Trustee Fiduciary Liability Insurance

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by Lillo DiPasquale*

When trustees act in a fiduciary capacity, they have a moral obligation to do what is in the best interests of plan participants and beneficiaries. They must act prudently and according to plan documents. Trustees are also subject to common law (except for Québec) and the statutory duties imposed on trustees by the provinces (e.g., Québec Supplemental Pension Plans Act).¹ Despite even the best of intentions, an allegation of a wrongful act or breach of fiduciary responsibility can place significant liability on trustees. Purchase of adequate fiduciary liability insurance is a wise course to take.

A fiduciary liability insurance policy protects plan assets as well as the personal assets of plan trustees when there is mismanagement, negligence or simply a mistake that leads to a breach of fiduciary duty, wrongful acts, and errors or omissions in plan administration. Such policies also provide protection for actual misconduct as well as allegations that wrongful acts have occurred.

Fiduciary Liability Insurance Versus Other Types of Coverage

It is important to keep in mind that fiduciary liability is not the only potential loss faced by trustees and funds—There are many others. Administrators and trustees should discuss the broader issue of risk and insurance with the fund attorney and insurance broker. Exhibit 1.1 offers an exposure checklist as food for thought.

The Right to Purchase Fiduciary Liability Insurance

The Employee Retirement Income Security Act of 1974 (ERISA) in the United States is very specific about the ability of trustees to buy insurance with plan assets. Canadian legislation is mainly silent on the subject. The primary issue is whether it is proper for trustees to use plan assets to purchase insurance to protect the trustees from liabilities associated with their personal responsibilities. To date, there are no known circumstances where this has been a problem in Canada. Legal advice should be sought on this topic. If there is still a concern after discussion with legal counsel, the fund insurance broker should approach the insurer(s) to arrange a premium split between the fund and the trustees with each trustee paying their own premium allocation. It is expected the cost for each trustee will be nominal.

Fiduciary Liability Insurance Versus Indemnity Agreements

Some trustees may question why there is a need to purchase fiduciary liability insurance when a trust agreement has indemnity provisions in place for trustee protection. Fiduciary liability insurance offers three areas of protection:

Coverage for the fund in cases where the fund itself is found liable for an insured claim
Coverage for amounts paid by the fund to trustees for claims covered under the indemnity provisions of a trust agreement
Coverage for the trustees in cases where the trust agreement indemnity provisions don’t offer protection while the broader coverage provided by a fiduciary liability policy does.

From a trustee standpoint, the third item is especially important. The indemnity provisions of a trust agreement frequently do not indemnify trustees for claims or losses arising from the individual fraud or negligence of that trustee. Even if a trustee thought he or she was acting in good faith, the courts may rule the trustee negligent. In this case, costs for the legal defence of the trustee, judgment against the trustee and other costs would be borne solely by the trustee. Coverage provided by a fiduciary insurance policy is far broader, and the risk that a trustee would be personally liable is greatly reduced.

The Canadian Insurance Market

Initially, fiduciary liability coverage was provided either by Lloyd’s of London or Canadian subsidiaries of U.S. companies. Because demand for such protection was not substantial, policies tended to be either U.K. or U.S. policies nominally amended to reflect the Canadian context. In the late 1970s, Canadian wording was developed after discussion with, and input from, Canadian trustees, lawyers and administrators. In terms of policy coverage today, the policy forms offered are relatively unchanged.

There are four insurers underwriting meaningful amounts of trustee fiduciary insurance and about four or five others offering some coverage.² Having a meaningful amount of similar business indicates an insurer has a commitment to providing this coverage on a long-term basis.³ Avoid companies trying to “buy” premiums in a soft market. Unfortunately, there are few insurers with a sufficient portfolio of Canadian fiduciary insurance premiums to produce standalone viable loss results. This means insurer portfolios may be subject to shock (large) losses or lumped in with other similar insurance that may not benefit Canadian trustees and trust funds.

Exhibit 1.1

Potential Exposure to Loss and Insurance Needs

Coverage

I. Fiduciary/general errors and omission protects the trust fund and trustees when there are errors and omissions on the part of trustees in carrying out their duties and responsibilities as trustees.

