Archived Insight | February 24, 2020

How Much Fiduciary Liability Insurance Do I Need?

Many governmental benefit plan trustees mistakenly believe they do not need fiduciary liability insurance. Although that may have once been true, recent changes have significantly altered the legal environment. Lack of coverage can subject you to large personal fines and legal costs, which have led some trustees into personal bankruptcy.

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Absolute protection is a thing of the past

Plan trustees like you have always been personally liable for the decisions made and the actions taken on behalf of the plans you serve. But you are protected by two legal structures—indemnification and sovereign immunity.

Indemnification and sovereign immunity are potential protections against fiduciary liability and, when they provide protection, can be excellent. However, they can no longer be trusted to always work as desired and needed by the trustees. Federal law and case law have significantly weakened their protections to the point where—as many trustees have discovered—trustees are personally financially vulnerable.  In those instances where they do not work, the consequences can be emotionally and financially catastrophic.

What happened to indemnification and sovereign immunity?

Indemnification by the related public sector entity means you generally receive legal representation and protection from financial liability if someone sues you in your capacity as a trustee. Case law over the past several years provides relevant information about indemnification. Indemnification comes with conditions.

For example, you must have been acting within your capacity as a trustee and in good faith. Lawsuits against trustees rarely limit their allegations to these two standards. Further, the jurisdiction’s legal department must review and approve any request for indemnification. This can take time. In one case, approval took approximately 10 years and several lawsuits. In the interim, the trustees had to provide their own legal defense. Some had to file for personal bankruptcy.

Sovereign immunity is based on the centuries-old concept that royalty could not be sued without their permission. Although elements of this idea prevail, even in the U.S., you can no longer assume that sovereign immunity offers broad and sweeping protection. In fact, it is safest to assume it will not prevail when considering how to protect your personal assets (as well as the plan’s).

Over time, between federal law and case law, the availability and scope of sovereign immunity has been eliminated or limited. For example:

The Federal Tort Claims Act waives the immunity if a wrongful act of a federal employee causes damage. That means citizens can pursue some tort claims against the government.

The Tucker Act waives the immunity over claims arising out of contracts to which the federal government is a party.

Consider these examples of relevant case law:

In Northern Insurance Company of New York v. Chatham County,the U.S. Supreme Court found that only a state and arms of the state possess immunity from suits authorized by federal law.

In Jinks v. Richland County, South Carolina, the State’s supreme court found that cities and municipalities lack sovereign immunity.

In Lake Country Estates, Inc. v. Tahoe Regional Planning Agency,the U.S. Supreme Court found that counties are not generally considered to have sovereign immunity, even when they “exercise a slice of state power.’”

How to protect yourself

Fiduciary liability insurance is a prudent way to protect you and your plan against unforeseen risks. However, purchasing a policy requires understanding which type of fiduciary liability policy affords the broadest protection. See the box below.

There is no standard fiduciary liability insurance language. It varies by carrier and over time based upon factors such as law (federal, state and case), profitability, competition and carrier priorities.

Given these factors, obtaining the broadest protection requires technical knowledge by a specialized, qualified insurance professional. As a result, your first priority is to hire such a professional to guide you and your board through the purchase. Most carriers, particularly those that specialize in governmental fiduciary liability insurance, will only work through an insurance professional.

At a minimum, a specialized, qualified insurance professional is a broker/agent that:

  • Specializes in governmental plans

  • Is knowledgeable about industry exposures and the various insurance carrier policies

  • Has a substantial book of governmental fiduciary liability insurance

  • Has a large professional staff with excellent negotiating skills and leverage

  • Is available for questions and/or meetings

  • Offers ancillary services, such as knowledge-enriched websites and periodic webinars.

It’s important to perform due diligence to find the best insurance professional. This will position the plan to identify and purchase an excellent fiduciary liability insurance policy. Most importantly and at a minimum, the policy should provide very broad defense coverage and adequate limits of liability, which means expert legal counsel and appropriate limits to cover their costs, and any ultimate settlement or judgment.

Defining the broadest protection

No fiduciary liability policy provides absolute protection. Policies may be “narrow” (offering limited coverage) or “broad” (offering broader coverage). Carriers may offer this coverage as a “low” or “high” priority. The “low-priority” policies usually provide limited coverage and minimal limits of liability. A “high priority” means the carrier has done its research and made a strategic decision to offer this coverage in a meaningful way. These carriers usually hire expert underwriters and their policies usually provide much broader terms and conditions.

However, all policies will contain definitions and exclusions that will either limit or eliminate coverage. Over time, even a highly committed carrier will change its policy language and scope of coverage to respond to factors such as profits or losses and changes in their strategic priorities.

It is the role of the professional insurance broker to have the knowledge and expertise to work within this environment and find the broadest protection for you and your plan.

It's time to act

Over the past several years, case law has demonstrated the constraints and limitations of indemnification and sovereign immunity as they apply to fiduciary liability. Further, insurance carrier experience has proven that such claims can result in settlements or judgments in the millions of dollars.

Your best protection is fiduciary liability insurance purchased through an insurance professional. Relying only on indemnification and sovereign immunity, may leave you exposed to legal costs and, in the worst-case scenario, even personal bankruptcy.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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