After a decade-long bull market, the financial markets declined severely in March 2020 based on the financial effects of the coronavirus pandemic. And while the market has recovered some of those losses, it appears that we are in for an extended period of market turmoil as the economy staggers under the government-enforced shutdown to combat the virus. The question we have been asked the most since the beginning of the crisis is whether employee benefit plans and their fiduciaries will be sued for investment losses, and how will fiduciary liability insurance policies respond. We cannot predict the future, but we can draw on our experience from prior recessions and declining markets to provide some context and guidance. Our prior post focused on potential coronavirus-related claims against health plans. This article focuses on retirement plans.
The Current Legal Landscape
When the famous criminal Willie Sutton was once asked why he robbed banks, he responded “because that’s where the money is.” For the last ten years, class action plaintiff law firms have been suing defined contribution plans for purported excessive fees. These plaintiff firms are attracted by the large asset base of many defined contribution plans, which allows them to allege substantial damage models based on allegations that higher investment and record-keeping fees deprived participants of better returns in 401(k), 403(b) and other defined contribution plans. Plaintiffs have filed dozens of cookie-cutter cases alleging the same core allegations that some of the plans’ record-keepers charged excessive fees or the investment options performed inadequately:
- That the plan fiduciaries failed to monitor the performance of actively managed plans that under performed the results of index funds;
- That the fees for individual plan investment choices were higher than Vanguard or other institutional share class index fund fees; and/or
- That the record-keeping fees charged to plan participants were excessive.
On March 18, 2020, the President signed the Families First Coronavirus Response Act (“Families First Act”), and signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020. The Families First Act requires group health plans, health insurers and government programs to provide free coronavirus testing, and the CARES Act clarifies some of the health care plan provisions. Like any new legislation, coverage issues and questions will arise, and will likely lead to participant benefit and provider reimbursement disputes. This article addresses how your fiduciary liability insurance coverage, particularly for health and welfare benefit plans, would respond to this new legislation. (more…)
ERISA contains a unique – and often confusing – statute of limitations provision. Someone suing the plan has six years in which to bring the lawsuit, but only three years if they have “actual knowledge” of the alleged breach. Plans often attempt to dismiss fiduciary breach claims under the shorter three-year statute of limitations, particularly for benefit claims that are deemed untimely. The question raised to the Supreme Court in Intel Corporation Investment Policy Committee v. Sulyma, is what constitutes “actual knowledge,” specifically whether the actual knowledge standard is met if the plan has sent adequate disclosures to participants that have been ignored or not read by the participant.
The Supreme Court ruled on February 26 that “actual knowledge” means subjective knowledge, not imputed knowledge from plan disclosures: that the shorter three-year actual knowledge limitations period does not apply if the participant has not read – even if they have received – plan disclosures. While the decision is unremarkable to the extent that the court enforced the plain meaning of the statute, the likely implication of this decision is that many benefit cases will now be more expensive to defend without the ability to enforce the shorter statute of limitations.
ERISA’s Statute of Limitations
Lawsuits under ERISA must be filed within one of three time periods, each with different triggering events. The first begins when the breach occurs. Specifically, under §1113(1) – considered a statute of repose – suit must be filed within six years of “the date of the last action which constituted a part of the breach or violation” or, in cases of breach by omission, “the latest date on which the fiduciary could have cured the breach or violation.” The second period – a statute of limitations – accelerates the filing deadline, beginning when the plaintiff gains “actual knowledge” of the breach. Under §1113(2), suit must be filed within three years of “the earliest date on which the plaintiff had actual knowledge of the breach or violation.” The third period, which applies “in the case of fraud or concealment,” begins when the plaintiff discovers the alleged breach. In such cases, suit must be filed within six years of “the date of discovery.”