The definition of insured should include the fund, all trustees and any person acting on behalf of the fund within the organization of the fund, including employees.
Coverage should apply even if an exculpatory clause waives trust liability for a particular error or omission.
Independent administrators, actuaries, auditors, investment managers, investment management services, consultants, lawyers and accountants acting in their capacities as such are excluded.
If the fund uses the services of an independent administrator, consider adding the administrator as an additional insured.
Verify that all professionals utilized and not covered under the fund’s insurance policy carry professional liability insurance of sufficient limits.
Coverage limits usually start at $500,000 for a small fund while a limit of more than $25 million is not uncommon for very large funds. The average limit purchased is $5 million.

II. Dishonesty protects a fund from the dishonest acts of trustees and employees—acting alone or in collusion with others—that cause a loss to the fund.

Limits range from $500,000 to more than $25 million depending on the size of the fund.

III. General legal liability provides protection for bodily injury and property damage claims arising on fund premises and as the result of fund operations and products. It may be extended to include:

Premises and operations
Products and completed operations
Personal injury
Nonowned automobile
Nonowned watercraft
Owners and contractors protective
Contractual liability
Contingent employers liability
Employers liability
Employee benefits errors and omissions
Advertising liability
Liquor liability
Incidental medical malpractice
Medical expenses
Elevator collision
Employees as insureds
Trustees as insureds
Occurrence property damage
Broad form property damage
Hostile fire extension
Intentional injury amendment
Tenant legal liability

General liability policies exclude owned aviation, owned automobile, owned watercraft, environmental, nuclear, professional and employment practices liability.
Most, if not all, possible extensions should be included. A number of these extensions can be included at little or no cost.
Limits range from $1 million to more than $25 million. A $5 million limit can usually be purchased at a reasonable price.
A combination of commercial general liability coverage and umbrella liability coverage may be desired to achieve appropriate limits of liability.

IV. Automobile (owned or operated)

Direct damage
All perils or collision and comprehensive
Loss of use
Third-party liability

This coverage is required if any motor vehicles are owned by, leased to or registered in the name of the fund.

V. Watercraft (owned or operated)

Direct damage
Loss of use
Third-party liability

This coverage is only required if a fund owns, leases, operates or has assumed responsibility for any watercraft.

VI. Aircraft (owned or operated)

Direct damage
Loss of use
Third-party liability

This coverage is only required if a fund owns, leases, operates or has assumed responsibility for any aircraft.

VII. Property (owned, leased or for which the insured has agreed to be responsible)

A. Direct damage

Building(s)
Boiler and machinery
Exterior glass
Signs
Growing trees, plants and shrubs
Office/plant equipment and stock
Computers (e.g., hardware, software, extra expense)
Fine arts
Customer goods
Employee property
Tenant improvements
Property in storage (off-premises)
Property in transit
Property in custody of sales reps
Accounts receivable records
Valuable papers records

B. Loss of use

Loss of income
Increased expenses

Auditors/professional fees
Other

Coverage should be written on a “blanket, all risks” basis.

Property policies exclude money and securities.
Coverage should also include:
– Replacement cost and stated amount clauses with extensions for earthquake, flood, sewer backup and full by-laws
– Interruption by civil authority protection for 30 days with 60 days’ notice of cancellation
– Separate coverage for computers, as well as general extra expense.
– Mechanical breakdown and transit on computers
– Boiler and machinery insurance written in a comprehensive form to pay for financial loss incurred when equipment breaks down suddenly and accidentally
Additional coverage available includes business interruption and consequential damage.
Appropriate limits are needed for extensions (e.g., extra expense, expediting expense, ammonia contamination).
Sufficient limits should be established for extra expense coverage with 100% of limit available the first month.
Sufficient sublimits should be established for valuable papers, accounts receivables records, professional fees and other extensions as appropriate.
Leases should be reviewed to determine any special insurance requirements or obligations.

VIII. Money and securities

Loss inside the premises
Loss outside the premises
Depositor forgery
Computer theft and funds transfer
Employee dishonesty

Employee dishonesty is addressed under Section II in this Exhibit.
Other coverage may be appropriate depending on fund handling of money and securities, etc.

