By Donald S. Malecki, CPCU

When it comes to fiduciary liability, and employee benefits liability coverages, there are two schools of thought on how the coverages should be handled, assuming both are necessary. The first is that both coverages should be combined into one policy. The second school of thought is that they should be handled separately.

Whether one method is more advantageous over the other is something that cannot be determined until the facts involving a given insured are considered, even though each of these coverages serves different purposes. This is an important point to remember, particularly since there is a tendency of insurers to combine both into one fiduciary liability policy.

Employee benefits liability

It was the 1962 court case of Gediman v. Anheuser Busch that is said to have prompted the need for employee benefits liability insurance. In this case an employer was held accountable to the estate of a former employee for providing incorrect information. Employee benefits liability coverage appeared on the market shortly after that case was decided.

The intent of this coverage, generally, is to protect entities, their officers, directors, stockholders, partners and partnerships, as well as employees who are authorized to act in the administration of any plan, in the event of a claim against them by former, present, or future employees, their beneficiaries, or legal representatives. The damages, if they are to be covered, hinge in part on negligent acts, errors or omissions in the administration of various plans.

The administration of the plans usually covered by this insurance are: group life and health; profit-sharing and pension plans; employee stock subscription plans; workers compensation and unemployment insurance; social security; and disability benefits coverages.

Two of the typical exposures that would be considered an object of employee benefits liability coverage are the following: When an benefits administrator (1) erroneously calculates the amount of pension program and an employee elects early retirement only to find out that the amount is considerably less; and (2) forgets to enroll an employee for the company's hospitalization program and the employee finds out about this omission following a serious illness.

Fiduciary liability coverage

Fiduciary liability coverage, also commonly referred to as pension trustees liability coverage, is commonly purchased by employers subject to the Employee Retirement Income Security Act of 1974, and Congressional amendment thereto (ERISA). Although not mandated by ERISA, fiduciary liability coverage is designed to cover losses caused by administrators, trustees, and other fiduciaries as a result of their wrongful acts committed while handling covered employee benefit programs.

Reference to "retirement" in the official title of the Act may be misleading because more than retirement or pension plans is involved. Also included is a variety of employee benefits provided by private employers that are engaged in interstate commerce or are otherwise subject to federal minimum wage law. Plans therefore could include profit-sharing, disability, medical, and life insurance.

How coverage is provided

Traditionally, employee benefits liability coverage has been provided by endorsement to general liability policies. In fact, the endorsement is almost automatic for most insurers issuing the commercial general liability policy for businesses, since businesses need it if they have one or more employees.

Most such endorsements are written on a claims-made basis without a retroactive date. Of course, if an insurer can prove that an employer's administrator was cognizant of a negligent act in the administration of an insurance plan prior to the inception of employee benefits liability coverage, the employer is likely to be confronted with a denial of coverage.

Even though an employee benefits liability coverage endorsement is written without a retroactive date, the CGL policy needs to be reviewed carefully at renewal to make sure no retroactive date is added. The same goes for such an endorsement with a retroactive date. With each passing year, the retroactive date must remain unchanged and correspond to the date that was first designated.

What if an employee benefits liability coverage endorsement written on a claims-made basis is attached to a CGL policy written on an occurrence basis? This should not present a problem so long as no retroactive date applies to the endorsement. Even if a retroactive date applies, problems can be avoided if the retroactive date remains unchanged with continuous coverage.

While there is no standard employee benefits liability coverage endorsement, it has been around long enough that insurers have been able to structure the coverage so that the scope of coverage is similar. As an endorsement to a CGL policy, employee benefits liability coverage typically is written subject to a separate limit corresponding to the CGL policy limit applying to the other coverages provided. This means that coverage may also apply follow form when an umbrella policy is issued. This is especially advantageous because employee benefits liability can be labeled as an exposure that is subject to a frequency of loss with a severity potential.

Fiduciary liability coverage also is nonstandard in nature. Although it has been available for many years, it still contains enough differences among policies so as to warrant fine-tooth-comb inspection. About the only similarity in these policies is that most (but not all) are on a claims-made basis and may combine employee benefits liability coverage, thereby dispensing with the need for the endorsement commonly added to the CGL policy.

The fiduciary liability limits selected also need to be handled with care because fiduciary liability coverage is seldom subject to umbrella liability coverage. If there are exceptions whereby an umbrella policy applies as excess, they would be rare. Also, many of these policies contain so-called "cannibal" limits, meaning that the limit is normally exhausted by a combination of legal and defense costs, and the payment of damages.

Employee benefits liability coverage often is combined with fiduciary liability policies, subject to the single limit. This is a distinct disadvantage because fiduciary liability presents an exposure that is infrequent but severe. The purpose for purchasing a fiduciary liability policy, therefore, can be wiped out with frequent employee benefits liability claims.

Avoiding problems

What often happens more than some people realize is that employers maintain employee benefits liability coverage by endorsement to their CGL policy for many years and then decide to purchase a fiduciary liability policy when they can afford one, or when their business grows enough to be subject to ERISA. If the fiduciary liability policy includes employee benefits liability coverage, care must be exercised that some or all of the employee benefit coverage is not nullified.

Let's say, for example, that an employee benefits liability coverage endorsement, without a retroactive date, was added to a CGL policy in 1995. In the year, 2000, the employer decides it also needs fiduciary liability coverage. The fiduciary liability policy incorporates employee benefits liability coverage, subject to a retroactive date corresponding to the policy's inception date. Employee benefits liability coverage under the CGL policy does not end. In doing so, it creates a potential other insurance problem, when the insurer providing the fiduciary liability policy finds out the insured has coverage with the CGL insurer.

If the employee benefits liability coverage endorsement is deleted from the CGL policy, and the insured relies on coverage from the fiduciary liability policy, the limits may need to be increased substantially when the fiduciary liability policy's limits are exhausted by a combination of damages and legal costs. This is particularly important considering that (1) employee benefits liability coverage is a frequent loss exposure, and (2) fiduciary liability coverage is not commonly subject to umbrella liability policies.

Points to consider

There are far too many scenarios to consider here involving the decision of whether to combine the two coverages or to keep them separate. However, the following should be considered by those who are interested in not shooting themselves in the foot in handling both coverages for their clients.

The last category above, dealing with insureds, needs to be reviewed carefully. The reason is that the fiduciary liability policy that combines employee benefits liability coverage is essentially two separate and distinct coverages, as should be the case. This means that those who are to be covered also should be different. However, there may be instances when the employee benefits liability coverage endorsement encompasses more insureds than when that coverage is combined with a fiduciary policy.

If there are instances where the two coverages have been combined and where employee benefits liability coverage had been previously provided by endorsement, it might be necessary to have employee benefit coverage deleted from the fiduciary policy. If that is not possible, it may be wise to search for another fiduciary liability policy.

Arranging for excess coverage under an umbrella policy for employee benefits liability coverage that is combined with a fiduciary liability policy may not work either, particularly when the fiduciary liability policy carries a later retroactive date--for example, the year 2000 in the above example *