Business Insurance Coverage

Fiduciary Insurance: How to Keep Your Finances Safe Starting Now

Agency Height

January 30, 2023 · 3.5 mins read

Fiduciary insurance revolves around protecting insureds from lawsuit expenses caused by a breach of fiduciary duty. However, to understand such breaches, let’s first discuss who a fiduciary is and what their responsibilities are.

A fiduciary can be an organization or a person who acts on behalf of another party. They are legally and ethically bounded to act in the party’s best interest. In simple terms, a fiduciary is anyone trusted to act in the best interest of concerned beneficiaries.

Fiduciaries can be money managers, bankers, accountants, insurance agents, financial advisors, board members, corporate officers, etc. As a result, the prime responsibility of a fiduciary is to serve the client’s best interest. Fiduciaries need to act in good faith and preserve the trust of clients.

For instance, if you’re an investment advisor, you are legally liable to suggest good investment opportunities to your clients. If you work to make profits for yourself while neglecting the client’s interests, you may face lawsuits on the grounds of breach of fiduciary responsibility.

What does Fiduciary Insurance Do?

Also known as fiduciary liability insurance, it covers employers from claims arising from a breach of fiduciary duty. The insurance takes care of legal defense expenses as well as claims settlement costs.

Consider the example of Wells Fargo’s case—20 Wells Fargo executives and directors were alleged to have failed in controlling the creation of bogus customer accounts. Consequently, according to Reuters, in the wake of their breach of fiduciary duty, the insurers for the officials had to pay $240 million to Wells Fargo’s U.S. shareholders in 2019. Had the officials not had insurance coverage, the lawsuits might have exhausted their personal assets.

Usually, fiduciary liability policy is purchased for people who have the discretionary authority of decision making over employee benefits plans. According to the US Department of Labor, the following have fiduciary responsibilities:

People or entities exercising authority as well as discretionary control on employee plan management.

Those responsible for the plan’s administration or exercise discretionary authority for the same.

Lastly, entities providing investment advice to a plan.

Do You Need Fiduciary Insurance?

Legally, fiduciary insurance is not mandatory. However, it may be the only insurance that adequately protects fiduciaries.

The coverages of fiduciary insurance are generally excluded from other insurances. For instance, while employee benefits liability insurance covers employee plan claims, it may not pay for administrative errors. Neither does general liability insurance adequately cover the personal assets of those facing fiduciary suits. Similarly, directors and officers (D&O) insurance excludes fiduciary liability claims specifically related to violations of the Employee

Retirement Income Security Act of 1974 (ERISA). Furthermore, errors and omissions insurance are designed to protect you from lawsuits by customers, rather than from employees.

The job of a fiduciary is quite sensitive. Safeguarding the interests of people and acting in their best interests require vigilant monitoring. One simple mistake can bring hefty litigations, possibly causing financial jeopardy.

Coverages of Fiduciary Insurance

Fiduciary insurance compensates you from suits arising from the following:

Careless selection as well as supervision of service providers
Improper investment decisions
Unauthorized changes in employee benefits plans
Prohibitive transactions
Wrongfully denied benefits to employees
Erroneous administration of plans
Conflict of interest (for e.g., self-profiting)
Improper consultation or advice
Mismanaged investments, such as no portfolio diversity

A fiduciary policy may provide comprehensive coverage to the company, directors, officers, employees, administration committees, employee benefits companies, etc. The fiduciaries provide coverage for fines, penalties, and punitive damages following lawsuits.

Exclusions of Fiduciary Liability Insurance

While the insurance has a myriad of coverages, it does not cover everything. Some exclusions are:

Any dishonest acts
Criminal or illegal actions
Intentional wrongdoing

How much does Fiduciary Insurance Cost?

Generally, an employer purchases fiduciary insurance to cover the fiduciaries working for them. Even so, it’s worth noting that fiduciaries are expected to always prioritize beneficiaries’ interests over the company’s interests.

The cost of fiduciary insurance depends on the following factors:

Business size

Large companies have more significant risks. And, greater risks mean greater premiums.

Nature of business

Insurers classify risk class based on the industry. Some industries are more prone to risks than others. If your business’s nature is categorized as having a higher risk exposure, you’ll be charged a higher premium.

Service provider

For instance, suppose you hire a financial advisor to take care of your financial plans. While selling fiduciary insurance, the insurance provider considers the claim records of that financial advisor. The higher the number of claims, the greater the premium and vice-versa.