IX. Environmental liability

Coverage may be required if a fund owns properties from which there is the possibility of environmental damage.

X. Professional liability

Trustees/directors’ and officers’ liability
Errors and omissions liability
Employment practices liability
Outside directors’ liability

Some larger funds set up an owned corporation to handle specific needs such as real estate. If this is the case, Items A and B are addressed under directors’ and officers’ liability (Section I of this Exhibit).
Employment practices liability relates to sexual harassment, wrongful dismissal, etc.
Outside directors’ liability applies if a trustee is asked to sit on the board of a company in which the fund has substantial investments.

XI. Accidental death and dismemberment (AD&D)

Coverage can be purchased to provide AD&D for trustees and employees.

XII. Key person insurance

Coverage can be purchased on the lives of key persons to the fund whose death would result in possible financial loss to the fund.

XIII. Ransom/kidnap

Coverage can be purchased against the possibility of trustees or key employees being kidnapped and held for ransom.

XIV. Credit insurance

Not likely to be appropriate for a fund

XV. Ocean marine

Not likely to be appropriate for a fund

XVI. Employee benefits insurance

Coverage can be arranged to provide a package of employee benefits (e.g., group life, dental).

XVII. Package of insurance products for sale to members (e.g., AD&D, medical, home, auto insurance and legal expense).

Trustees may want to consider offering a package of insurance products that members can purchase.

XVIII. Cyber liability insurance

Coverage is broken down into coverage for first- and third-party costs. Examples of first-party costs covered by a policy include:
– Notification costs—letting all those affected by a breach know the breach has occurred (i.e., mail campaign, credit monitoring, call centre to handle questions)
–Forensic investigative costs—hiring a professional third party to determine where, when and how the breach occurred, including data system preventive processes
–Data restoration costs—restoring the network and data to the point it was at before the breach occurred
–Cyberextortion—an attack or threat against a plan when there is a demand for compensation to stop the attack.
Examples of third-party liability costs covered by a policy are:
–Network security liability—damages and claims expenses associated with the unauthorized access to, degradation of or disruption to the plan’s network through use of malware, denial of service attack, phishing, etc., causing loss
–Privacy liability—liability for unauthorized collection, disclosure, use, access, destruction or modification of personal protected information
–Electronic Media Liability—liability resulting from allegations concerning infringement of privacy defamation,
–disparagement, piracy, copyright infringement, etc., related to content displayed electronically (i.e., website).

Source: HUB International (Ontario) Ltd. Insurance Brokers.

Coverage Analysis Highlights

There is no clear-cut best wording for a policy in the Canadian insurance market nor a clear-cut best insurance carrier for all situations. Consider the pros and cons of policy wording when addressing a specific risk or circumstance. Typically, an insurance carrier provides additional endorsements to address any concerns.

The insuring agreement should pay on behalf of and not reimburse. Pay on behalf of means the insurer pays first and, thus, trust funds are not spent. Policies usually cover all sums the insured becomes legally obligated to pay for a wrongful act.

All policies include defence costs. It is important to know whether defence costs are included in or an addition to policy limits. Obviously, it is better to have defence costs in addition to the limits. Today, however, it is common for insurers to include defence costs in policy limits as opposed to an addition to the limits. If defence costs are included within the limit, consider higher limits. With the added threat of class action lawsuits, defence costs can quickly add up and could potentially exhaust a sizable portion of the total limit secured.
Most, if not all, fiduciary liability policies are on a claims-made basis. With claims-made policies, claims that arise during the life of the policy are covered. Typically, claims anticipated or known prior to the policy effective date are excluded. Claims on prior events not expected as of the policy effective date should be covered. The insurance carrier whose policy is in effect on the date a fund becomes aware and gives notice to the insurer is the carrier that must defend and settle the claim. With most claims-made insurance, the application becomes part of the policy and acts as a warranty. It is therefore imperative the application be an accurate representation of overall plan operations.
An insurer may offer a retroactive effective date.This simply means any unknown claims that arise out of circumstances that occurred prior to the retroactive effective date are not covered. This is an important area that requires discussion with your insurance broker and legal advisors.
It is important to know the extension rights under a claims-made policy. Once a policy is cancelled or lapsed, there is no further coverage. There is the chance that sometime in the future—perhaps years later—a claim will be made on a situation that occurred while the policy was in force. Most policies offer an extension commonly known as an extended reporting period if the insured pays an additional premium when the extension is exercised. Since a claim against a plan/board of trustees or individual fiduciary can take many years before it manifests itself, coverage for the longest possible extension period is best. An extended reporting period endorsement allows additional years of insurance protection for the reporting of claims committed and not reported before the cancellation of the policy.

