Fiduciary Liability

CrawfordAdvisors, LLC

Consulting, Brokerage & Administration

November 4, 2010

Patrick C. Haynes, Jr. Today’s presenter

As counsel for Crawford Advisors’ Employee Benefits and Executive Compensation Group,

Mr. Haynes advises employers and plan sponsors in a variety of health and welfare benefit plan

compliance matters, including, but not limited to, tax qualification and other Internal Revenue Code

issues, ERISA, COBRA and HIPAA portability and privacy issues. Mr. Haynes lectures frequently

and has published many articles on health and welfare benefit plan compliance topics.

Practice Areas

Employee Benefits & Exec Comp, ERISA, COBRA, HIPAA, §125, and §§ 105, 106, 129, 132

Education

Temple University School of Law, LL.M.

Rutgers University School of Law, J.D.

Rutgers University School of Business, M.B.A.

Rutgers University College of Arts & Sciences, B.A.

Admitted to Practice

U.S. Supreme Court

Federal and State Courts of

New Jersey

Pennsylvania

Connecticut

District of Columbia

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Agenda

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Basics of Fiduciary Liability under ERISA

The Importance of Fiduciary Liability Insurance

Fiduciary Liability Claim Examples

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Liability Under ERISA

•Under ERISA, an individual/organization is a fiduciary if that entity/

(person) has “any” discretionary control over management.

•Any person that has the responsibility for investment, control, or

disposition of assets held in the plan is a fiduciary.

•ERISA defines “employee benefit plans” as any one plan, fund or

program established or maintained for the purpose of providing to

its participants or beneficiaries employee benefits.

•Fiduciaries are subject to the “prudent man” rule under ERISA (code

404). This rule says that fiduciaries must, when administering a plan,

act prudently and with undivided loyalty to the participants and their

beneficiaries, subject always to the terms of the plan so long as they

are consistent with ERISA. Fiduciaries are personally liable for their

breeches.

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Fiduciary Liability Insurance

Four Types of Coverage:

1) Fidelity Bonds – required by law*. This form of insurance is required

for dishonesty situations. When dishonest administrators or trustees

have financially harmed an employee benefit plan, these bonds are

used, but only for the benefit of the plan and the plan beneficiaries.

2) Employee Benefit Liability (EBL) - this insurance covers many claims

arising out of errors or omissions in the administration of a benefit

plan, including the failure to enroll an employee in the plan and the

administration of improper advice as to benefits.

3) Fiduciary Liability or Fiduciary Legal Liability – bond or insurance

policy that protects a company from allegations of negligence with

regard to the holding of funds on behalf of someone else. (Breach of

Fiduciary Duties including cost of defense, claims etc…)

*See ERISA, Section 412.

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4) By Endorsement - There is more than one type of fiduciary liability coverage.

Since coverage may also be established using directors and officers (D&O)

liability, commercial general liability (CGL), or trust E&O/professional liability

policies as long as those policies have attached an endorsement that is

specifically tailored to cover fiduciary liabilities.

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With ERISA, most D&O policies exclude ERISA claims.

Removal of such an exclusion would provide

coverage to directors and officers in their fiduciary capacity

with respect to employees but would offer far less broad

coverage than a typical endorsement which also protects:

•the plan itself

•the corporate sponsor

•the individual non-officer fiduciaries

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Claim Examples

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Breach of Fiduciary Duty - $80,000

Two EE’s filed suit against a seed

manufacturer, alleging they had been

told they were automatically enrolled in

the company 401(k) plan. The plaintiffs

claimed their ER had a fiduciary

responsibility to inform them of their

non-enrollment and provide them an

opportunity to enroll. An insurer paid

$80,000 in defense costs before

summary judgment was granted in the

insured’s favor.

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Failure to Fund Benefits - $200,000 A telecommunications firm maintained a self-insured health

plan. When the company was forced into bankruptcy,

employees sued officers and management of the company

for failure to ensure the company funds would be used to pay

outstanding medical benefits rather than general company

obligations. An insurer defended the case, which resulted in

a summary judgment in favor of the telecom firm.

An insurer paid in excess of $200,000 toward defense fees.

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Breach of Fiduciary Duty - $120,000

The Department of Labor (DOL) investigated a

communications company for the methodology the

company used in determining the allocation of Plan

earnings and expenses between active and non-active

participant accounts.

The DOL initially asserted losses in the range of $317,000

to non-active participants’ accounts. The case was settled

by an insurer for $120,000.

Benefits Communications - $150,000

Six retired employees of a nonprofit consulting firm sued

the firm, alleging entitlement to early retirement benefits.

The plaintiffs alleged they relied on oral and written

representations of the plan administrator, (an EE from HR).

•The plan document was alleged to be ambiguous, preventing

a successful motion for summary judgment.

•An insurer provided defense to its insured and paid $150,000

in resolving the dispute.

Benefits Eligibility - $1 million

A group of independent contractors sued a company,

asserting they were eligible to participate in the insured’s sponsored

employee benefit plans.

•The plaintiffs, who were accountants hired during the tax season, argued

that they met the plans’ eligibility Requirements.

•The plaintiffs sought retroactive benefits, including matching contributions in

the 401(k) plan and earnings on those contributions.

•The court granted summary judgment to the insured.

•An insurer paid more than $1,000,000 in legal defense fees.

Breach of Fiduciary Duty - $100,000

A software manufacturer faced a claim for life insurance

benefits. While the plaintiff was out of work on long-term

disability, the insured made the decision to change life

insurance carriers.

During the transition, the insured neglected to identify the plaintiff as an EE.

The plaintiff subsequently died, and the new life carrier denied coverage,

citing a policy that only covered active employees.

Since the death did not occur during the old policy period, the old carrier

also denied the claim. A claim was subsequently made by the decedent’s

estate against the insured for the life insurance benefits. The ER’s insurer

contributed to a settlement including contributions from both the old and a

new carrier.

Breach of Fiduciary Duty - $250,000

A Midwestern manufacturer failed to submit the

requisite forms for an EE’s life insurance policy,

but continued to deduct a premium from the employee’s

paycheck.

•When the EE died, the life insurer denied the claim.

•The EE’s heirs sued the plan fiduciary, and recovered

$250,000 from the insurer.

Failure to pay health care benefits - $30,000

The parents of a deceased child sued a trucking company

and a TPA for payment of health care benefits by a local

hospital. The TPA, on review of hospital charges, reduced the

charges by more than $100,000.

•The suit alleged the failure to pay violated the insured’s

fiduciary duty under ERISA.

•The insurer defended the suit and the case was dismissed

after incurring $30,000 in legal fees.

Failure to Provide Disability Coverage - $550,000

An EE enrolled in the LTD plan filed suit against a clothing store,

alleging violations of ERISA, the Americans with Disabilities Act,

and Title VII.

Specifically, the plaintiff alleged the insured had wrongfully

terminated her due to disability. The insurer afforded a Defense.

At trial, it was determined that the plaintiff was entitled to LTD

benefits and that the insured had breached its duty in failing to fully

consider all of the medical information. The case was appealed

and was settled prior to a decision.

In addition to significant defense costs of $300,000, the insurer

agreed to pay the plaintiff’s attorney fees in the amount of $250,000.

Questions

Crawford Advisors, LLC

• 200 International Circle, Suite 4500, Hunt Valley, MD 21031

• 555 East Lancaster Ave, Suite 640, Radnor, PA 19087

• 800.451.8519

• www.CrawfordAdvisors.com

Via E-mail to: webinars@crawfordwebinars.com

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