Confusion about insurance and personal liability is normal and to be expected in commercial insurance coverages. At the top of the list about which to be confused is the insurance associated with the “mother of all employee benefit plan legislation,” ERISA. Unfortunately, many sellers as well as buyers of the insurance products associated with this legislation are also confused.
Critical Aspects of ERISA
There are several critical points to keep in mind about ERISA:
- ERISA applies to all employee benefit plans (with only very limited exception). Technically, this means that to be in compliance with this important federal law, all employee benefit plans must be included for “fidelity bonding,” which is the mandatory insurance coverage specified within ERISA. (Yes, that means that employee group health insurance and group life insurance is required to be fidelity bonded, even though neither typically has any assets.) The use of omnibus Named Insured verbiage, or in connection with the policy definition of “Insured Plans” is quite important.
- Clearly, persons within the organization who exercise discretionary judgment are deemed to be “personally liable” under ERISA Section 410(a). This “personal liability” is a bit of a heavy burden: It is undesirable in a society fraught with litigation, and some insurance relief available is actually rather narrow and often not very protective. About the only reliable source of insurance coverage for this personal liability exposure is the insurance product known as fiduciary liability insurance.
- ERISA specifies a formula for the amount of insurance coverage required for the fidelity bonding (Section 412), and this formula has been amended several times since ERISA was enacted in 1975. Currently, the limit of this mandatory insurance must be in a minimal amount of $1,000 and the limit of fidelity insurance must represent 10% of the assets of each employee benefit plan (plus anticipated annual contributions to each plan), subject to a maximum amount of fidelity insurance of $500,000 (unless employer securities are either a benefit plan investment option (think 401(k) plan), or employer securities are used to match employee contributions, in which case the maximum limit required is $1 million.
An Insurance Product That is Misleading
Don’t get sidetracked by the minimal insurance product known as “Employee Benefits Liability insurance” (EBL), which requires minimal additional premium, if any, and is often summarily attached to an organization’s Commercial General Liability insurance policy. The reason the cost for this coverage is nil or very small is because the coverage provided is nil or very small. And the coverage provided by the EBL feature is solely for “administrative mistakes” in the administration of employee benefit plans by the employer—there is no ERISA liability insurance provided by this rather insignificant insurance product.
Insurance claims in the ERISA area of exposure have been on the rise. Many of these claims have alleged excessive fees (ultimately) charged to employees, through employer sponsorship of benefit plans. In 2020 we saw increases in such litigation by more than 80%, according to a leading broker of the insurance coverage. The same source cites additional claims factors, including Department of Labor rule changes, endorsement actions, and plaintiff attorneys bringing litigation.
Impact of Electronic Transactions
Certainly, with the mass of employee benefit-related transactions being handled electronically, this adds a new dimension to exposures. This makes cyber insurance increasingly important, and concerned employee benefits practitioners should certainly consider this added protection. Last year, the Department of Labor provided guidance on cybersecurity and data privacy, a clear statement that it seems cybersecurity as a key responsibility for all businesses that are 401(k) plan sponsors.
Planning Ahead
It is imperative that businesses take a proactive measure and take a hard look at their current plan of action and conduct due diligence when searching for insurance protection. Across the board, insurance plans should include a solid defense of liability allegations along with the mandatory fidelity bonding coverage to meet the needs of employers in all 50 states.
An extra step of defense is cyber liability insurance. While there is no way to fully protect yourself against an attack, there are measure executives need to put into place in order to be prepared for an attack. The likelihood of a business falling victim to a cyber attack is more likely than not. Cyber liability insurance is a safety net offering the right individuals both legally and technically, to move forward with a response plan—ensuring that customers and employees remain digitally safe once an attack hits.
Checking these boxes is a safeguard to protect businesses and their assets.
Richard Clarke is the Chief Insurance Officer at Colonial Surety, a leading national direct seller and writer of surety bonds, fidelity bonds and insurance products.
This commentary does not necessarily reflect the views of NAPA or its members.
