If you are a plan fiduciary and your company has purchased fiduciary liability insurance, you and your board may have simply assumed that the policy would cover any fiduciary breach. You may have even congratulated yourselves on understanding that the plan’s ERISA bond provides reimbursement only to the plan, so separate protection for fiduciaries is a good practice. However, a decision just issued by a Pennsylvania court denying coverage to CIGNA is a wakeup call to carefully review such policies to determine what they do and do not cover.
In December, in the probable coda to a lengthy case that went up to the U.S. Supreme Court, the Second Circuit Court of Appeals upheld a district court decision that CIGNA’s misleading communications about “wearaway” ( a period during which no benefits would be earned by plan participants) were deliberately misleading and fraudulent.
CIGNA had previously filed an action for a declaratory judgment that its policy covered the actions which were the subject of the lawsuit, under a clause that covered “wrongful acts”, which were defined as “any actual or alleged…misstatement, misleading statement, act, [or]omission” by the insured. However, the Pennsylvania court agreed with a lower court that the policy needed to be construed as a whole, and that the exclusion for fraudulent or criminal acts overrode the wrongful act provision. CIGNA is now a two time loser; once under the class action and a second time under the policy.
What should you look for when buying fiduciary insurance?
There are differences among policies available in the market. They have different scopes and costs. Among the issues to consider are the following:
- Does the policy cover only litigation, or will it cover compliance problems discovered on audit or fixed through voluntary correction programs?
- What actions are excluded?
- Are there time limits on the coverage based on when the acts occurred?
- Who selects counsel to defend legal actions?
- Does the policy cover all of your internal fiduciaries or is it limited to employees in certain positions? Are riders necessary to cover the right people?
Your policy typically will not cover third party vendors such as investment managers or third party administrators. It is advisable to determine that they have their own fiduciary liability insurance in place, and to get a representation that they will maintain it. However, the best advice for those in the market for fiduciary liability insurance is to carefully review it with the assistance of experts before signing on the dotted line.