This is the third in my series of posts called Plan Sponsor and Fiduciary 2.0, which addresses how fiduciaries and plan sponsors should now be conducting themselves in light of operational changes, legal developments, and liability risks that have developed over the past ten to fifteen years. You can find the origin story behind this series here, as well as prior posts on handling vendor contracts here and on relying on litigation expertise here. The focus of this series is on steps that plan sponsors and fiduciaries should take to update their practices for the current environment in which they operate.

The importance to plan sponsors and fiduciaries of insuring their liability risks in running benefit plans, particularly 401(k) or other retirement directed plans, in the modern era (namely, the time after the class action bar started coming after ERISA plan fiduciaries regularly) cannot be overstated. In this post, I address both the increased importance of a properly constructed insurance program for plan sponsors and fiduciaries, as well as the need in current times for plan sponsors to fully understand that program and to best use it to their advantage.

Historically, in my view, fiduciary liability insurance – which provides coverage for liability risks of fiduciaries in running ERISA plans – was a tag along coverage, often, in my experience, purchased almost as an afterthought to D&O insurance, which was where the focus in setting up the insurance program was typically centered. There was a good reason for this, which was that the director and officer exposures were of more concern to all involved, from the insurer to the risk manager to the broker to the Board. Over time, as the fiduciary liability risks and exposures in running ERISA plans have expanded, fiduciary liability insurance has taken on its own status and importance, often co-equal to D&O coverage in setting up an insurance program. In today’s world, if fiduciary liability insurance isn’t treated with as much importance as insuring a plan sponsor’s other risks, it should be.

That’s point number one for plan sponsors – take fiduciary liability insurance very seriously, and don’t treat it like just another part of the corporate insurance program. Litigation costs and settlement exposures from ERISA litigation, particularly class action litigation claims, are too high and the coverage can be a lifesaver in that regard.

Point number two for plan sponsors is to pro-actively understand the coverage. More and more often, I am asked to do a preemptive review of coverage and address for plan sponsors and fiduciaries where the gaps may be in coverage and whether they have the right protection in place. As the title of my blog – Boston ERISA and Insurance Litigation – highlights, my expertise overlaps both insurance coverage and ERISA, making this type of review a natural fit for my experience. Regardless of who does it, though, plan sponsors should conduct this type of a review of the coverage for their benefit plans regularly, perhaps as part of policy renewal.

Plan fiduciaries – who often will be corporate executives charged with overseeing a company’s benefit plans – should insist on this type of review, if the risk management department or, in smaller companies, the Board, isn’t doing it on their own as a matter of good governance. Plan fiduciaries obviously face potential personal liability exposure under ERISA, so they are the ones most at risk if the insurance program is insufficiently robust (I could tell you some war stories about this by the way, but this isn’t the place for them).

Point number three for plan sponsors and fiduciaries is to consider how much control of lawsuits against them that they want to have under their fiduciary liability insurance policies. Many such policies do not allow plan sponsors to use their usual outside counsel to defend such cases and limit plan sponsors and fiduciaries to the insurer’s panel counsel or other counsel selected by the insurer. Let me be clear – there is nothing inherently wrong with that. I have prevailed in a number of cases for plan sponsors and fiduciaries where I was the defense lawyer selected by the insurer, so I am not here to suggest that there is anything wrong with this approach.

However, ERISA litigation poses risks for plan sponsors and fiduciaries that are very different from those posed by other types of insured exposures. These include in particular the risk of personal exposure to executives, as well as the reputational harm of being painted – possibly entirely unfairly – as poor stewards of the benefits of the plan sponsor’s own employees. ERISA litigation can also trigger extensive disruption for plan sponsors, partly because the issues being litigated often have a history that runs back many years and, moreover, can touch on numerous events and involve multiple parties.

For many insured plan sponsors, these risks and disruptions can be reduced by having their usual, long running outside ERISA counsel and litigators defend them against claims covered under their policies. My recommendation to my own clients in this regard is to ask to have the right to use their own counsel, usually by identifying their existing counsel as the choice, written into an endorsement in the policy. My own contacts in the insurance industry have recommended this approach to me, and I always pass this along to my own clients whenever I can.

For more on this last idea, insurance coverage lawyer Bradley Dlatt, who represents policyholders in coverage disputes, has an excellent post on LinkedIn on this point that, by sheer coincidence, he posted while I was working on this latest entry in my Plan Sponsor and Fiduciary 2.0 series. You can find it here, and it does a nice job of providing an overview of the issues of, and reasons for, seeking to endorse policies in this way.