Again, it is important to emphasize that coverage be fully understood. Consultation with an insurance broker and legal counsel is essential.

Who Can and Should Be An Insured?

A fiduciary liability insurance policy should cover all trustees—past, present, and future—regardless of any hold harmless or exculpatory clauses contained within the trust document to protect the trust fund. The fund itself should also be covered by the policy so it is protected against loss arising from trustee actions. When allowed by law, it is common for trustees to be held harmless for their inadvertent actions. While this protects trustees, there may still be financial loss to the fund. It is essential that any insurance purchased picks up this type of loss. If a fund has employees, the employees should also be named insureds. Outside administrators can be added in certain circumstances; however, this affects liability limits.

How Much Coverage Should Be Purchased?

The answer to this question is subjective and must be made by the trustees, taking into consideration the advice of professionals including accountants, attorneys, insurance brokers, insurers and insurance consultants. Professional opinions should be weighed based on the particular professional’s expertise. The decision ultimately must be based on a review of as many factors as possible. At minimum, the following factors (in no particular order of importance) require consideration:

What coverage is being purchased by others?
- Limits, deductibles and premiums by asset size
- Average coverage limits by asset size
Are defence costs included in the limit?
-If they are, consider higher limits than for a policy that has defence costs in addition to the limit.
-Most policies contain an annual aggregate limit for all claims arising in a policy year. Consider the possibility of having more than one claim in a policy year.
What is the prior claims history? Consider the history of:
-The fund (if any)
-Similar Canadian insureds
-Similar U.S. insureds.
What limits are available in the marketplace? Very low limits are available for some coverage. In these cases, the limit issue may be moot. Consider alternative risk financing vehicles (e.g., reciprocals, spread loss). At present, limits of $25 million or more are available for well-managed Canadian trust funds.
What are the anticipated future trends?
- There seems to be a swing toward having professionals and others in a fiduciary capacity be increasingly accountable for their actions.
- Legislation continues to change, which is making pension plan management increasingly complicated. In addition, the laws governing plan management place a higher duty of care on trustees—dictating that trustees assume more and more responsibility for plan administration and investment.
- Although not to the level of our neighbours to the south, Canada is becoming more litigious. At the extreme, some parties are unwilling to suffer the least inconvenience or injury without seeking compensation from someone—anyone! The original object of the tort system was to allow redress against others who, through carelessness, cause harm to others. In a number of cases, the need to show negligence is being replaced by simply showing involvement. The “deep pocket” syndrome looks for anyone who can pay.
What are the financial reporting requirements for a fund? If a suit exceeds the coverage limits purchased, this can have a detrimental impact on the annual financial statements. The potential impact of such a claim should be discussed with the fund auditor and legal counsel. Keep in mind that it is not uncommon for a liability claim to take up to ten years to settle.
How many insureds are involved and what is the loss exposure? In deciding upon adequate limits, trustees must, as best as possible, assess their exposure—particularly if more than one insured is involved. It is not uncommon for multiple insureds to be the case. The annual aggregate limit normally applies to all insureds. Consider the implication of having not only one large claim but multiple claims in a policy period. The failure to secure a higher limit of protection could result in one or more claims exhausting most, if not all, of the aggregate limit with little left for the remaining policy period.
How much is the deductible? Most policies are subject to a deductible. It may be two-layered, with a higher deductible for the fund and a lower deductible for the trustees. In most cases, the deductible is negotiable. A higher deductible often yields a premium reduction. Check whether the deductible applies to legal costs.
What is a reasonable premium? Historically, the insurance industry has been cyclical with periods of soft and hard underwriting positions. Soft means most premiums are negotiable. After a decade of low interest rates and increasing competitive intensity that left the insurance industry performing at an unsustainable level, in 2019 the insurance marketplace began to harden. Hard markets are characterized by a lack of capacity where limits or even complete lines of business are removed from carrier portfolios. Hard markets also see deductibles increase, coverage terms and conditions restricted, and premiums rise. Starting in 2020, the COVID-19 pandemic also contributed to the challenges of the insurance market. It created further financial strain and uncertainty across the Canadian economy.
With pandemic restrictions wound down, economic activity returning to mostly prepandemic levels and several years of insurance premium rate increases, the insurance industry’s financial performance and sustainability has improved significantly. There are signs that the hardened market is moderating, at least in well-performing product lines and for good risks. As a result, the rate of increase of premium including for trusteed plan fiduciary liability risk has slowed.
Despite improved financial positions, insurance companies are likely to remain cautious. That uncertainty will cause many insurers to continue to be cautious with respect to both the risks they are prepared to underwrite and the cost for the assumption of these risks. Under these current conditions, it would not be a surprise for modest rate increases to continue for the foreseeable future even as insurer margins return closer to historical levels.

