Fiduciary Liability Insurance Premiums Are Soaring-What Are Plan Sponsors To Do?

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A new report in Pensions and Investments should be an eyeopener for sponsors of 401(k) and 403(b) plans who haven’t yet gotten the message that even responsible fiduciaries can be sued. I previously wrote that 2020 promises to be a banner year for 401(k) plan litigation. Now P&I reports that fiduciary liability insurance premiums are up 35% as a result of costly awards and settlements. Plan sponsors are also being required to pay more-P&I gives an example of a $2 million payment- just to be able to renew policies. This trend can only accelerate as 2020 fiduciary breach lawsuits continue to be filed and older lawsuits continue to be settled at a fast pace.

Is There a Vaccine Against ERISA Litigation?

Fiduciary liability insurance, unlike ERISA bonding, is not legally required. As a practical matter, though, plan fiduciaries need it and they sometimes incorrectly assume that corporate errors and omissions policies will cover fiduciary breaches despite the fact that many of these policies specifically exclude ERISA claims. The reason that fiduciary liability insurance is so important is that it is expensive to defend lawsuits even if you win. Recently, I have seen some articles that apply wishful thinking to this situation by suggesting that by following good practices, fiduciaries can make their plans litigation proof. However, a review of the cases shows that nothing could be farther from the truth. Following good practices is the best protection available, but plaintiffs’ counsel target plans in a scattershot manner with cookie-cutter complaints and conclusory allegations based on the types of investments plans have. No fiduciary, however responsible, is immune from being named as a defendant in these actions. There isn’t any vaccine. That is why when clients ask me how much coverage to get, I usually respond that they should purchase as much coverage as they can afford.

Good Practices Still Matter.

There is a chance that good practices might lower your chances of being sued if you are a plan fiduciary, but mostly good practices help fiduciaries prevail in litigation when they are sued.

Hiring outside professionals such as fiduciary investment advisers, investment managers and professional administrators can increase the chances of prevailing when company fiduciaries lack the necessary expertise. Professional investment managers described in Section 3(38) of ERISA take over the legal responsibility for investment decisions. Professional administrators, called 3(16) administrators, are not your typical plan recordkeepers, who don’t take over fiduciary responsibilities at all, but service providers whose business is to relieve plan sponsors of some or most of their fiduciary administrative responsibilities. Beginning in 2021, there will be a new option called a pooled employer plan, or PEP, that some employers may find attractive. The entity operating the PEP can take over much of the fiduciary responsibility.

None of these service arrangements provide a total litigation shield for company fiduciaries, as the company fiduciaries will still be responsible for prudently selecting and monitoring their plan providers. However, ERISA permits delegating day-to-day fiduciary responsibilities to ”named fiduciaries” such as 3(38) investment managers and 3(16) plan administrators. Further, hiring competent outside professionals, even if they just provide advice, will count in the plan sponsor’s favor when fiduciary processes are reviewed.

What to Do.

P&I writes that coverage limits are being reduced at the same time as premiums are increasing. Plan sponsors can obtain insurance from more than one provider to get around these limits if they can afford it. They can also compare quotes from insurers to get the best price rather than automatically renewing with their current providers. Remember that these policies are not standardized like bonding coverage-they will vary in important features such as deductibles, exclusions, payment of claims when there are other policies in effect, advancing litigation costs and the process for selecting counsel to handle the litigation. All of these factors should be part of the review of bids received. If third party fiduciaries have been hired, it is also important to insure that these outside fiduciaries are obligated in their services agreements to maintain their own fiduciary liability coverage.

Since plan sponsors need the best people serving as company fiduciaries, they can also agree to indemnify fiduciaries who act responsibly and in good faith to the extent insurance doesn’t cover them. Indemnification may not be as valuable as insurance due to state law limits on corporate indemnification and difficulties in pursuing indemnification claims if the plan sponsor is in financial difficulty. There may also be a dollar cap on the indemnification obligation, but indemnification can still serve as an alternative to or an additional backstop to insurance.

Plan sponsors may also wish to consider having participants sign mandatory arbitration agreements and class action waivers to try to avoid class action litigation altogether. The U.S. Supreme Court has upheld these agreements in the employment context, although they have a downside. Arbitration decisions typically can’t be appealed and may result in inconsistent decisions in different jurisdictions.

Of course, if the fiduciaries do get sued, that will also affect premiums, so good practices remain important. Fiduciaries should be required to get formal training about their responsibilities and how to fulfill them on a regular basis. Fiduciaries should not only follow a prudent process in fulfilling their responsibilities, but document how they have followed the process in writing.

Are Too Many Cases Being Settled?

The P&I article lists some staggering examples of individual fiduciary breach settlements. The number of settlements is also huge. Yet due to the scattershot approach of plaintiffs’ counsel in these cases, they are targeting fiduciaries who follow a sound process as well as those who haven’t fulfilled their responsibilities well. Defendants who can point to a good record and aggressively pursue the litigation may prevail. This may be on a summary judgment motion or motion to dismiss that avoids the need for a full scale trial. We have, in fact, had surprisingly few of these cases actually go to trial given the number that have been filed.

Pursuing litigation is expensive, and settling, particularly after losing early motions, can make sense if you view these cases individually. However, in the aggregate, lucrative settlements encourage plaintiffs’ counsel to keep filing more lawsuits. Plan sponsors, insurers and fiduciaries should consider whether greater reluctance to settle cases in which they can put up a good defense might be one way to help stem the tide of litigation and help keep future premiums under control.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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