A Focus on Fiduciary Insurance

Serving as a plan fiduciary is getting riskier, at least from a litigation standpoint. Last year saw a near-record 155 fiduciary class-action lawsuits filed, according to an analysis by Encore Fiduciary.

And while most of those lawsuits center on excessive fees, plaintiff firms are also expanding their target areas, with a rising number of cases looking at plan forfeitures (how plans use unvested employer contributions) and tobacco-related surcharges on group health plans. To reduce their risk in the face of such trends, plan sponsors are paying closer attention to the terms of their fiduciary liability insurance policies and considering increasing their coverage limits.

“Fiduciary insurance has been around for a long time, but it’s now come to the forefront because, historically, before these cases were filed, you rarely needed to use it,” says Rick Nowak, a partner in law firm Mayer Brown, who co-leads the firm’s practice on litigation related to the Employee Retirement Income Security Act. “There weren’t many cases challenged asserting fiduciary breach claims.”

That trend appears poised to continue, as new plaintiff firms enter the space and often file similar suits against dozens of plan sponsors at once. Although a bill  in Congress is trying to make such cases harder to bring.

The growth of ERISA litigation has “definitely changed the insurance industry, in that insurers are worried about systemic risk across their entire book of business,” says Kate Maybee, a product leader for Fiduciary Liability Insurance at Marsh.

Still, not every plan sponsor has coverage: Aon’s 2025 Global Pension Risk Survey found that just over three-quarters of respondents had a policy, and confusion about such insurance persists. Some plan sponsors continue to conflate fiduciary liability insurance and ERISA bonds, underestimate personal exposure, and remain unclear about what and who is covered under a policy.

Defending against ERISA lawsuits

Fiduciary liability insurance provides coverage for a plan sponsor and its subsidiaries, the plans themselves, and individual fiduciaries in the case of an ERISA lawsuit. It typically does not cover external consultants or vendors that work with the plan, even if they have fiduciary responsibility. The policy pays for defense costs (often the biggest component,) settlements and judgments, and some regulatory investigations related to fiduciary duties.

“Like other forms of insurance, whether it’s E&O [Errors and Omissions] policies and the like, fiduciary insurance is designed to help protect and provide a backstop in case there’s excessive liability or costs associated with the defense of the claims.” Nowak says.

Experts say recognizing the limitations of fiduciary liability insurance is just as important as understanding the areas where it provides coverage. For example, fiduciary liability insurance does not cover “benefits due” when a plan underpays participants due to a miscalculation, although it would cover defense costs and damages that arise from a related suit.

Fiduciary liability insurance does not replace an ERISA fidelity bond, which covers the theft or embezzlement of plan assets. Most plans are required by law to have an ERISA bond valued at 10% of plan assets.

While fiduciary liability insurance is not legally required, experts say that it’s essential coverage for most plans.

“You can do everything right and still get sued,” says independent employee benefits attorney Fred Reish. “Even if you’re not liable, it could take you hundreds of thousands of dollars, maybe even millions to get to that point. And you may decide to settle rather than fight it all the way to the end, because the litigation process is highly unpredictable.”

About three-quarters of today’s fiduciary breach cases make it through the motion stage (when a judge could dismiss it), and given how fact-intensive these cases are, discovery can be very expensive, says Jay Desjardins, the fiduciary liability practice leader in the financial services group at Aon.

“The litigation is a very real threat, and it’s very expensive,” he adds.

Protecting individuals

Without liability insurance, committee members and other fiduciaries could face personal liability.

“Fiduciary liability insurance is meant to protect the personal assets of the individuals,” Marsh’s Maybee says. “Because if they’re sued and they don’t have insurance, you could be looking at the house, car, etcetera, if they can’t be indemnified.”

While there’s no precise formula for determining the “right” amount of fiduciary coverage a plan needs, experts recommend that plan sponsors determine how much to purchase by benchmarking their limits against other plans of a similar size and type and adjusting based on their risk profile and premium budget. They should also bring in legal counsel to review the policy.

“This is not easy for somebody to do on their own,” Reish says. “It’s written in legalese, and it’s technical gibberish to someone who’s not used to reading these policies.”

As plaintiff firms continue expanding the types of claims they are filing to focus not only on retirement plans, but also on group health plans, they are also starting to target smaller companies. Research from Chubb last year found that the size of a company’s 401(k) or 403(b) plan had no bearing on its risk of being sued over its health plan, and a quarter of the companies sued over their group health plan had retirement plans with less than $500 million in assets.

So, even smaller firms might want to consider whether fiduciary liability insurance makes sense for their situation, says Steven Cohen, senior vice president, professional and executive risk, at insurance brokerage Lockton.

“As an employer, even the smallest kind, I just don’t think fiduciary liability [insurance] is a luxury,” he says. “I know it feels less important than, say, property insurance or compensation insurance. But fiduciary liability is right up there as one of the things you just must have, even as a startup.”

 

More on this topic:

	What Does It Mean to Be a Fiduciary?
	How Does Outsourcing Affect Fiduciary Duties?
	How the 401(k) Alts Debate Raises Fiduciary Stakes
	Keeping the Missing Participant Search Compliant