The Intel Imprudent Investment Lawsuit
As a leading underwriter for fiduciary liability insurance, we are often asked about the difference between a Fiduciary Liability Insurance policy and an Employee Benefits Liability (EBL) insurance policy. Namely, some plan sponsors believe that they do not need to spend additional premium dollars to purchase fiduciary liability insurance when they have EBL coverage as part of their commercial package general liability insurance policy. As discussed more fully below, including an analysis of a recent court case, a fiduciary liability insurance policy provides significantly broader coverage than the limited administration coverage in a standard EBL policy to protect employee benefit plans and its fiduciaries. Even the defense of routine benefit claims can be excluded from coverage under an EBL policy, which is why plan sponsors need to protect their plans and plan fiduciaries with quality fiduciary liability insurance coverage.
EBL Insurance Coverage
The standard Employee Benefits Liability Insuring Agreement[i] provides that the Insurer “will pay those sums the insured becomes legally obligated to pay as damages because of acts, errors, or omissions arising out of the ‘administration’ of your ‘employee benefit program.’ “Administration” is defined to mean: “(a) Counseling employees, including their dependents and beneficiaries with respect to the ‘employee benefit program’; (b) Handling records in connection with the ‘employee benefit program’; (c) Effecting or terminating any employee’s participation in a plan included in the ‘employee’s participation in a plan included in the ‘employee benefit program,’; or (d) interpreting the ‘employee benefit program.’ Administration does not mean the selection process of your ‘employee benefit program.’” “Employee Benefit Program” is defined to “include only the following: (a) group life, disability or dental, group accident or health insurance; unemployment insurance, social security benefits, workers’ compensation and disability benefits; (b) unemployment insurance, social security benefits, workers’ compensation and disability benefits; (c) The following plans but only if they are self-directed by the employee: (1) IRS qualified pensions; (2) 401K plans; (3) profit sharing plans only those plans that are IRS qualified and equally available to all full-time employees; and (4) stock subscription plans but only those plans that are IRS qualified and equally available to all full-time employees.”
The Insurance Services Office (ISO) EBL policy contains exclusions that limit the available coverage:
This insurance does not apply to:
(a) Dishonest, Fraudulent, Criminal or Malicious Act. Damages arising directly or indirectly out of any intentional, dishonest, fraudulent, criminal or malicious act, error or omission, committed by any insured, including the willful or reckless violation of any statute . . .
(d) Insufficiency of Funds. Damages arising directly or indirectly out of failure of performance of contract by an insured.
(e) Inadequacy of Performance of Investment/Advice Given With Respect to Participation. Any “claim” arising directly or indirectly out of: (1) the failure of any investment to perform; (2) errors in providing information on past performance of investment vehicles; or (3) advice given to any person with respect to that person’s decision to participate or not to participate in any plan included in the “employee benefit program.”
(g) ERISA. Damages for which any insured is liable because of liability imposed on a fiduciary by the Employee Retirement Income Security Act of 1974, as now or hereafter amended, or by any similar federal, state or local laws.
(h) Available Benefits. Any “claim” for benefits to the extent that such benefits are available, with reasonable effort and cooperation of the insured, for the applicable funds accrued or other collectible insurance.
(i) Taxes, Fines or Penalties. Taxes, fines or penalties, including those imposed under the Internal Revenue Code or any similar state or local law.
Although many companies modify the ISO language, the core EBL coverage is usually very similar. EBL provides coverage for “administration” of a company’s employee benefit plans. Administration is broadly defined to cover advice to participants, including interpretations of the plan as to whether something is covered, enrollment of employees in a plan, and handling plan records. The limitations of EBL coverage, however, are found in its multiple broad exclusions. For example, EBL coverage excludes any breach of fiduciary duty claim under ERISA or any fiduciary law. This excludes most claims against employee benefit fiduciaries, as even the most generic denial of benefit claims are usually styled as breaches of fiduciary duties against the plan administrator and its fiduciaries or trustees. The ISO form goes further to exclude any claim for “available benefits,” which excludes both defense and indemnity under the policy. While this benefits exclusion is not contained in every insurer’s EBL coverage, the ERISA exclusion is universal. Finally, the EBL policy excludes claims for funding of the plans, claims of dishonesty or malfeasance, and regulatory penalties are also excluded – all crucial liability risks faced by modern employee benefit plans.
