Fiduciary Liability vs. Fidelity/Crime Coverage

Fiduciary Liability vs. Fidelity/Crime Coverage

Fiduciary Liability, Fidelity, Crime, Theft, Employee Dishonesty, 3rd Party Crime, ERISA Bonds – Oh My!!

Another set of coverages in our series of articles describing The Optional Coverages – are they really optional?  What do all of these terms mean?

After being asked to describe each of these terms individually as they come up, we realized that the best way to understand is to begin with the broadest terms first.

Let’s begin with Fiduciary.  As an adjective, fiduciary means placing a high degree of legal or ethical trust on a relationship as in attorney/client, trustee/beneficiary, bank/trust, guardian/ward, etc.   A fiduciary duty requires one party to act in the sole best interest of the other party.  The person acting in the fiduciary capacity is called a fiduciary.  Thus the word can also be used as a noun.  Most often, the existence of a fiduciary relationship is clearly stated in a legal agreement.  In these cases, the need for fiduciary liability coverage is pretty clear as a simple poor decision or lack of a decision could prompt a claim for breach of fiduciary responsibility.

Our readers who act as a fiduciary as their normal course of business understand their fiduciary duty and know they need fiduciary liability coverage.  But, what about the others?  Are you acting as a fiduciary in your current position?   If your company offers benefit programs for your employees, your personal assets may be at risk and we urge you to consider fiduciary liability coverage.  Employers who offer a retirement plan should be familiar with the Employee Retirement Income Security Act (ERISA) and its requirement for the employer to hold an “ERISA” bond.  The Fidelity Bond required by ERISA does not provide coverage for your fiduciary duty to administer your employee benefits programs in the sole best interest of the participants in the plan as required by ERISA.  The coverage provided by the Fidelity Bond is described later in this article.

What many employers don’t realize is that ERISA also sets forth certain fiduciary duties for employers who choose to offer group benefit plans to their employees.  In addition to ERISA requirements, common law includes precedent establishing the employer’s responsibility for administering group benefit plans as fiduciaries.  This applies to all group benefits plans – not just retirement and pension plans.  The exposure does not go away when you hire a third-party administrator.   Examples include failure to enroll an employee in a timely manner, failure to research the cost of benefits relative to similar benefits, selection of risky investments in a defined benefit pension plan, erroneous benefits advice, etc.  No one requires an employer to purchase fiduciary liability insurance yet, the exposure is clearly there.  A cost-benefit analysis of fiduciary liability coverage should always be offered by your agent and include employee benefits liability.

A good fiduciary policy will cover:

  • Assets of the named insured organization
  • Assets of the benefit plans scheduled in the policy
  • Personal assets of the individuals serving as fiduciaries of the insured’s firm
  • Personal assets of any additional persons named in the policy

Covered losses include damages, judgments, settlements, and defense costs that the insured becomes legally obligated to pay.

The policies are usually written on a “duty to defend” basis.  The insurer will manage the defense of the claim on behalf of the insured.  Defense costs are covered but reduce the limit of liability available for expenses if the insured settles or is found liable.  Policies generally carry an insured retention that applies first dollar to defense costs.

Fiduciary liability policies include Employee Benefits coverage.  This coverage is sometimes offered on its own or as an endorsement.  It provides coverage for errors and omissions committed while handling nondiscretionary functions like failure to enroll, failure to change the beneficiary designation, etc.  It is not designed to cover more discretionary or higher-level decision-making functions such as management of fees, investment decisions, following plan documents, etc.

It is important to note that fiduciary liability does not include loss from theft of plan assets.  We turn to crime coverage for this exposure.

Crime coverage can include several different types of coverage such as: employee dishonesty coverage, forgery or alteration coverage, computer fraud coverage, funds transfer fraud coverage, kidnap, ransom or extortion coverage; money and securities coverage and money orders and counterfeit money coverage.  These coverages can be included on a Commercial Crime policy and several can be purchased as a stand-alone insurance policy or bond.

In terms of the insurance industry, Crime and Fidelity are interchangeable. Unlike fiduciary liability insurance, crime insurance is a first-party coverage.  It protects the assets of your company and the assets of your company’s benefit plans from loss.

As always, your first step is to decide which exposures apply to your company and what assets are at risk.  Once the appropriate coverages are chosen, your insurance agent will secure quotes at different policy limits and deductibles.

Following are the seven basic coverage parts of a standard crime policy. You choose which parts are most valuable to you based on your exposures.

Employee Theft of company assets – may also include assets of specifically described employee benefits plan and therefore complying with the ERISA requirement for a fidelity or employee dishonesty bond.   Employee Theft of client’s property can be added by endorsement when needed.

Forgery or Alteration – pays for losses caused by outside parties who forge or alter the named insured’s checks.  May also include defense costs if you are sued for refusing to pay an instrument you believe is forged.

Inside the Premises – Theft of Money and Securities – provides coverage for money or securities only (no merchandise) from within the walls of your premises or banking premises.  Also pays for damage done to the exterior of your building during the actual or attempted theft under certain conditions.  Also covers locked safes, vaults, cash registers, cash boxes, and cash drawers that were inside and damaged by the theft or theft attempt.  Theft of other property may be added by endorsement.

Inside the Premises – Robbery or Safe Burglary of Other Property coverage applies to robbery of a custodian and to safe burglary.  Robbery involves the threat of or actual bodily harm or unlawful act witnessed by another person.

Outside the Premises includes theft, disappearance, and destruction of money and securities while outside the premises and in the custody of a messenger or armored car company. Includes theft and robbery.  Other property may be added by endorsement.

Computer Fraud covers money securities and other property fraudulently transferred by someone using your computer either directly or remotely.

Money Orders and Counterfeit Paper Currency provides coverage for loss incurred as a result of accepting counterfeit currency.

Other available endorsements:

Funds Transfer Fraud – pays for losses resulting from fraudulent instructions received by a financial institution to pay money from your account to someone else.

Extortion – pays for losses sustained via extortion by injury threats to people and threats to damage property.

In conclusion, please consider the need for these coverages with your insurance agent.  Know the difference between Fiduciary (duty of care) vs. Fidelity (unlawful or fraudulent acts).  Remember that the “ERISA Fidelity or Employee Dishonesty Bond” fills a minimum requirement of the ERISA act and provides very limited coverage for plan participants only. Crime coverage sections can be purchased in any combination to suit your company’s unique exposures.