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5 Questions to Ask About Your Pension Fiduciary Insurance Policy

Mitch Backes
February 22, 2018

One of the many things a pension trustee learns during required training sessions is that trustees are liable if they breach their fiduciary duties. Beyond that, pension trustees that do not follow the basic standards of conduct may be held personally accountable to restore any losses to the pension fund. Fiduciary liability insurance can be used to protect pension trustees from fiduciary error. The number of pension funds in Illinois that purchase fiduciary liability insurance has risen over the past ten years, but there are still many that are uninsured. It’s my experience that those who do purchase fiduciary liability insurance do not fully understand what coverage options they have available to them. Consider the following questions when deciding whether to purchase fiduciary liability insurance, or whether the coverage you currently carry is the right coverage for you.

1. What is sovereign immunity and how does it affect pension trustees?

Sovereign immunity is the legal principle that the sovereign (the government) is immune from lawsuits or other legal actions unless it consents to them. Most states provide immunity to government agents and that protection extends to pension trustees. The protection provided to pension trustees by sovereign immunity has limits and in some cases may not apply at all. Understanding the protection provided by sovereign immunity can affect what level of fiduciary liability insurance a pension board may purchase.

Fiduciary liability insurance policies can be set up to protect trustees at the first notice of a possible issue, whether or not sovereign immunity applies. This approach would be the correct choice for trustees that want their insurance company involved from the very beginning of any potential fiduciary liability issue. The alternative coverage option would be to structure the insurance to become involved only after any possible protection provided by sovereign immunity has been exhausted. A lower premium is typically charged for the latter coverage option.

2. Who provides the legal counsel for my fiduciary liability claim?

It’s not uncommon for fiduciary liability insurers to choose the attorney for a claim without any input from the pension trustees. However, certain insurers will allow the trustees the choice of legal counsel. If it’s essential to pension trustees to be able to have a say in which attorney is used in the event of a claim, this may influence which insurance company is chosen to provide the fiduciary liability insurance.

3. Can fiduciary liability insurance provide coverage for insufficient contributions?

The underfunding of public pensions is routinely in the news, so it’s not surprising that trustees often ask if this risk can be considered by fiduciary liability insurance policies. Willingness to provide coverage for insufficient contributions varies by insurance company. The insurers that are willing to provide the coverage won’t provide it to all pension boards. The current level of funding is a major consideration for insurers when weighing whether to provide this coverage to a particular pension board.

4. Is individual fiduciary liability insurance available?

Pension trustees can also purchase individual fiduciary protection. This protection is usually written as a complementary policy to the policy already purchased by the Board of Trustees.  This coverage may be a good choice for trustees that want the additional insurance protection in instances when:

  • they believe the underlying coverage may not respond.
  • the coverage for the plans they serve is not in place.
  • they are seeking higher limits of protection. 

Plan assets can be used to purchase this individual protection.

5. What is Cyber Liability/Data Breach coverage and why might it be necessary for pension boards?

Cyber Liability/Data Breach coverage is becoming a more common component in commercial insurance protection today. The coverage provides protection for those that store “personally identifiable information” of others (social security numbers, credit card numbers and similar info). Any breach of this information, whether it be through computer hacking or a physical breach, can result in a formal response to those whose data was breached and a potential class-action lawsuit. Pension funds could be a target for a breach, but vendors selected by pension trustees could also be targets. If a vendor has a breach, it’s conceivable the pension fund would need to respond as well. Some fiduciary liability insurers are including limited Cyber Liability/Data Breach coverage in their fiduciary liability policies. Higher limits of Cyber Liability/Data Breach coverage can be purchased on a stand-alone policy.

Whether or not to purchase fiduciary liability insurance has been the question many pension boards have been asking themselves. If fiduciary liability insurance is desired, be sure to ask more questions to ensure the policy will respond as desired in the event of a claim. Contacting a fiduciary liability insurance advisor may be helpful in navigating all insurance options.