Fiduciary Liability Insurance & Fiduciary Bonds for Ohio, Indiana, Michigan, Kentucky, and Pennsylvania Businesses
May 14, 2024
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Running a small or mid-sized business (SMB) comes with a lot of responsibility. You’re not just accountable for the day-to-day operations and keeping your employees happy, but you’re also entrusted with managing finances, retirement plans, and other assets on behalf of others. This can be a lot to handle, and even unintentional mistakes can have serious consequences. That’s where fiduciary liability insurance and fiduciary bonds come in. These two tools work together to protect businesses and individuals from financial losses if they’re accused of breaching their fiduciary duty. Let’s dive deeper into what each option offers and why they’re important for SMBs.
Understanding Fiduciary Duty
A fiduciary is someone who holds a position of trust. They have a legal obligation to act in the best interests of another person or entity. In the context of business, this can apply to a variety of roles, including:
- Company directors and officers: They are responsible for acting in the best interests of the shareholders and the company as a whole.
- Benefits plan administrators: They manage employee retirement plans, such as 401(k)s, and ensure they comply with federal regulations.
- Business partners: They owe a duty of care and loyalty to each other.
Fiduciary Liability Insurance vs. Fiduciary Bonds
- Fiduciary Liability Insurance: This type of insurance protects businesses and individuals from financial losses if they’re accused of breaching their fiduciary duty. It covers legal defense costs and settlements associated with claims.
- Fiduciary Bonds: A fiduciary bond is a three-party agreement between the business owner (the principal), a surety company (the obligee), and the beneficiary (often a government entity or the person the fiduciary is responsible for). The bond acts as a guarantee that the fiduciary will fulfill their duties as outlined. If they breach their fiduciary duty, the surety company will pay out a claim to the beneficiary, up to the bond limit.
Sublimit Coverage Items Available:
- Voluntary Settlement Program
- HIPAA
- Pension Protection Act
- ERISA 502(c)
- Healthcare Reform
- Section 4975
Why Consider Both?
While fiduciary liability insurance is crucial for covering legal defense costs and settlements, it doesn’t guarantee that the fiduciary themself won’t be held personally liable, depending on the severity of the breach. Fiduciary bonds, on the other hand, provide a financial guarantee to the beneficiary and can help mitigate the risk of personal liability for the fiduciary.
Claims Scenarios:
- Risky Pension Plan Investments- Employer purchases risk junk bonds or IPO’s and decimates the pension plan that is in force. Employees bring suits to recover damages for the poor decisions that would be considered high risk.
- Healthcare Benefits Administration– An employee is let go prior to a large medical procedure, and after the employer has been made aware of the situation. Without proper healthcare in place the terminated employee has no means to pay for the medical procedure. The employee sues the employer for mishandling the employee benefits plan because they were withholding treatment.
- Excessive 401k Fees– Employees are being charged fees that are in excess of what a normal management fee should be. Over an extended period of time these fees can grow to hundreds of thousands of dollars. Due to the potential of lost investments the employees sue for what they feel is an overcharge of what is reasonable.
- Company Stock Dissolved– A Company declares bankruptcy and the 401k balances are decimated in the process, the employees bring suit against the employee for their fiduciary negligence in handling their 401k balances.
Choosing the Right Protection
- The specific type and amount of coverage you need will depend on several factors, including:
- The size and nature of your business
- The types of employee benefit plans you offer
- Your risk tolerance
- Legal requirements in your state (some states may mandate fiduciary bonds for certain fiduciary roles)
What does Fiduciary Liability Cost?
The cost can be directly associated with the number of assets under management. We didn’t elaborate on the term ERISA until now, but the Employee Retirement Income Securities Act was put into place in 1974 to protect employees against their hard-earned pension contributions. Companies with a retirement plan are required to carry a Fiduciary bond in the amount not less than 10% of the plan value up to a maximum of $500,000. The ERISA cost is directly related to the amount of coverage needed. The minimum amount of premium we’ve seen is $100 per year, with the maximum being around $1,250.
Outside of ERISA, a true Fiduciary liability policy has a ton of variables. They’re typically not very expensive compared to how much they’re protecting. We’ve seen costs as low as $680 per year for a policy that has a $1,000,000 liability limit on an organization that has 50 employees with sales in excess of $25,000,000.
Hitchings Insurance: Your Partner in Risk Management
At Hitchings Insurance, we understand the unique challenges faced by SMBs in Ohio, Indiana, Michigan, Kentucky, and Pennsylvania. Our experienced agents can help you navigate the complexities of fiduciary liability insurance and fiduciary bonds. They can recommend the right combination of coverage to protect your business and its assets. We offer comprehensive coverage options and work closely with you to ensure you have the peace of mind you deserve.
Contact Hitchings Insurance today for a free consultation. We can help you learn how fiduciary liability insurance and fiduciary bonds can work together to safeguard your business.