On Tuesday, an explanation and history of fiduciary liability insurance occurred at the ERISA 403(b) Conference in Washington, D.C.
The panel discussion titled “Fiduciary Liability Insurance” featured Euclid Fiduciary’s Daniel Aronowitz, Sompo International’s Joe Kelly, and Marsh McLennan’s Mitch Milless. It focused on the “weaponization” of ERISA in recent years, resulting in an explosion of lawsuits.
While fiduciary liability insurance initially covered individuals, no one thought it was for a plan or company. It changed in the 1990’s and today, fiduciary liability insurance is malpractice insurance for fiduciaries, Aronowitz explained, and it generally covers four areas:
- A breach of fiduciary duty
- Management negligence
- Specific IRS and DOL penalties
- Voluntary compliance sanctions
Plan assets can be used to pay for a fiduciary liability insurance policy (although it is not generally a best practice) as long as the insurance company can subrogate against the other party’s insurance company.
Milless noted that between 2000 and 2013, there was an average of 10 to 14 class action lawsuits, but that number exploded in 2016 to 60 a year.
“Premiums and deductibles were low, but the increase in lawsuits really changed the fiduciary liability insurance landscape,” he explained.
“Plaintiff lawyers are taking circumstantial evidence like a plan underperforming the S&P 500 and claiming somehow there was a bad process put in place by a plan sponsor,” Aronowitz lamented. “As an officer or director, you are guilty until proven innocent, and we have a serious litigation abuse issue in this country.”
“The largest exposure used to be company stock that was included in a plan, like with Enron and WorldCom,” he added. “You could see it and therefore underwrite for it. We then entered a capricious environment in which plaintiffs’ attorneys are looking for liability, which is very difficult to underwrite.”
He concluded that investment underperformance is the next frontier in fiduciary liability litigation, as well as (potentially) healthcare fees under the Consolidated Appropriations Act of 2021. Milless added that cybersecurity breaches and ESG will also be targets moving forward.
