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Overlooked, Misunderstood and Often Uncovered
the Fiduciary Liability Exposure
by Tom Havens, Director of Marketing Services

Section 409 of the Employee Retirement Income Security Act (ERISA) reads, in part:

“Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations and duties imposed upon fiduciaries by this title, shall be personally liable to make good to such plan resulting from each such breach, ….”.

The scope of ERISA is broad. With some limited exceptions, most employee benefit plans fall under ERISA control. The types of plans covered by ERISA are divided in two general groups, employee benefit pension plans and employee benefit welfare plans.

Employee benefit pension plans essentially means any plan that provides retirement benefits to employees (pension or profit sharing) or, a plan that defers income for employees to periods after termination of employment. Less understood is ERISA’s breadth as respects employee benefit welfare plans which include medical, accident, disability, death, unemployment, hospital care, training or various other employee welfare plans. 

Although ERISA legislation does not require the establishment of any benefit plans nor does it mandate the procurement of liability insurance, if a bank does decide to establish a pension or welfare plan for their employees, ERISA prescribes certain strict standards of conduct for those who control those funds and manage those plans.

ERISA is clear in demanding personal responsibility for those persons defined as “fiduciaries.”  A community bank’s plan administrators, trustees, and fiduciaries must take care to see that their fiduciary responsibilities are carried out properly. Carelessness in the investment of plan assets, for example, can  open the door to personal financial disaster for these individuals.

Who is a Fiduciary? Anyone who exercises discretionary authority or control over plan management or plan assets; anyone with discretionary authority or responsibility in administration of a plan; anyone who provides investment advice to a plan for compensation.  Their basic duty is to “discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries.”

Who could be a fiduciary? Your community bank’s Human Resource Director; Chief Financial Officer; members of the plan’s investment committee; persons who select the investment committee; persons who have authority and responsibility in the functioning of the plan, regardless of their formal title. The key to determination is what that person does or has the right to do with respect to the plan. If a person has discretionary control over the plan or its assets, then that person is likely a fiduciary. The person’s conduct will then be judged according to ERISA’s strict fiduciary standards.

What are some typical claim scenarios that might give rise to fiduciary liability?

• Participants sue their bank employer, claiming that the employer attempted to prevent them from obtaining benefits under the plan. Such claims may arise in the context of a layoff or other discharge from employment, which the employee asserts was motivated by the employer’s desire to avoid paying pension or other benefits.
• Participants sue on the ground that plan assets have performed poorly, due to alleged mismanagement by trustees, investment advisors, or others with control over assets.
• The bank’s trustees or investment advisors are accused of insufficient diversification of plan assets, that those investments are underperforming.
• The bank’s self-directed 401(k) plan offers too few fund choices, or funds that only offer lower overall returns with high administrative expenses.
• You make a decision to change medical plan carriers and an employee loses a critical cancer benefit. That employee in turn sues the bank and plan fiduciaries alleging negligence in the failure to review that decision’s impact upon its employees.
• You offer an ESOP for your bank employees. The asset value of the ESOP drops significantly. The participants sue the fiduciaries of the ESOP alleging that the ESOP paid too high a price for the shares sold to the ESOP and mismanaged the company’s performance, contributing to the drop in asset value.
• Disability plan benefits are denied by the plan based on disputed evidence regarding the fact or extent of the participant’s disability.
• Fiduciaries are alleged to have dealt with plan assets in circumstances where a conflict of interest exists (e.g. self-dealing or dealing with a related person or entity).

Why is the purchase of Fiduciary Liability coverage oftentimes overlooked during a bank’s professional liability coverage review?

One of the most common misconceptions is that a bank’s Directors & Officers Liability policy automatically covers the fiduciary liability exposure. Actually, all ERISA liability is generally excluded by most D&O insurance policies.

Another misunderstanding is that the purchase of Employee Benefit Liability (EBL) coverage alone, usually obtained as an endorsement to the bank’s general liability policy, will provide all the necessary insurance protection for a bank’s fiduciaries.

While EBL coverage is indeed valuable, it only provides part of the solution. Bank employees who provide benefits counseling to employees, interpret benefits, handle records and other “administrative” tasks while engaged in these ministerial functions within guidelines established by others are probably not considered fiduciaries. The rationale is that with the possible exception of improper counseling and benefits interpretation, many of these types of mistakes are minor in nature and can usually be corrected once identified. Those individuals “would” likely be afforded necessary insurance protection provided by the EBL coverage endorsement.

However, EBL coverage alone does not cover “judgmental” errors or prohibited acts, nor address the broader personal liability exposures faced by a bank’s fiduciaries. The good news is that most Fiduciary Liability Insurance policies incorporate not only employee benefit liability coverage but also personal liability protection for fiduciaries under their respective contracts. 

Finally, another reason often cited for not purchasing Fiduciary Liability coverage is that a bank often only offers self-directed 401(k) plans. It is important to note that 401(k) plan liability can arise, albeit less often, even where the bank employer only offers a self-directed 401(k) option.

