Do You Need Fiduciary Liability Insurance?
If your business manages employee benefits, retirement plans, or acts in any financial capacity on behalf of others, fiduciary liability insurance could be essential protection you didn’t know you needed. This specialized coverage safeguards businesses from costly lawsuits related to their fiduciary responsibilities—and the financial consequences can be severe without it.
Like any insurance term, fiduciary liability coverage usually requires a bit of effort and research to understand its nuances. So let’s break down what fiduciary liability insurance is, why you might need it, and how to make the most of it.
What Is a Fiduciary?
A fiduciary is someone who has a legal duty to act in another person’s best financial interest. In business contexts, this typically applies to:
- Plan administrators who manage 401(k) or other retirement plans
- HR managers who oversee employee benefit decisions
When you take on fiduciary responsibility, you’re legally required to make decisions that benefit the plan participants, not your company’s bottom line.
What Is Fiduciary Liability Insurance?
Fiduciary liability insurance protects businesses and individuals from claims alleging violations of their fiduciary duties under the Employee Retirement Income Security Act (ERISA). This coverage is specifically designed for breaches of fiduciary responsibility—something general liability insurance won’t cover.
Unlike general liability insurance, which covers property damage and bodily injury, fiduciary liability insurance focuses exclusively on financial harm caused by mismanagement of employee benefits. It’s also distinct from professional liability insurance, which covers errors in professional services rather than fiduciary breaches.
What Does Fiduciary Liability Insurance Cover?
The cost of a lawsuit against a business can range from a few thousand dollars to millions, depending on the circumstances, and for a small business, even a small lawsuit can be disastrous without coverage. If your business finds itself facing such a lawsuit, what will insurance actually cover? Here’s what you can typically expect for fiduciary-related claims:
- Defense costs for lawsuits alleging fiduciary breaches
- Settlements and judgments from successful claims
- Regulatory investigations by the Department of Labor
Common covered situations include choosing high-risk or poorly performing investments that don’t serve participants’ best interests, failing to follow plan guidelines, and not clearly disclosing fees like administrative or investment costs. These mistakes can lead to confusion or mistrust that may lead participants to seek legal action to recover their losses.
Who Needs This Coverage?
Any business that sponsors employee benefit plans should consider fiduciary liability insurance. This includes:
- Small businesses with 401(k) plans
- Companies offering health savings accounts
- Organizations providing any ERISA-covered benefits
Even if you hire third-party administrators, you may still retain fiduciary liability for certain decisions, leaving you vulnerable without this coverage.
Common Questions About Fiduciary Liability
Q: Does my general business insurance cover fiduciary breaches?
A: No, general business insurance typically does not cover fiduciary breaches. You need specific fiduciary liability insurance for that.
Q: If I hire professional plan administrators, am I free from liability?
A: Not entirely. While professional administrators handle many responsibilities, your business is still responsible for selecting and monitoring them.
Q: Isn’t fiduciary liability insurance only necessary for large corporations?
A: Not at all. Small businesses often face higher risks, as they typically lack dedicated benefits specialists to manage compliance and oversight.
Q: Aren’t fiduciary breaches rare?
A: Unfortunately, no. Errors in benefits management, compliance issues, or improper oversight can lead to fiduciary breaches, even in well-run organizations.
Protect Your Business with Bethany Insurance
Fiduciary liability insurance is an essential coverage for any business managing employee benefits. The cost of coverage is minimal compared to the potential financial devastation of an uninsured fiduciary lawsuit, and you can often find affordable ways to include this insurance in a business owner’s policy.
At Bethany Insurance Agency, our experienced professionals understand the complexities of fiduciary liability and can help you find the right protection for your business, without breaking the budget. Contact Bethany Insurance today to discuss your insurance needs and ensure your business stays protected.