Many fiduciaries find audits by the Department of Labor (DOL) mysterious, so it helps when the DOL provides any type of guidance. The DOL’s Employee Benefits Security Administration (EBSA) recently released 2018 statistics for its enforcement of the Employee Retirement Income Security Act of 1974 (ERISA). When combined with EBSA’s recent commentary on its enforcement initiatives, fiduciaries can be better prepared to address compliance issues before a DOL audit. The following is an analysis of the recently released 2018 statistics, as well as a look at the “national enforcement projects” for EBSA investigators. EBSA continues to target its published enforcement priorities, is focusing on major cases, and is recovering higher overall amounts in its investigations. The Voluntary Fiduciary Correction Program also continues to grow.
2018 Statistics compared to 2017
One specific trend to note is the increase of monetary recovery by EBSA. In Fiscal Year 2018, EBSA closed 1,329 civil investigations, with 860 of those cases (64.7%) resulting in $1.1B monetary recoveries for plans or other corrective action. In comparison, during Fiscal Year 2017, EBSA closed more than 1,707 civil investigations with 1,114 of those cases (65.3%) resulting in $682.3M in monetary recoveries for plans or other corrective action. While EBSA closed fewer investigations in FY 2018 than it did in FY 2017, the total monetary recovery from enforcement actions increased by $400M from FY 2017, as detailed in the table below.
The ERISA-mandated recourse provision discussed in the preceding section – which applies if the fiduciary insurance is paid out of plan assets – means that a breaching fiduciary’s personal assets would still be at risk for all losses caused by the fiduciary notwithstanding the fiduciary insurance policy. To prevent the right of the insurer to recoup any payments from the individual fiduciary, therefore, the fiduciary liability insurance policy must include a “waiver of recourse” provision.
Fiduciary liability insurance and fidelity bonding are easily confused. A fidelity bond is a contract under which the issuer of the bond, typically a surety company or an insurance carrier, agrees to reimburse a benefit fund for losses caused by theft, fraud, or other dishonest acts covered by the bond. A fidelity bond covers losses due to intentional acts to deprive a benefit fund of fund assets. By contrast, a fiduciary insurance policy covers losses caused by negligence or other acts or omissions not intended to cause the benefit fund to lose assets. But unlike fiduciary insurance which is discretionary, fidelity bonding is mandatory under ERISA.
Who must be bonded? The ERISA standard is that each person who handles plan assets must be bonded. The ideal bond not only names the plan as the insured and covers the plan’s trustees and employees, but also covers any natural persons employed by a vendor who would be required to be bonded. The reason is that fund assets are often handled by third parties. Euclid Specialty’s coverage is even broader, expanding coverage to “… any other natural person who handles Employee Benefit Plan assets, whether or not required to be bonded …” With this language, coverage is automatic not only for the employees of a plan vendor, but also for the employees of entities typically exempt for ERISA’s bonding requirements, such as banks and insurance companies. An employee of a non-fiduciary service provider would also be covered if they embezzle plan assets. The key provision to review is the definition of “Plan Official” or “Employee” to ensure that your bond meets the ERISA requirement.
The modern fiduciary liability insurance policy will offer four basic coverage grants: (1) breach of fiduciary duty; (2) negligence in the administration of the plan; (3) voluntary compliance programs; and (4) regulatory penalties.
A fiduciary liability insurance policy is a contract designed to protect plan trustees, other fiduciaries and the employee benefit plan against claims alleging breach of their fiduciary duties to the plan or claims alleging they committed an error in the administration of the plan.
Euclid Specialty Managers, LLC is an insurance program administration company specializing in fiduciary liability insurance for employee benefit plans. We provide best-in-class fiduciary, crime/ERISA fidelity, cyber liability, EPL and other professional liability insurance coverages to protect the trustees of U.S. employee benefit plans. Our underwriters and claim professionals are experts in fiduciary liability and crime exposures, with decades of fiduciary experience for complex employee benefit plans.