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A Buyer's Guide to Insurance for Fiduciaries of ESOPs and Other Benefit Plans

An NCEO Issue Brief

by Theodore M. Becker and Richard J. Pearl

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Over the past decade, many class actions and other lawsuits have been brought against benefit plan fiduciaries, and many of these suits have involved ESOPs. The cost to defend and resolve these lawsuits can be substantial, and the fiduciaries can be held personally liable under ERISA. Traditionally, the company sponsoring the plan agreed to pay the fiduciaries' defense costs and indemnify the fiduciaries against a claim. However, such agreements have come under attack. An alternative is to use insurance. This publication addresses the complex issues relating to insurance for ESOP and other benefit plan fiduciaries. It explains what fiduciary liability insurance is supposed to accomplish and how seemingly minor differences in policy language can result in widely varying coverages.

For more information on this topic, see our issue brief on Legal and Practical Considerations for ESOP Fiduciary Liability Insurance.

Publication Details

Format: PDF, 34 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (August 2011)
Status: Available for electronic delivery

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Contents

What Is Insurance?
Navigating the Insurance Policy
The Declarations
The Form Policy
The Insuring Agreement
Exclusions
Definitions
General Conditions
The Endorsements
Schedules

What About Those Other Policies—Do They Cover ERISA Claims?
Directors and Officers Policies
Commercial General Liability Policies
Employment Practices Liability Policies
Fidelity Bonds
What the Fiduciary Liability Policy Should Cover
Comparison Shopping
Analyzing Particular Clauses
Defense Provisions: The Duty to Defend vs. the Duty to Pay Defense Costs
Right to Select Counsel
Ability to Control the Defense
Complete or Partial Defense
Eroding Policy Limits
Limits on Attorney Rates and Other Billing Limitations
Timing of Payments
Ending the Defense Obligation

Definition of "Defense Costs"
Definition of "Insured"
Definition of "Plan"
Definition of "Wrongful Act"
Definition of "Claim"
Coverage for Penalties and Fines
Exclusion for Criminal or Fraudulent Conduct
The Benefits Due Exclusion
The Prior and Pending Litigation Exclusion/Prior Notice Exclusion
Prior and Pending Litigation Exclusion
Prior Notice Exclusion

Exclusion for Claims Seeking Non-Monetary or Injunctive Relief
The Insurer's Right to Recoup Defense Costs
Allocation Clauses
Deductibles/Retentions
Conclusion

Excerpts

From the section "Defense Provisions: The Duty to Defend vs. the Duty to Pay Defense Costs"

One of the most important protections provided by an insurance policy is the insurer's defense obligation. If a claim is made against an insured, the defense obligation should provide coverage for the costs of a defense, including, at times, costs that may have been incurred to investigate a claim, even if such costs might not be considered costs to defend against the claim itself.

Not all insurance policies provide the same type of defense coverage. Indeed, the defense coverages provided by two otherwise comparable policies can differ materially. If you do not understand the defense coverage provided by your policy, you could be in for quite a shock if an ERISA claim is brought and the insurer refuses to pay your defense attorney's customary rates, refuses to pay your defense invoices as they come due, or appoints a law firm of its choosing that you would not have selected if given a choice and begins making all of the strategic decisions regarding the defense of the claim.

To understand how these issues might arise, you should understand the two general types of insurer defense obligations: the duty to defend and the duty to pay defense costs. Here are some important differences:

Right to Select Counsel
The duty to defend requires the insurer to provide a complete defense to a claim against an insured. In most cases, the insurer has the right to select counsel of its choice (subject to an insured's objection, which may be raised in very limited situations), and most insurers have trusted counsel or "panel" counsel that they have approved in advance. In the fiduciary liability field, insurers may have selected experienced and reputable counsel as panel counsel, so insureds should not necessarily be reluctant to employ counsel selected by the insurer.

The duty to pay defense costs requires the insurer only to pay the costs of the insured's defense. The insured may be able to choose its own counsel, subject to the insurer's consent, although some policies still may have panel-counsel requirements for certain claims, particularly larger claims, even under policies that provide for reimbursement of the defense costs by the insurer.

Before choosing a policy, ask the insurer to provide you with a list of its approved panel counsel so you will know in advance of a claim which defense counsel may be available to defend you. Certain insurers are familiar with the very best ERISA defense attorneys and choose experienced panel counsel who are well-qualified to effectively defend and settle claims on favorable terms.

Ability to Control the Defense
In most states, an insurer defending a claim has the right to control the defense. Some years ago, this right was considered essentially unfettered, and an insurer could control most if not all aspects of the defense, including strategic decision-making, settling at any time and on terms of the insurer's choosing, and refusing to settle if the insurer wanted to take the case to trial against the insured's wishes. In many states, insurers no longer have the unfettered discretion they used to have, although an insurer who is defending still has the right to control the defense to a large extent.

An insurer with a duty to pay defense costs does not control the defense; indeed, some recent court decisions have questioned whether the insurer has the right to participate in the defense at all, and some courts have not permitted insurers to review certain attorney-client privileged communications between the attorneys and the insured (although cooperating with an insurer might be to the insured's benefit). Under a duty-to-pay-defense-costs policy, the insured makes strategic decisions, although the insured still must consult the insurer before settling.