What Is Excluded From a Fiduciary Policy?

Standard exclusions on all fiduciary liability insurance policies typically include:

Criminal or deliberate fraudulent acts/dishonesty, which can be insured separately
Illegal personal profiting
Bodily injury/property damage, which can be insured separately
Discrimination, libel, slander and defamation of character, which should be insured separately
Failure to collect contributions
Pending and prior acts—Prior to its inception, a fiduciary insurance policy is not intended to provide coverage for “known” litigation or circumstances that could give rise to a claim.
Pollution
Cyber and data privacy breach (but see below).

Protecting Member Data

Safeguarding data is a significant concern for many organizations today in all business sectors. As the purveyors and protectors of plan data, a trusteed board is certainly no different. From network intrusions and data extortions to the compromise of sensitive personal and plan information either by criminal network hackers or an innocent error by a plan employee or representative, the impact of a data breach can be enormous.

While a board of trustees may be able to hold outsourced third-party providers liable for any privacy or network security breaches, it is possible that the board also be held liable and responsible for securing the personally identifiable information of its members.

What Protections Can a Cyber Insurance Policy Provide a Board of Trustees?

The potential costs involved in managing a data breach incident covered in a cyber insurance policy can be divided into first-party and third-party costs.

First-Party Costs:
If a board and its administration office were to become involved in a breach incident then a cyber insurance policy is designed to manage and pay for costs associated with required “triage” services, including:

Legal fees for the “breach coach” lawyer who would advise the board and oversee a breach response strategy

Costs for any forensic IT investigation to determine the extent and severity of any network intrusion, (i.e., the source of the network security or privacy breach came from a network system that a trustee or plan representative was using)
Notification costs in the event that plan members must be advised of the breach
Costs for retaining public relations experts who can assist in crafting the proper messaging around the breach incident
Credit monitoring/credit restoration costs in the event that financial information has been stolen/compromised and affected plan members need such a service.

Third-Party Costs
Includes the payment for costs associated with responding to and defending a claim brought by a third party. If the board of trustees fails to safeguard plan member information and a plan member brings a suit against the board for its negligence, then the third-party liability coverage from a cyber liability insurance policy can respond.

In addition to first-party and third-party costs, breach incidents can result in certain ancillary costs.

Ransomware attacks, including forensic IT support to investigate
Legal costs to negotiate with the extortionist and the payment of the actual ransom itself, whether in cryptocurrency or otherwise.

Working Remotely

In the post-COVID-19 environment, a board could face a “wrongful act” claim from plan members alleging that plan trustees failed to plan and respond adequately. Allegations of plan management failings could include:

A failure to have adequate systems in place to allow access to servers and systems so that “business as usual” can be maintained while administrative staff/plan employees “work from home”
Lack of planning on how to monitor systems and controls at the required level with increased remote working
Lack of cyber resilience capabilities to ensure the security of data when there is a very high level of remote access.

