Employment Law Report
A False Sense of Complacency – Fiduciary Liability Insurance: Don’t Forget the Nonrecourse Rider
Many employers that sponsor an employee benefit plan opt to obtain fiduciary liability insurance in addition to a fidelity bond, though ERISA only requires the latter. Not to be confused with the fidelity bond, which insures a plan against loss due to fraud or dishonesty by people who handle plan funds or other property, fiduciary liability insurance protects plan fiduciaries against breaches of fiduciary duty. Under ERISA a fiduciary can be held personally liable for plan losses that result from a breach of fiduciary duty, and the duties ERISA imposes on a plan fiduciary have been referred to as “the highest known to the law.” Moreover, fiduciary liability coverage is often not included in D&O, E&O, or other liability policies an employer may purchase. As such, it is generally advisable to obtain fiduciary liability insurance to protect plan fiduciaries against any breaches of fiduciary duty.
However, fiduciaries shouldn’t relax into the protection offered by fiduciary liability insurance without either (1) ensuring the coverage includes a nonrecourse rider that was purchased with non-plan assets, or (2) ensuring the fiduciary liability insurance was purchased with non-plan assets. ERISA includes a prohibition against a fiduciary entering into an agreement that purports to relieve him or her of fiduciary liability. The Department of Labor has interpreted this prohibition as preventing the use of plan assets to pay for a fiduciary liability insurance policy that does not allow recourse against the breaching fiduciary. That is, if the fiduciary liability insurance policy is purchased with plan assets, the insurer must be able to take action against the individual fiduciary whose breach caused a loss. To protect against such an action, the employer or individual fiduciary can purchase a nonrecourse rider with non-plan assets (e.g., employer assets or the fiduciary’s personal funds), which will generally prevent the insurer from proceeding against the fiduciary in the event of a covered loss. Alternatively, the employer can purchase the fiduciary liability insurance policy with non-plan assets, obviating the need for a nonrecourse rider.