What if the employer is unable to offer enough investment fund choices to its employees? What if the fund choices offered by the bank deliver lower than expected overall returns? What if employees are paying high expenses, usually borne by the employees, to administer the plan? Even if an employer hires a professional firm to run the bank’s 401(k) plan, someone at the bank has selected that particular firm and will likely share at least some co-fiduciary liability.  Increased litigation in this seemingly exposure-free area indicates a growing sophistication and awareness of required employer responsibility to employees of 401(k) plan performance.

Can fiduciary responsibility be delegated and/or mitigated?

As mentioned in the previous paragraph, as respects a self-directed 401(k) plan, a fiduciary may delegate his or her responsibility by appointing a qualified investment manager to manage all or part of the plan assets. The named fiduciary would not be liable for the acts of the investment manager as long as he or she acts prudently in choosing and retaining the investment manager. However, a fiduciary is not relieved of his/her responsibility merely because he or she follows the advice of an investment advisor- see Section 405 of the ERISA Act.

Such delegation must be permitted by the terms of the plan document and implemented in a prudent manner . However if a delegating fiduciary knows, or should know, that the delegated duties are not being carried out appropriately, he or she may be liable. Delegation or allocation of fiduciary duties also does not entirely relieve the fiduciary of all liability since the delegating fiduciary will always remain subject to co-fiduciary rules and responsibilities.

Does fiduciary responsibility insurance offer the best solution?

ERISA permits the plan to insure itself or its fiduciaries for loss on account of fiduciary acts or omissions.

Most such insurance protection protects the assets of the plan from depletion caused by mismanagement, reimburses the organization if they have to pay for administrative mistakes (EBL), pays the cost of legal defense, and protects the personal liability of fiduciaries.

It is important to note that several major industry studies have concluded that defense cost coverage alone is sufficient enough reason to consider buying this coverage. We live in a litigious society, and despite your bank’s fiduciaries acting like prudent experts in accordance with the rules of ERISA, there are bound to be lawsuits and the decision maker/fiduciary should assume a worst case scenario.

The above article illustrates the need for a careful review of your D&O/Professional Liability program in order to eliminate this major gap in coverage. Make sure that your community bank itself (the entity) is included in any coverage you procure as, not surprisingly, most lawsuits will typically include all deep pockets. This is relatively inexpensive protection, so make sure your BancInsure advisor or independent agent carefully checks your policy during any professional liability review.

BancInsure now offers a Single Policy Solution to protect the assets of your community bank and those of your directors and officers. Introducing our new Extended Professional Liability Insurance Policy. Under one integrated policy, we offer an expansive selection of management, e-commerce and professional liability choices with the flexibility to select only the coverages your institution requires. It’s your choice:

·          Executive Liability
·          Company Reimbursement
·          Company Professional Liability
·          Company Lender Liability
·          Company Securities Liability
·          Employment Practices Liability
·          Fiduciary Liability
·          Trust Department Liability
·          Electronic Banking Liability
·          Electronic Publishing Liability
·          Harassment of Third Parties Liability – New!
·          Public Relations Expenses – New!
·          Customer Privacy Expenses – New!
·          Investigative Expenses – New!

If you would like to find out more about this Extended Professional Liability Insurance Policy, contact your local BancInsure Territory Sales Manager, independent agent or visit us at www.bancinsure.com for more information.

Oklahoma City, OK-  The Board of Directors for BMSI Holdings, Inc, the parent company of the insurer BancInsure, Inc, announced today that Bruce Livingston has been promoted to Vice President and Chief Underwriting Officer of The Companies. 

“This leader brings a depth of underwriting and insurance experience that is essential for our operations,” said Rodney N. Sargent, President and CEO of The Companies.  “His strategic insights into product and program development, coupled with his executive leadership acumen, reflect the growing bench strength of our leadership team.” 

Mr. Livingston comes to BancInsure with 24 years of executive experience in underwriting leadership, program development, and operational oversight.  Prior to BancInsure, Mr. Livingston led product management and development for Harleysville Insurance Company in Pennsylvania and was an officer of the company.  He was a former Division President of Professional Underwriters Corporation (a subsidiary of Legion Management Corporation) where he served as Chief Executive Officer for this underwriting services company handling program premium in excess of $150M.   Bruce started his career at Crum & Forster Commercial Insurance Company where he held a variety of roles. 

A graduate of Texas Tech University, Bruce holds a BA in Business Administration. He holds the Chartered Property and Casualty Underwriter (CPCU) and Associate in Claims (AIC) designations. Prior to Bruce’s relocation from Pennsylvania to Oklahoma, he was an active member of the Greater Valley Forge Chapter of CPCU.

Founded in 1985 as the only truly independent insurer focusing completely on financial institutions, BancInsure's understanding of financial institutions and their intricate operations is unmatched in the marketplace.  This translates to extraordinary value through complete risk mitigation and risk management solutions. Headquartered in Oklahoma City, BancInsure holds an A- (Excellent) A.M. Best rating and is licensed in 48 states.