Fiduciary Liability Insurance and ERISA
By Mark Johnson, Ph.D., J.D.
The definition and responsibilities of an ERISA fiduciary compared to an ERISA settlor form the basis of a recent New York Court of Appeals ruling in Federal Insurance Co. v. IBM Corp., 2012 N.Y. LEXIS 311 (N.Y. Feb. 21, 2012).
Background on the Distinction between an ERISA Fiduciary and Settlor
The Employee Retirement Income Security Act of 1974 (ERISA) that establishes legal and operational guidelines for private pension and employee benefit plans. Not all decisions directly involving a plan, even when made by a fiduciary, are subject to ERISA’s fiduciary rules. These decisions are business judgment type decisions and are commonly called “settlor” functions.
This caveat is sometimes referred to as the “business decision” exception to ERISA’s fiduciary rules. Under this concept, even though the employer is the plan sponsor and administrator, it will not be considered as acting in a fiduciary capacity when creating, amending or terminating a plan.
Among the decisions which would be considered settlor functions are:
-- Choosing the type of plan, or options in the plan
-- Amending a plan, including changing or eliminating plan options
-- Requiring employee contributions or changing the level of employee contributions
--Terminating a plan, or part of a plan, including terminating or amending as part of a bankruptcy process
These types of decisions are extremely important and certainly directly impact the plans and the benefits available to participants. But ERISA’s fiduciary duties, both substantive and procedural, do not apply to those who make these settlor decisions even when they are otherwise unquestionably fiduciaries.
Plaintiffs in IBM Case Initially Charged Age Discrimination
The IBM case dates back to the 1999 matter of Cooper v. IBM Personal Pension Plan, Case No. 99-cv-00829 (S.D. Ill.). The plaintiffs in this class action case claimed that IBM engaged in age discrimination when amending an ERISA benefit plan. Breach of fiduciary duty was noticeably lacking from the charges brought. The case was ultimately settled for $300 million.
Fiduciary Liability Insurance and ERISA Litigation
IBM maintained primary fiduciary liability insurance with Zurich American Insurance Company, which paid $25 million in the case. IBM then pursued its secondary carrier, Federal Insurance Company, for an additional $25 million under a “follow form” excess policy that included by reference the primary Zurich policy.
ERISA terminology became important here, as policy coverage hinged on a strict interpretation of ERISA and related insurance coverage terms and definitions.
Federal Insurance denied coverage, arguing that IBM’s actions were within a settlor capacity. Further, Federal claimed that IBM did not meet the requirements of a “wrongful act” as defined in the policy, which involves “any breach of the responsibilities, obligation or duties by an insured which are imposed upon a fiduciary of a Benefit Program by [ERISA].”
IBM countered that it acted within the general meaning of “fiduciary,” rather than the “artificial” meaning established in the ERISA guideline.
The New York Court of Appeals ultimately sided with Federal, noting also that the plaintiffs did not allege any breach of ERISA fiduciary duty.
ERISA Insurance Misconceptions
Fiduciary liability insurance generally provides the insured with liability coverage if the insured is charged with failing to act prudently within the meaning of ERISA.
Most Directors & Officers (“D&O”) insurance policies specifically exclude fiduciary liability exposures, including those related ERISA. The same is true for employment liability insurance (“EPLI”), which is generally limited to coverage for employment-related claims such as harassment, discrimination and wrongful termination.
A fidelity bond is commonly required for plan sponsors with management responsibility for plan funds. The bond protects against loss of funds due to specified fraudulent or dishonest acts, but generally does not extend to fiduciary liability protection.
Plan sponsors are advised to work closely with their insurance brokers and carriers to fully understand the exact coverage contemplated in a fiduciary liability insurance policy. Definition of terms is particularly important, as can be seen in the IBM case. Attorney fees and defense costs should also be clearly defined.
A plan sponsor is free to amend or terminate its plan at any time. If these actions are taken, the plan sponsor needs to comply with regulations on communicating certain types of changes prior to the effective date. The ability to amend or terminate a plan which exists pursuant to a collective bargaining agreement might be restricted by the union contract and would likely require bargaining and or union concurrence. While it may be advisable and a good personnel policy practice to consider a less severe alternative to terminating a plan, there is no ERISA obligation, fiduciary or otherwise, to do so.
A corporate official who has dual roles is bound by ERISA’s fiduciary roles only when managing the plan or when directing investment managers; not when performing settlor functions, or when conducting general corporate functions. Fiduciary status is not automatically acquired by one’s position in the corporate structure, i.e. an officer or member of the board of directors; and when fiduciary status is acquired, it is limited to having or exercising discretion over the plan.
The technical definitions contained within ERISA are specific and carefully detailed. Plan sponsors who act outside ERISA guidelines expose themselves to potential litigation. Fiduciary liability insurance, when carefully written, can help to offset the risks of plan sponsorship.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778 or www.erisa-benefits.com.
Contact ERISA Expert Dr. Mark Johnson
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