Will that insurer your company has been paying premiums to for
all of these years stand behind you if you are sued for ERISA
violations? Have you just been relying on a broker to give
you the coverage you need?
previously wrote about a decision in which CIGNA's insurer
was permitted to deny coverage for fiduciary breach due to a fraud
exclusion in its policy. We have just had another
decision from an appeals court in Louisiana in which
fiduciaries being sued by the U.S. Department of Labor were denied
coverage under each of three separate policies they thought would
provide them with legal defense costs and cover any awards assessed
against them. Again, the reason was buried in the policy
fine print, which even the brokers didn't seem to understand,
if the facts set out in the decision are any indication.
The facts boil down to the following: Plaintiffs had three
policies: a D&O policy, fiduciary liability insurance and
excess fiduciary coverage. They were sued by the DOL
following a formal investigation for selling stock to an ESOP at an
inflated price, but the court ruled that the policies didn't
cover the plaintiffs for the following reasons:
The policies didn't cover actions taken before the
The D&O policy didn't cover ERISA claims at all.
Plaintiffs failed to give notice of the claims during the
policy period, where the claim was specifically defined as
including an investigation by the Department of Labor or the
Pension Benefit Guaranty Corporation.
The excess coverage didn't kick in until the policy limits
in the basic policies had been reached (which was not possible
given the court's other rulings.)
The plaintiffs were also told that they couldn't amend their
complaint to include the brokers who they claimed were supposed to
be providing them with specific coverage, but failed to do so.
No one wants to wade through the details of these policies, but
those who fail to have them reviewed by legal counsel may be in for
rude surprises later on. We regularly speak with very
competent employee benefits professionals who confuse the
required ERISA bonding coverage (which provides recovery to the
plan, not the fiduciaries) with fiduciary liability insurance, or
who think D&O policies cover their ERISA plan committee actions
(many such policies either don't cover ERISA claims at all, or
don't cover lower level committee members). We frequently
are told that a plan sponsor maintains fiduciary liability
insurance, only to be sent the ERISA bond when we ask to see a copy
of the policy. In many of those cases, we have to deliver the
bad news that the fiduciaries have no personal coverage at all.
Clearly, the time to review coverage and obtain any required
endorsements is not when the accusations of fiduciary breach are
raised. Just a few among the points to be considered in a
thorough review of coverage are the following:
Your broker is not a lawyer. Don't rely on her to
interpret legal clauses in your policy. Get a qualified independent
Don't assume that employer indemnification obligations are
a substitute for coverage or will cover any gaps in coverage.
There will be legal constraints (for example, under state corporate
law) on the company's ability to provide full indemnification
and the commitment may become worthless in the event of bankruptcy
or other financial distress.
Understand the exclusions in your policy and find out whether
endorsements are available to eliminate some of them.
Consider whether your policy limits should be increased.
Courts seem to be awarding ever increasing damages in fiduciary
Understand and follow the notice requirements in your
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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