Fiduciary Insurance Is Critical

Art by Luyi Wang

With retirement plan litigation on the rise, experts say it is more important than ever for retirement plan sponsors to have adequate fiduciary insurance. And, as a result of the increase in litigation, carriers have become more selective about sponsors they will cover.

“These are interesting times right now,” says Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability at Berkshire Hathaway Specialty Insurance. “There is a tremendous amount of class action litigation naming plan sponsors and their agents, particularly with respect to private company employee stock ownership plans [ESOP] and fees. None of this litigation seems to be slowing up.”

In fact, claims are moving down market, “particularly the excessive fee cases,” she says.

“Everyone has to be aware of their fiduciary duties, make sure they have processes in place [for] these duties and work with an insurance broker to make sure they have adequate fiduciary insurance coverage in case they are sued,” Prussack says.

As to the potential monetary value of insurance a sponsor will need, generally “10% of the plan assets” is a good rule of thumb, Prussack says. However, the sponsor has to consider the “size of the plan and the complexity,” she says. “That answer might change if the plan is an ESOP sponsored by a nonpublicly traded company. It is not uncommon for companies with large plans [holding] $1 billion or more in assets to purchase towers of insurance of $75 million to $100 million or more.”

A tower is created by coverage from several insurance carriers, explains Nancy Ross, a partner and head of the Employee Retirement Income Security Act (ERISA) litigation practice at Mayer Brown. “If you want $100 million in insurance, you certainly might have different carriers,” Ross says. “Generally, one carrier will provide only up to a certain level of coverage, say up to $25 million. Then the next two might each cover $15 million apiece.”

Even just 15 years ago, fiduciary coverage was typically offered within a rider attached to a company’s directors’ and owners’ (D&O) policy. Fiduciary insurance coverage has since been carved out as a stand-alone, Ross says. If a sponsor thinks its D&O coverage extends to fiduciary insurance, it might be in for a surprise, she warns.

When assessing how much insurance to have, it is critical for sponsors to consider how high their defense costs could run, Ross says. “In a complicated ERISA class action alleging fiduciary breaches, your defense fees can run anywhere from $10 million to $20 million. So, if they run on the high side and you have a $50 million policy, will the remaining $30 million be enough to cover the cost of being hit with a judgment?”