What is Fiduciary Liability Insurance?

Fiduciary liability insurance is a type of insurance coverage that helps to cover legal liability that may come about when there is a failure to act in a manner that is in compliance with specific governmental regulations regarding the operation of a trust or other type of benefit plan offered to an employee. In the United States, the laws that govern fiduciary liability are structured to support the Pension Reform Act of 1974. The resulting laws and regulations require fund administrators to conduct fiduciary plans, including life insurance and medical expense plans, in accordance with the conditions set forth in those laws. In the event those regulations are breached, fiduciary liability insurance aids in protecting the administrators by offsetting all legal liabilities arising from the breach, which in turn also helps to protect the interests of the employees participating in the plan.

In many cases, insurance providers will offer employers a combination of fiduciary liability insurance and employee benefits liability coverage as a means of providing a total solution for all parties that are affected by some type of non-compliance with federal laws. While it is possible to secure both types of coverage under a single plan and pay a single premium, there is some disagreement on the wisdom of this approach. This is because there is more opportunity for employee liability claims to be submitted, which over time would have an adverse effect on the total level of protection provided under the terms of the dual policy. For this reason, many employers choose to go with two separate plans.

There are many situations in which securing fiduciary liability insurance is considered a strategic move. Employers who offer retirement and other benefits to employees are often cited as ideal candidates for this type of coverage. In addition, trustees who are responsible for administering benefits from a trust may also find liability insurance of this type to be helpful. It is important to note that fiduciary liability insurance provides protection in situations that are not generally covered under the terms of employment liability insurance. This means even officers of the company who are charged with overseeing a pension plan may find this type of insurance useful in protecting themselves in the event that there is some question about how the funds are administered.

As with most types of insurance coverage, fiduciary liability insurance is obtained with the hope that the coverage never has to be used. While expensive, the costs associated with securing and maintaining this type of insurance plan can be offset by a single incident. Since the plan makes it possible to cover all liability associated with the incident, the administrator or fiduciary does not have to be concerned about the seizure of personal assets or the liquidation of key company assets that could lead to the failure of the business, the loss of employment for a number of people and all the other repercussions that would otherwise ensure if damages were awarded in the event that fiduciary misconduct was proven in a court of law.