Articles

Do Public Sector Boards Need Fiduciary Liability Insurance?

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. We explore the question: as a member of a public sector board, do you need fiduciary liability insurance coverage? 

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Gone are the days of absolute protection. What’s going on?

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.

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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