Fiduciary liability opportunitiesk
Travelers study points to need for greater understanding of ris
The soft market conditions that have been a part of the commercial insurance segment for a number of years have caused many agents and brokers to search for new ways to differentiate themselves from their competitors. While they have found a number of ways to do that, they are turning more and more to product knowledge and specialization as a viable way to stand apart from their competition. Capitalizing on this strategy frequently requires identifying a risk that is not fully understood by the general public—or the brokerage community for that matter—and acquiring specialized understanding, combined with an insurance solution to resolve these situations for clients and prospects. And fiduciary risks fit the bill admirably.
Travelers Insurance Company had a similar thought recently and did some significant research on this matter. The survey of more than 250 independent agency employees produced some interesting findings. The respondents to the survey included a mix of agency personnel, including principals, producers/account executives, customer service representatives, and marketing managers. According to John Trefry, Travelers' fiduciary liability product manager, "All of the participants were involved, one way or another with handling fiduciary liability business for their agency."
In essence, fiduciaries have always been liable for potential negligent action involving employee health, welfare, and retirement plans. However, it was not until the passage of the Employee Retirement Income Security Act of 1974 (ERISA) that claims in this area became prevalent. Before this, notes Trefry, "There was no federal law that provided a civil enforcement mechanism that allowed plan participants to bring a private right of action against plan fiduciaries." For the most part, ERISA substantially increased the liabilities of U.S. fiduciaries, since it better defined some of the responsibilities and associated liabilities. "Now," Trefry says, "fiduciaries are personally responsible for any breach in their duties" and "there are federal civil enforcement remedies." He goes on to point out that at the end of the day, "This really changed the exposure landscape for companies and the executives that managed these plans."
Trefry also notes that one of the biggest issues from an agent/broker standpoint is the number and type of related coverages that surround fiduciary liability coverage. In addition to the fiduciary liability coverage itself, there are:
• Fidelity bonds—provide a form of insurance to plans for dishonest acts by fiduciaries, but they do not provide fiduciaries with insurance protection against third-party lawsuits.
• Employee Benefits Liability (EBL) insurance—provides coverage for claims arising out of errors or omissions in the administration of the plans, but EBL policies typically exclude damages imposed on fiduciaries by ERISA.
• Directors & Officers Liability—frequently believed to offer coverage for these types of losses; however, most D&O policies contain specific exclusions for claims arising out of ERISA-related situations.
The survey, It's Time to Untangle Fiduciary Liability, helped to define what agents were experiencing in the marketplace and what knowledge was still needed to allow them to best serve their commercial clients.
Trefry says that Travelers "learned a lot about the buying behavior of many of our clients and their agents." An important finding was that the agents indicated that only about 17% of their clients initiate discussions regarding fiduciary exposures. Travelers also learned that few clients are initiating a discussion with their agents about their fiduciary exposure, but agents are providing a quote almost half the time (46%), and of those 48% purchase the coverage. Trefry says that Travelers believes that the "agents understand enough about these products to sell them, but find it difficult to properly communicate the concepts of fiduciary responsibility and the accompanying liabilities to the client." He indicates that this is due to the limited knowledge the client has about ERISA and what it requires of an employer. Bottom line, he says: "Clients do not understand their fiduciary exposures."
Thus, it is important for agents to provide proper education for clients and prospects. But, according to Trefry, "There is simply not a lot of information that is easily available to agents or clients on this subject." For example, few agents and fewer clients understand how important this coverage can be. Claims, for example, are one area that can provide a clue as to the importance of this coverage. Claims subsequent to ERISA have increased significantly. "Over 9,000 ERISA cases were filed in federal courts over the past year," notes Trefry. Additionally, a lot of other enforcement activity is going on as well. According to the Department of Labor, 2010 saw 3,112 civil investigations with 74% closed with some type of monetary consideration.
In addition to any monetary settlement, most policies also cover the cost of defending the claim as well. When asked, most of the agents (68%) considered covering the costs of defending the claims as the top benefit of the coverage. The agents also noted several motivators for their agency to sell this coverage. Among the more popular reasons were "make sure my client's fiduciary exposure is covered," and "round accounts to strengthen the client relationship." A distant third place was "reduce the agency's E&O exposure."
According to Trefry, "The missing piece for Travelers was the realization that we needed to provide more outreach educational endeavors." He says that's coming through loud and clear. "We need more continuing education classes on this subject and we need to provide the agents with more tools for their tool box to help educate their clients and prospects." The survey "has shown us what we had long suspected; it validated our assumptions," and provided a strategy forward.
Responding to the challenge
While an increase in educational opportunities should assist agents in selling fiduciary liability coverage, it really starts with a superior product. Travelers fiduciary liability coverage can be purchased as a stand-alone policy or part of a larger management liability package policy. Either way, the coverage has a broad definition of "loss," as well as a broad definition of "insured." In addition, Trefry points out, "You get our four decades of underwriting experience. From a financial standpoint, we offer insurance products provided by a carrier with financial stability that enjoys a top-notch credit rating."
Also included is one of the industry's best risk management programs. "Our risk management program has a specially designed ERISA help line which provides access via a 1-800 number, to one of the premier ERISA law firms," says Trefry. The law firm can provide guidance with regard to this exposure. Also included is access to a library full of other fiduciary liability educational materials.
Many corporations have failed to see the significance of ERISA-related claims. According to Trefry, "They have no idea just how broad the ERISA definition of a fiduciary really is." This broader definition has opened the door to potential problems from many corporate executives. However, it has also opened the door for agents "to strengthen their relationships with their clients and prospects by providing an insurance solution for this seriously overlooked problem."
In order to see the true magnitude of this "overlooked" problem, Trefry notes that you only have to see some of the closed cases. For example, recent stats from Towers Watson indicated that the average judgment/settlement of these types of claims is $994,000, while average defense costs are about $365,000. All this serves to highlight both the high risks involved in managing benefit plans, as well as the opportunity that this exposure provides for agents.