson (J&J) in its capacity as an employer and plan sponsor.
The suit alleges that J&J breached its fiduciary duties by failing to take proper measures to ensure its plan costs were reasonable, exercise prudence in selecting its pharmacy benefit manager (PBM), and agree to undesirable contract terms. Specifically, the suit accuses J&J of mismanaging its employees’ drug benefits, resulting in employees significantly overpaying for certain drugs.
This case is an example of the recent uptick in impending lawsuits regarding compliance with transparency rules, reinforcing the need for fiduciary governance.
Callahan Risk
Obtaining the right insurance coverage and working with the risk and insurance services provider is especially important when the product is as complicated and highly specialized as fiduciary liability insurance.
You can count on Callahan for insurance solutions as your business grows and faces challenging market conditions.