Any of these failings and more could potentially expose a board to investigations and claims arising from its contingency planning and decision-making.

Your fiduciary liability policy does not sufficiently cover data privacy breaches and cyber liability claims. Cyber insurance fills the gap left by policy wording exclusions. Pairing cyber insurance with a fiduciary liability policy ensures adequate protection for the breach, potential class action actions and claims arising from a breach.

What Precisely Is a Claim Under a Fiduciary Policy?

The definition of claim varies widely from policy to policy, and some do not define it at all. Generally, a claim includes any written demand alleging a wrongful act by an insured in their capacity as a plan fiduciary or in the administration of a plan seeking monetary or nonmonetary damages. This includes lawsuits and may be expanded to include formal investigations.

When Should a Claim Be Reported?

Typically, a claim must be first asserted or made against a plan or board of trustees and reported to the insurance carrier during the policy period. If the claim is not reported in a timely fashion or other reporting provisions of a policy are not followed, the insurance carrier may refuse a claim that otherwise would have been covered. It is important to be familiar with the reporting requirements of a fiduciary policy, including the terms of any post-policy-reporting period that may exist or any extended reporting requirements.

Final Thoughts

Accepting the principle that purchasing fiduciary li- ability insurance is prudent, trustees should recognize that not all insurance providers are equal. In addition, while the cost of protection is important, it is not the only factor to consider. The insurer’s reputation, financial strength and claims payment record should also be examined. The breadth of coverage, limits available and insurer’s track record providing fiduciary liability insurance should also have a bearing.

The selection and role of an insurance broker is equally critical. Trustees have a fiduciary responsibility to carefully select and monitor their plan’s insurance broker as well as other fund advisors. At a minimum, the broker selected should be able to demonstrate expert knowledge regarding fiduciary risk, leverage insurance market relationships and provide support in the event of a claim or service request. Questions to ask when evaluating a broker include:

How long have you been involved in multi-employer fiduciary insurance?
How many multi-employer clients do you handle?
What staff is dedicated to this coverage?
What in-house resources do you have access to?

In the event of a claim, the broker should be the plan’s advocate with the insurer and serve as a resource for fund counsel.

Tip for Trustees

The old saying that “an ounce of prevention is worth a pound of cure” is good advice. Fund administrators and trustees should know what steps to take to prevent intentional and unintentional wrongdoing with respect to fund management. There are many excellent articles on risk management.<4> A discussion with fund advisors, including the fund attorney and insurance broker, on this topic is essential.

*This is an update of the chapter written by Brian Jeffrey for Employee Benefits in Canada, Third Edition Revised, published by the International Foundation of Employee Benefit Plans.

Endnotes

Supplemental Pension Plans Act, R.S.Q. 1990, R-15.1, s. 151.
Commercial Union Assurance Company (now CGU Canada Ltd.), Axa Insurance Canada, Chubb Insurance Company of Canada, American Home Assurance Company, London Guarantee Insurance Company.
M. Larsen and P. Sinott, “Our Latest D&O Survey Shows . . . , ” Watson Wyatt’s D&O Newsletter (Winter 1989), pp. 1-2. Although related to directors and officers, the comments contained in Watson Wyatt’s D&O Newsletter (Winter 1998) are appropriate to this circumstance: “Current premium, loss, and coverage trends suggest that we could be only a few years away from some fairly adverse loss ratios and shrinking profit margins. Corporate insurance purchasers should, therefore, take a longer term during 1998 or 1999 D&O policy renewal negotiations. While looking to identify the best D&O insurance value for their particular circumstances, they should also be prepared to:

Negotiate a fair price
Establish a long-term strategy to maintain appropriate coverage
Assess the strength and reputation of the D&O liability insurers with whom they negotiate.

In addition, multiyear policies may merit consideration for many companies, particularly if the organization is comfortable with its current insurer.

Lillo DiPasquale is the National Practice leader of Hub International’s—Multiemployer Pension and Benefit Trust Fiduciary Liability Insurance Practice, Canada’s largest Fiduciary Liability Insurance provider for Plan Trustees and Administrators.