Fiduciary Liability vs. Employee Benefits Liability Insurance

I recently attended a class taught by an attorney with expertise in ERISA law and was reminded that this area of our law is complex and often difficult to navigate. Understanding the corresponding insurance coverages can also be confusing for many. In this blog post, we’ll help you navigate both policies’ intricacies to determine the right coverages for your business while ensuring compliance with the Employee Retirement Income Security Act (ERISA).

What is Fiduciary Liability Insurance?

Fiduciary liability insurance provides protection for employers, plan sponsors, and fiduciaries against claims arising from alleged mismanagement of employee benefits plans, including retirement plans and 401(k)s. This coverage shields your business from potential financial losses resulting from errors or omissions in the administration of these plans, which may include claims alleging mismanagement of funds, imprudent investment decisions, failure to adequately disclose information or administrative errors related to employee benefits plans. It may also cover legal defense costs, settlements, or judgments arising from such claims.

Under ERISA law, fiduciaries are required to act in the best interests of the plan participants and beneficiaries, with the duty of loyalty and prudence. While ERISA doesn’t mandate fiduciary liability insurance, it recognizes the potential liability that fiduciaries may face for breaches of their duties.

Who Should Purchase Fiduciary Liability Insurance?

If your business offers employee benefits plans, such as pensions, health insurance, or retirement savings options, then fiduciary liability insurance is recommended. This policy is especially crucial for business owners and executives who serve as fiduciaries or have decision-making authority over the management of these plans. By investing in fiduciary liability insurance, you can protect your personal and business assets from claims related to alleged breaches of fiduciary duty.

What is Employee Benefits Liability Insurance?

Employee Benefits Liability Insurance (EBLI) provides coverage for claims arising from errors or omissions in the administration of employee benefit programs. This policy protects your business against claims made by employees who believe they suffered financial loss due to mistakes made during the handling of their benefits, such as accidental cancellation of coverage, incorrect enrollment, or inadequate communication.

While ERISA doesn’t mandate the purchase of EBLI, it is common for employers to obtain this insurance coverage to mitigate the financial risks associated with potential claims.

Who Should Purchase Employee Benefits Liability Insurance?

If your business offers employee benefits, such as health insurance, life insurance, or disability coverage, obtaining employee benefits liability insurance is highly recommended. Even the most diligent companies can make unintentional errors while managing employee benefits programs.

Coverage Differences: Fiduciary Liability Insurance vs. Employee Benefits Liability Insurance

The key difference between Fiduciary Liability Insurance and Employee Benefits Liability Insurance lies in the scope of coverage and the parties protected. Fiduciary Liability Insurance protects fiduciaries from personal liability in relation to the management of employee benefit plans, while Employee Benefits Liability Insurance safeguards employers from claims arising from errors or omissions in the administration of employee benefits plans, protecting the company itself. The former centers around fiduciary responsibilities, while the latter is more concerned with the employer’s administrative actions and potential liabilities.

What is Not Covered?

It’s important to note that Fiduciary Liability Insurance typically does not cover intentional illegal acts, fraud, or personal gains derived from fiduciary activities. Additionally, claims resulting from poor investment performance, market volatility, or fluctuations in plan assets are generally not covered.

Similarly, Employee Benefits Liability Insurance does not cover intentional illegal acts or fraudulent activities. Moreover, it typically excludes claims arising from deliberate acts of harassment, discrimination, or wrongful termination.

The Bottom Line

In today’s litigious society, safeguarding your business and personal assets is paramount. Fiduciary Liability Insurance and Employee Benefits Liability Insurance play different but equally critical roles in mitigating the risks associated with managing employee benefits programs and retirement plans. The coverage level you’ll need for both will depend on a few things, namely the size of your business, your financial situation, and your claims needs. By proactively investing in these coverages, you can protect your business from potential financial losses resulting from claims and allegations. 

Remember, in the ever-changing business landscape, it’s essential to stay one step ahead by proactively managing your risks. Contact us to ensure you have the right coverage tailored to your unique needs. Our team of experienced insurance experts understands the complexities of risk management for businesses and individuals and can provide personalized advice on the right insurance solutions.