What is a fiduciary liability insurance policy and what does it cover?

If your business has some sort of employee benefits plan (pensions, savings, profit-sharing, or health plans), someone is in charge of designing and administering these plans. This person is known as a fiduciary. That's the case regardless of their official job title – under the Employee Retirement Income Security Act of 1974 (ERISA), a fiduciary is anyone who has authority or control over an employee benefits plan (learn more about benefits in An Overview of Commercial Group Life and Health Plans).

As such, this person has a fiduciary duty to various parties, including the beneficiaries covered under the plan. Liability can arise from administrative errors and omissions, giving improper advice, denial or reduction of benefits, terminating a plan, conflicts of interest, poor choice of service provider (i.e. insurer), or even from poor investment decisions.

Fiduciary liability insurance is a policy designed with these many risks in mind. Not all fiduciary liability policies are the same, and policy terms can vary wildly for even basic things like their definitions of employees, benefit plans, and so on. But at its core, it insures against liability for damages that might arise from the failure to exercise your fiduciary responsibilities as a benefits plan administrator. The policy will also kick in to defend the fiduciary from lawsuits that arise from alleged failure to perform the duties of a fiduciary.

A common source of confusion is many people believe that once they meet legal requirements and are ERISA bonded, they are protected and have no need for liability insurance. This is not true. The bonding only responds in situations where dishonesty was a factor. It still does not protect fiduciaries from liability.

Fiduciary liability insurance is a complex and niche topic so I encourage you to consult your commercial lines agent or broker and view your policy documents to get a better idea of what's covered (see 4 Essential Types of Liability Insurance Every Business Should Have for more coverage advice).