By Patrick J. Dixon, Account Executive, and Jeffrey S. Gelburd, Vice President, Murray Insurance
Fiduciary Liability
The majority of insurance companies providing fiduciary liability insurance offer a similar policy form containing similar definitions, exclusions, and policy extensions. However, there are important areas where they differ, as described below. It is important these areas are confirmed either through the insurance broker offering the coverage or through the insurer directly.
- ESOP Exclusion: Not many, but some, policies still contain an outright ESOP exclusion. In those cases, the insurer would need to attach an endorsement confirming the ESOP is covered.
- ESOP Deductible: Also, check to see if the policy contains a higher deductible for claims involving the ESOP. The fiduciary policy generally has one deductible for all claims. However, with some insurers, the ESOP would have its own higher deductible.
- ESOP Exclusion on the D&O: If D&O (directors and officers) insurance is purchased along with the fiduciary coverage, some insurers are putting an ESOP exclusion (or a major shareholder exclusion) on the D&O form. This is especially true if the policy provides separate limits of liability for the D&O and fiduciary coverages.
- Non-Stacking Endorsement: Another area to be mindful of when both coverages are purchased is the insurer may put on a “non-stacking” endorsement when two separate limits are provided on the policy. (Stacking is when more than one policy is used to cover the same event.)This endorsement will limit the policy coverage to the one limit instead of two (D&O and fiduciary).
Trustee Liability
Most of these policies are provided on a “Miscellaneous Professional Liability” errors and omissions (E&O) form with endorsements attached that modify the policy’s coverage. Since fiduciary exposure is being covered on an E&O policy form, endorsements are required to essentially convert them into acting like ERISA liability insurance policies. Each insurance company offering this coverage differs in terms of what is being covered and endorsements they want to add onto the policy.
- Definition of Professional Services: When reviewing a proposal for this type of insurance, it is important to note that the outside trustee shouldn’t rely solely on the policy description of professional services listed in the policy form. The declaration page on the policy needs to be amended to include ESOP trustee services. Furthermore, as a recent case highlights, the professional services definition alone is just one component to finding appropriate coverage. In a dispute between an insurance carrier and insured (the plaintiff), the plaintiff argued that since the policy had the correct professional services definition, the insurance company should have known that there was ERISA exposure and thus provided coverage. The plaintiff argued that coverage was therefore illusory, but the court disagreed. This highlights the importance of negotiating the following coverage items.
- ERISA Liability Exclusion: First and foremost, it should be confirmed that this policy form does not have an ERISA liability exclusion. Most policies contain such an exclusion and should therefore be amended to apply only to the trustee’s own plans and not to those they provide professional services for.
- Regulatory Coverage: Equally important is whether there is any limitation on the coverage afforded to claims by or brought on behalf of a regulatory government body (i.e., Department of Labor). Most policies are “silent” on regulatory matters, meaning that they neither expressly provide nor exclude coverage. It is preferable to have an affirmative endorsement. A minority of base E&O policies contain an outright regulatory exclusion and need to be endorsed accordingly.
Valuation Firms
- ERISA Liability Coverage: Although business valuation firms have not been the target of DOL actions, it is best to confirm the policy does not have an ERISA liability exclusion.
- Definition of Professional Liability Services: Additionally, review the description of the covered services often found on the Declaration Page of the policy. Make sure it matches up with the services being offered to the clients.
Policy Liability Limits
A final word about the limits of liability any of the above policies discussed will provide to the ESOP company, trustee, or business valuation firm.
Keep in mind that these policies generally work the same way when it comes to how defense costs (such as legal fees paid to defend the policyholder on a claim or suit) are paid by the insurance company. In most cases, defense costs will erode the policy limit shown on the policy. With defense costs rising, they can eat up quite a bit of the policy limit, leaving less coverage for any ultimate award or settlement. So while you may think a $1MM policy limit is a great deal of coverage, defense costs will reduce what is left once the claim or suit is near settlement. Currently, policy limits being purchased now for these policies described above are at least $2MM and more depending upon the size of the ESOP company or the client size of the trustee or business valuation firm. Your insurance broker should be available to consult on the appropriate insurance limit you should purchase.