Fiduciary Liability Insurance
Why It Matters
Fiduciary liability insurance protects employers and plan fiduciaries from claims alleging mismanagement of employee benefit plans. Understanding fiduciary liability coverage helps clarify how it differs from directors & officers (D&O) insurance and why ERISA exposure requires specialized protection.
Understanding Fiduciary Liability Insurance: A Practical Guide
Employers that sponsor retirement or health benefit plans take on fiduciary responsibilities under federal law, particularly under the Employee Retirement Income Security Act (ERISA). These responsibilities create personal and corporate liability exposure for those managing the plans.
Fiduciary liability insurance exists to protect against claims alleging breaches of fiduciary duty.
This guide explains what fiduciary liability insurance covers, how it works, and why it is distinct from other management liability policies.
What Is Fiduciary Liability Insurance?
Fiduciary liability insurance is a management liability policy that protects plan sponsors, trustees, and fiduciaries from claims alleging:
- Breach of fiduciary duty
- Errors in plan administration
- Improper investment decisions
- Failure to follow plan documents
- Mismanagement of employee benefit plans
Coverage typically includes legal defense costs and settlements.
What Problem Does Fiduciary Liability Insurance Solve?
Fiduciary liability insurance addresses risks such as:
- Lawsuits alleging excessive retirement plan fees
- Claims of imprudent investment selection
- Allegations of failure to diversify plan assets
- Administrative errors in enrollment or eligibility
- Failure to comply with ERISA requirements
Without coverage, fiduciaries may face personal financial exposure.
Who Is a Fiduciary?
Under ERISA, a fiduciary is anyone who:
- Exercises discretionary authority over plan management
- Controls plan assets
- Provides investment advice for a fee
- Has discretionary authority in plan administration
This can include:
- Company executives
- HR managers
- Plan committees
- Trustees
Fiduciary status is based on function, not job title.
How Fiduciary Liability Insurance Works
At a high level:
- An employer sponsors an employee benefit plan.
- A claim is filed alleging breach of fiduciary duty.
- The insurer provides or reimburses legal defense.
- Covered settlements or judgments are paid, subject to policy limits.
Policies are typically written on a claims-made basis.
Key Coverage Components
Most fiduciary liability policies include:
- Defense Costs
- Settlements and Judgments
- Administrative Error Coverage
- Voluntary Compliance Program Coverage (sometimes)
- Coverage for Individual Fiduciaries
Coverage may apply to both the company and individual fiduciaries.
Fiduciary Liability vs D&O Insurance
Important distinction:
| Feature | Fiduciary Liability | D&O Insurance |
|---|---|---|
| Covers ERISA Claims | Yes | Typically No |
| Covers Plan Mismanagement | Yes | No |
| Covers Corporate Governance | No | Yes |
| Protects Individual Fiduciaries | Yes | Yes (for corporate acts) |
D&O policies generally exclude ERISA fiduciary claims.
What Fiduciary Liability Insurance Typically Does Not Cover
Common exclusions include:
- Intentional fraud or criminal acts
- Personal profit or illegal remuneration
- Benefits owed under the plan itself
- Bodily injury or property damage
- Certain prior known claims
Fiduciary insurance covers management errors—not plan performance guarantees.
What Affects the Cost of Fiduciary Liability Insurance?
Premiums are influenced by:
- Size of retirement plan assets
- Number of plan participants
- Type of plans offered (401(k), ESOP, health plan)
- Claims history
- Investment structure
- Governance processes
Larger plans with significant assets face higher exposure.
Growing Litigation Trends
Recent trends include:
- Excessive fee litigation
- Target-date fund performance disputes
- ESG-related investment scrutiny
- Class-action lawsuits
Retirement plan litigation has increased significantly in recent years.
Risk Management Considerations
Insurers may evaluate:
- Investment committee structure
- Documentation practices
- Independent fiduciary oversight
- Regular fee benchmarking
- Compliance processes
Strong governance reduces exposure and premium cost.
Smart Questions to Ask an Agent
When evaluating fiduciary liability insurance, consider asking:
- Does this policy cover both the company and individuals?
- Are defense costs inside or outside policy limits?
- Does coverage apply to healthcare plans as well?
- Is voluntary correction program coverage included?
- What exclusions apply to investment-related claims?
Understanding ERISA exposure is critical.
When Fiduciary Liability Insurance Makes Sense — and When It Might Not
Fiduciary liability makes sense if:
- You sponsor a 401(k), pension, or health plan
- You have plan assets under management
- You appoint fiduciaries or committees
- You want protection from ERISA litigation
It may be less necessary if:
- No employee benefit plans are sponsored
- Plan administration is fully outsourced (though fiduciary responsibility may still exist)
For most employers offering retirement plans, fiduciary coverage is prudent.
Cheat Sheet
| Feature | Fiduciary Liability Insurance |
|---|---|
| Coverage Focus | ERISA & benefit plan management |
| Covers Plan Investment Claims | Yes |
| Covers Administrative Errors | Yes |
| Claims-Made Policy | Yes |
| Covers Corporate Governance | No |
| Often Bundled With | Management liability suite |
| Required By Law | No (but risk-driven) |
Key Takeaway
Fiduciary liability insurance protects employers and individuals responsible for managing employee benefit plans from claims alleging breach of fiduciary duty. Because ERISA imposes strict standards and litigation risk is rising, this coverage plays a critical role in protecting both corporate and personal assets.