PSNC 2010: Bonding/Fiduciary Insurance

August 3, 2010 ( – A panel at the PLANSPONSOR National Conference in Chicago, Illinois, gave attendees an exhaustive list of types of litigation that would trigger fiduciary insurance coverage.

Douglas Morris, VP-Retirement Services and Lockton Financial Advisors, LLC, said fiduciary coverage helps protects the assets of the company, personal assets of plan fiduciaries, and litigation costs. H. Douglas Hinson, Partner at Alston & Bird LLP, warns that coverage does not provide benefits if a participant wins litigation. He adds that a fiduciary insurance policy also excludes equitable relief under Employee Retirement Income Security Act section 502(a)(3).  

Trustees, third party administrator, or other third parties are not covered by the policy, Hinson says. He notes that even if a sponsor’s agreement with service providers say the sponsor will indemnify the provider, fiduciary insurance won’t cover that.  

Before buying fiduciary insurance, Casey Zgutowicz, VP-Account Executive in the Financial Services Department of Lockton Financial Advisors, LLC, says sponsors should do a total risk analysis including benchmarking based on plan size and loss probability forecasting. He adds that sponsors should look at a qualitative approach to risks, asking what is specific to their plan, looking at the type of plan and investments, and related companies, industry, and financial condition.  

Hinson warns that sponsors should watch for the practice of combining limits of the fiduciary policy with the Directors & Officers policy. That will be a problem particularly if there is both shareholder litigation and participant litigation as is often the case in a stock drop suit.  

He also warns that different carriers handle counsel differently. Some have a “panel counsel” list of counsel across the country that a sponsor can use.  

In determining the coverage amount to buy, Hinson says sponsors should consider prior litigation similar to what they might get sued for, looking at settlement amounts as well as the cost of company exposure. In addition, sponsors should look at how much money is invested in the riskiest asset of the plan or largest investment option.  

Zgutowicz says sponsors should also consider the size of the plan and size of the firm.  

Hinson concludes that while sponsors should buy fiduciary insurance to cover a loss, they should have a well-documented fiduciary process in place to avoid claims in the first place.  

Audio of the panel presentation is here.