Fiduciary Liability Revisited
Fine Tuning the "Blurred Line" between D&O & Fiduciary Liability Coverages

W. Meade Collinsworth CPCU, ARM, AIM, AAI

"ERISA" established four general standards of conduct for all fiduciaries:

1. The duty of loyalty to act for the exclusive benefit of the plan and its participants.
2. The duty of prudence to act reasonably with respect to plan matters.
3. The duty to diversify plan assets.
4. The duty to follow the terms of the plan documents consistent with the other three duties and not be in violation of the ERISA statute.

Federal courts have traditionally recognized that a company and its Directors and Officers can take actions in the ordinary course of business which may adversely affect the ERISA plans: e.g. (terminate or amend the plans) without creating a liability exposure, but denial of claims can create big problems.

As a result, it is generally understood that Directors and Officers have no fiduciary responsibility for investment of plan assets... as they are not a fiduciary. But... when Directors and/or Officers make false or misleading disclosures and when they give this information to employees, shareholders, or the public... then they can definitely come within the "ERISA" responsibilities.

As with D&O exposures... Directors and Officers have two potential sources of financial protection in the event they incur liability from ERISA... insurance and indemnification... particularly in a tag-along suit... involving fiduciaries. However, there are unique issues with respect to both of these coverages as they apply to this type of litigation.

It is important to remember that... D&O policies exclude coverage for ERISA actions and accordingly, insurance coverage available for this type of litigation will most likely exist only under a Fiduciary Liability policy. Fiduciary Liability has not usually been the subject of analysis or negotiation by companies when purchasing coverage since it has been relatively cheap and infrequently triggered by claims.

In today's environment, companies would be prudent to scrutinize their insurance and the indemnification process periodically. When reviewing the adequacy of Fiduciary Liability in insurance in light of ERISA, some of the following things should be considered:

1. Coordinate Fiduciary Liability and D&O coverages... it does not hurt to have both coverages with the same carrier as this will mitigate and gaps in coverage.
2. Evaluate adequacy of limits and consider purchasing higher limits based on the environment that we are dealing with today.
3. Have separate policies for D&O and Fiduciary Liability in order to have higher limits without worrying about impairing either policy.

Indemnification - As a general rule, a sponsoring company may indemnify its ERISA fiduciary in most instances... fortunately, under state and federal law. The availability of the indemnification is less predictable than the indemnification of Directors and Officers for non-ERISA type matters. Since this is the case... it is unlikely that Fiduciary Liability for non-indemnifiable losses will be widely available. The following are some of the indemnification issues you need to consider for ERISA fiduciaries. A plan sponsor is generally permitted under the Department of Labor Regulations to indemnify a plan fiduciary, but ERISA indemnification provisions are somewhat limited, as follows:

• A fiduciary cannot be relieved of their responsibility of liability under ERISA by an agreement. However, the purchase of Fiduciary Liability will provide protection in the event that the fiduciary breaches their duty. But... the carrier may possibly have rights to seek recourse from fiduciaries for amounts paid for the fiduciary's breaches under some circumstances.
• A plan may not agree to indemnify a fiduciary for fiduciary breaches although an employer may do so. In other words, and employer is generally permitted under ERISA to indemnify a plan fiduciary. However, the scope of permissible indemnification under ERISA may be limited under certain circumstances.
• It is important to remember... indemnification provisions cannot encourage undesirable fiduciary conduct and this will not be enforced by the court.

A sponsor's company's indemnification plan for fiduciaries is subject to the indemnification statute in the state in which the company is incorporated. In fact, several of the limitations applicable to indemnification of Directors and Officers are also applicable to ERISA fiduciaries under state law. Obviously, no indemnification will be available if the ERISA fiduciary fails to satisfy the "requisite standard of conduct" and the indemnification will not be available if the corporation is not financially sound enough to fund the indemnification... as a result, insurance is an absolute necessity.

Corporations should examine the following primary issues when evaluating the quality of indemnification for the protection of its ERISA fiduciaries:

• Review the applicable State Indemnification Statutes, as you would with D&O coverage to determine if an ERISA fiduciary must be served at the request of the company in order to be indemnified. If so, be sure that the person(s) intended to be protected is clearly serving as a plan fiduciary at the written request of the corporation.
• Review the state indemnification process to confirm that the corporation is obligated to indemnify all of the persons intended to be protected without any material restrictions on the indemnification.
• Do the terms of the indemnification provisions create public policy concerns as similar concerns may likely arise with respect to ESOP type fiduciaries?
• The internal indemnification process should mandate indemnification to the fullest extent permitted by law in order to increase the possibility that the indemnification will be available in suits by or on behalf of the sponsoring corporation.

Our recommendation is to contact your attorneys handling your benefit plans subject to ERISA regulations. Have them evaluate your state's indemnification statutes and draft an indemnity agreement as broad as possible that is not in conflict with your state laws and/or ERISA regulations. Then contact your insurance agent or broker to coordinate your company's D&O coverage with your fiduciary liability insurance, as mentioned in this essay. This thereby will assure that your company is providing the best protection possible for your Directors, Officers and Plan Fiduciary(s).

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W. Meade Collinsworth, CPCU, ARM, AIM, AAI, is President of Collinsworth, Alter et al., a Miami Lakes, Florida insurance agency specializing in insurance for architects, engineers, land surveyors and contractor construction related activities. Mr. Collinsworth is a Past President of a/e ProNet and is a regular contributor to the Guest Essays column. He may be contacted at (305) 822-7800, or mcollinsworth@canfd.com.

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NOTE: This article is intended for general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate advisors for advice applicable to their individual circumstances.