FIDUCIARY LIABILITY MOVES INTO SPOTLIGHT

Retirement plan trustees, other fiduciaries face tightening market

"There hasn't been a great deal of focus on fiduciary liability in recent years, primarily because stock market returns were high. Now ... we're seeing a good deal more pressure on fiduciaries of companies."

-- John Kuhn, President Kemper Financial Insurance Services

With all the corporate scandals that are being reported every day--Enron, Tyco, ImClone, and the others--a great deal of attention has been understandably focused on directors and officers liability insurance. However, little press attention has zeroed in on fiduciary liability even though fiduciaries of employee benefit plans are more exposed to lawsuits today than ever before, particularly in light of the recent Enron scandal.

With the Enron situation, employees of the organization were required to invest in the company's stock in order to receive their 401(k) pension benefits upon retirement. Only employees who had reached the age of 50 were allowed to diversify their pension portfolios. When the company went under, so too did most of the employees' pensions. Though several directors and officers lawsuits have been filed, D&O insurance typically excludes pension plans that are governed by ERISA. Therefore fiduciary liability has moved into the spotlight.

This year's PLUS conference will feature a special panel titled "Breach of Fiduciary Duties: Attack of the Clone Claims." The panel will include: Nicholas L. Bozzo, Kemper Financial Insurance Services; Louis H. Castoria, Wilson Elser Moskowitz Edelman & Dicker; Ray DeCarlo, AIG Technical Services, Inc.; Thomas A. Dubbs, Goodkind, Labaton, Rudolf & Sucharow; and Ann M. Langmore, Willis Global Finance.

The session is designed to explain how underwriters and brokers evaluate professionals' risks of exposures to fiduciary duty claims, and how they may employ risk management techniques to mitigate those exposures. In addition, the session is intended to assist PLUS attendees in becoming familiar with the increased litigation exposures to those who are traditionally considered "fiduciaries"--such as ERISA plan trustees--during times of underfunded or overfunded plans. Finally, the panel session is geared to help attendees understand legislative, regulatory and self-regulatory initiatives in response to nationally publicized fiduciary/professional liability cases involving corporate directors and the professionals who advise them.

"There hasn't been a great deal of focus on fiduciary liability in recent years, primarily because stock market returns were high," says John Kuhn, president of Kemper Financial Insurance Services. "Now that the market has turned, we're seeing a good deal more pressure on fiduciaries of companies ranging from the smallest to the Fortune 200 companies. And, of course, because of Enron everybody in the industry is being hit with fiduciary liability claims."

Kuhn says that many changes are in the offing as the result of recent corporate scandals. "There are many companies that base their employees' pension benefits on the employees purchasing company stock. It demonstrates that management and employees have a common goal. They each have a vested interest in the firm. But because of the Enron situation, companies are going to have to be more transparent in their financial reporting to employees. Also, companies with such plans will probably be allowing their employees to diversify their portfolios earlier, perhaps at the age of 40 or 45 instead of 50."

Another area where there will probably be change is in the relationship between auditors and the company. Auditors and the companies they report on will have to make certain that there is no conflict of interest, says Kuhn. For all of these reasons, Kuhn says that the importance of fiduciary liability insurance is becoming more evident.

How things can change in a short time! Last year, the consulting firm of Tillinghast Towers Perrin completed a study on fiduciary liability claims and insurance purchasing patterns. Surveys were mailed to organizations in the United States and Canada. The primary purpose of the survey was to help organizations to assess probable exposures to claims against the fiduciaries of employee benefit programs they sponsor. Data for U.S. participants was in U.S. dollars, and in Canadian dollars for Canadian participants.

Among the 483 U.S. survey participants, all major industrial groups were represented, according to Tillinghast. Their median asset size was approximately $600 million, and 196 organizations with more than
$1 billion participated in the survey.

Tillinghast found that the purchase of fiduciary liability insurance was common among its survey participants, with 90% of U.S. participants and 75% of Canadian participants having some form of coverage. Banks, manufacturers and technology firms in the United States reported the highest prevalence of coverage, with more than 97% carrying insurance. Less than three-quarters of governmental and nonprofit organizations and educational institutions in the U.S. purchased fiduciary liability insurance, according to Tillinghast. Among Canadian firms, utilities and financial services firms reported the highest prevalence of fiduciary liability insurance coverage (93%), while durable goods manufacturers reported the lowest (40%).

About 29% of insured U.S. participants reported no deductibles or retention on their fiduciary liability coverage. Says Tillinghast: "This is a reduction in the percentage reporting no deductibles from 31% in our 1993 survey," says the consulting firm.

Approximately 12% of U.S. firms surveyed reported one or more claims against the fiduciaries of their employee benefit plans over a 10-year experience period. Canadian participants reported only one claim. Nevertheless, Tillinghast says that the frequency of fiduciary liability claims doubled since its last survey in 1993, with most of the increase reported by organizations that sponsor very large benefit plans.

"Organizations with a history of merger, acquisition or divestiture activity and public companies were more than twice as likely to experience a claim against the fiduciaries of their employee benefit plans," says Tillinghast.

Benefits disputes, including denial of benefits, were the most frequently cited fiduciary liability insurance claim issue (47% of claims) among U.S. survey participants.

These findings, however, are from a survey released a year ago. While the Enron situation surfaced only in 2001, its resolution and the resolutions of the corporate scandals that followed it are still a long way off.

Kuhn says that the result of these scandals will be much tighter underwriting standards among fiduciary liability insurance underwriters, plus higher retentions and higher deductibles. *