Legal and Practical Considerations for ESOP Fiduciary Liability Insurance
An NCEO Issue Brief
by Nicholas Nierengarten, Susan Lenczewski, and Jeff Gelburd
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Our related publication A Buyer's Guide to Insurance for Fiduciaries of ESOPs and Other Benefit Plans discusses fiduciary liability insurance from the standpoint of a buyer's guide.
Format: PDF, 28 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (October 2011)
Status: Available for electronic delivery
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Insurance for ESOP Fiduciaries: Policy Terms and Legal Considerations
ERISA Regulatory and Enforcement Framework
Remedies for Violation of ERISA
Defense and Indemnification of ESOP Fiduciaries
Fiduciary Liability Insurance
Defense of the Insured
Fiduciary Liability Insurance
Considerations When Purchasing a Fiduciary Liability Policy
"Claims Made" Form
"Duty to Defend" or "Pay on Behalf" Form
What to Expect When Filing a Claim
Applying for Fiduciary Liability Insurance
From "Insurance for ESOP Fiduciaries: Policy Terms and Legal Considerations"As noted above, ERISA provides for fines and penalties as well as an award of attorney's fees to the prevailing party. Fines and penalties are typically excluded from coverage with a limited carveback for fines and penalties awarded under ERISA Sections 502(i) and 502(l). Allied World, for example, excludes from the definition of "loss" fines and penalties except for 5% or less of a civil penalty awarded under ERISA Section 502(i) and 20% or less of a civil penalty imposed under ERISA Section 502(l). Other policies contain similar limitations within the definition of "loss." All other fines and penalties under ERISA are excluded.
The Travelers policy excludes "civil or criminal fines (except settlement fees pursuant to Insuring Agreement B and civil penalties under Sections 502(i) and 502(l) of ERISA); sanctions; liquidated damages; payroll or other taxes; or damages or types of relief deemed uninsurable under applicable law." While the Travelers policy does not cap the amount payable for fines and penalties under ERISA Sections 501(i) or 502(l), it limits such coverage to "settlement fees" subject to a substantially lower separate sublimit. Zurich simply excludes from the definition of "loss" fines and penalties "which are uninsurable under the law pursuant to which this Policy is construed." Thus, it is unclear whether an award of fines and penalties would be covered without knowing the applicable law governing the policy. This introduces considerable uncertainty into determining whether coverage is adequate.
Whether an award of plaintiff's attorney's fees is covered also presents a mixed bag. Significantly, the Allied World policy expressly includes within the definition of "loss" "costs or fees awarded in favor of the claimant." Similarly, the Travelers policy defines "loss" to include "legal fees and expenses awarded pursuant to a court order or judgment." Other policies may cover an award of attorney's fees by implication. The Hartford policy, for example, defines "loss" to mean the amount the insureds are legally liable to pay as a result of a covered claim, including "compensatory damages" and "costs awarded pursuant to judgments." Other policies contain similar formulations. Since an award of attorney's fees is not otherwise excluded, such an award could potentially fit within the definition of a loss.