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Legal and Practical Considerations for ESOP Fiduciary Liability Insurance

An NCEO Issue Brief

by Nicholas Nierengarten, Susan Lenczewski, and Jeff Gelburd

This is one of our archived publications; specialized publications that have been removed from our main publication list and are not being updated, but are are still available for purchase, although sometimes only in digital form.

$15.00 for NCEO members; $25.00 for nonmembers

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Individuals serving as trustees or other fiduciaries of an ESOP face enormous personal exposure under ERISA for breach of fiduciary duty. The easiest and, therefore, most prevalent method for reducing or eliminating that personal financial exposure is indemnification by the company that sponsors the ESOP. However, indemnification may not be available as a matter of law or where the ESOP sponsor is insolvent or in bankruptcy, or to the extent its assets are either illiquid or insufficient to satisfy its indemnification obligations. Fortunately, commercial liability insurance continues to be a viable supplement or alternative to indemnification for transferring fiduciary risk away from the fiduciaries and onto parties better able to satisfy such liability. The first article in this publication addresses whether and to what extent the fiduciary liability insurance coverage offered by various insurers adequately protects trustees and other fiduciaries from potentially ruinous financial liability for breach of fiduciary duty. The second article discusses several crucial issues to consider when purchasing a fiduciary liability policy, plus important tips for applying for fiduciary liability insurance.

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.

Publication Details

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
ERISA Fiduciaries
Remedies for Violation of ERISA
Defense and Indemnification of ESOP Fiduciaries

Fiduciary Liability Insurance
Insuring Agreement
Policy Exclusions
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
Policy Limits
What to Expect When Filing a Claim
Policy Exclusions

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.