Many businesses believe that standard business insurance or directors and officers insurance insure against losses, claims or lawsuits related to administration of employee benefit plans. But most of those policies specifically exclude coverage for fiduciary liability.

Under ERISA, the federal laws that regulates most employee benefit plans, decision-makers are fiduciaries and may be held personally liable for their errors, omissions and imprudence in the administration and handling of retirement plans, group life insurance and medical expense plans -- even if they employ consultants to manage them. ERISA allows employees and others to go after a fiduciary's personal assets, which are not covered by the ERISA bond that some companies are required to have.

Employees, the estate of deceased employees, the Department of Labor and the Pension Benefit Guaranty Corporation all have standing to file lawsuits against fiduciaries. Given the precipitous increase in federal lawsuits against employers, and the fact that ERISA expressly authorizes the purchase of fiduciary liability insurance from plan assets, employers may be remiss by not buying fiduciary liability insurance to protect against a loss or waste of plan assets.

Fiduciary liability insurance covers a number of potential sources of employee lawsuits, including breach of fiduciary duty, fraud, misrepresentations, negligent errors, nondisclosures, improper disclosures, failure to monitor investments and managers, bad investment advice, faulty advice of counsel, improper amendments to plan documents and the mishandling, misappropriation, preventable loss or wasting of plan assets.

Buying fiduciary liability insurance can provide fiduciaries with protection from what are typically very expensive lawsuits. But it's no substitute for following all regulations, updating plan documents, keeping employees informed and working with reputable consultants and co-fiduciaries.

-- Thomas G. Eddy,
BPU Investment Management,
teddy@bpuinvestments.com

"Money Q&A" and "Company Town" are featured exclusively at PG+, a members-only web site of the Pittsburgh Post-Gazette. Our introduction to PG+ gives you all the details.