Why Governmental Risk Pools Need Fiduciary Liability Insurance

Members of governmental risk pools face increasing exposure to claims of breach of fiduciary duty and failure to properly handle various employee benefit plans. Pool members are subject to liability even if they participate in a state public entity retirement system. The following is a summary of key points as to why governmental pools should protect against fiduciary liability with the purchase of fiduciary liability insurance.

Governmental Entities are Subject to the High Fiduciary Liability Standard of Care

Even though fiduciaries of governmental plans are not subject to most of the Employee Retirement Income Security Act (ERISA), they are still subject to fiduciary responsibility exposure under state and local law, common law rules, ERISA Title II tax provisions and plan documents. These sources of fiduciary liability typically mirror ERISA’s high fiduciary standard of care or impose similar fiduciary requirements on governmental plans. The bottom line is that governmental fiduciaries are at risk of personal liability and need risk protection.

Pool Members Cannot Rely on Governmental Indemnification and Statutory Indemnification

Most states have some version of either an indemnification and/or sovereign immunity statute to reduce legal claims against government officials. However, these statutes do not provide sufficient protection against claims of breach of fiduciary duty or failure to properly administer employee benefits. The reason is that most indemnification statutes contain significant exceptions and are sometimes even discretionary. For example, most state indemnification protections are limited to actions within the scope of employment and offer no protection for willful conduct, gross negligence or breach of good faith – allegations that are included in many breaches of fiduciary duty claims. Consequently, government officials cannot rely on governmental immunity or indemnification for fiduciary exposures.

Participation in a state public employee retirement system (PERS) does not relieve the member entity of fiduciary responsibilities. Some states provide that the pension benefits of city or county employees are handled in a statewide PERS that provides pension benefits. This does not, however, relieve city or county executives from fiduciary responsibility. Indeed, while the state handles certain administrative and investment functions for the pension fund, fiduciary responsibility still resides with local officials for many responsibilities:

• Local entities must still ensure contributions to the state PERS are sent on a timely basis, as participants can allege loss of contribution credit or investment income for delays.
• Local officials still have a duty to monitor and ensure that investments are consistent with the investment guidelines outlined under the plan documents.
• Local officials must also review the fees charged by investment managers or incurred through investment vehicles and defray excessive plan expenditures.
• Local officials are also responsible for non-defined pension benefits (supplemental defined contribution, or DC, plans), and non-pension benefits including health & welfare plans, and other post employment benefit (OPEB) plans.
• Trustees must also ensure the financial solvency of the plans under their administration to secure the benefits of participants and retirees.

Importantly, a participant alleging breach of fiduciary duty or improper calculation or distribution of benefits can include the contributing governmental entity as a defendant along with PERS. The member entity has its own independent liability against which to defend.

Even if a member entity contributes to state PERS, any fiduciary liability insurance protecting PERS will not protect contributing member entities. The state PERS will likely purchase fiduciary liability insurance. Nevertheless, any such insurance is intended to protect the specific PERS plan – not contributing members. Those entities need to protect themselves independently of PERS.

Even with PERS, member entities still have responsibility for non-defined benefit pension benefits, including supplemental defined contribution plans (like 401(a) and 457 plans) and health and welfare plans, including OPEB plans. Most municipalities and other governmental entities have supplemental pension plans and health-related plans that are not subject to PERS. Pool members have substantial fiduciary responsibility – and individual liability for responsible government officials – for these additional employee benefit plans.

Benefits of a Fiduciary Policy

Fiduciary policy protects against the personal liability imposed on plan trustees and responsible government officials for any plan losses resulting from the breach and for any profits that were attained through the misuse of plan assets. The policy protects the plan and individual fiduciaries.

Fiduciary policy protects fiduciaries that are found liable for statutorily imposed penalties such as monetary sanctions or corrective fees imposed by the Internal Revenue Service (IRS) and other governmental entities.

Fiduciary policy protects against lawsuits commenced by parties withstanding such as a participant or beneficiary, co-fiduciary or governmental entity.

The Alliant Fiduciary Liability Insurance Program (FLIP)

The Alliant Fiduciary Liability Insurance Program (FLIP) has been specifically tailored for public entity pension plans across the nation. This group purchase program is designed to provide broad coverage terms on a manuscript form combined with highly competitive pricing, saving members an average of 15-25%.

Our innovative approach allows buyers to come together and leverage a competitive advantage in the marketplace, earning greater negotiating power and access to broader terms at optimal rates There is no sharing of limits or retentions and each entity is rated on its own merits. In the face of fluctuating market volatility and catastrophic events, our long-term relationships with A-rated insurance carriers allow our clients to benefit from greater cost savings and stability.  As our program continues to grow, our members continue to benefit. 

Our specialists at Alliant bring over 40 years of experience in creating effective group purchase programs for governmental entities. If you would like more information, please contact Shawn M Kraatz, Senior Vice President, Alliant Specialty, at 949.660.8117 or shawn.kraatz@alliant.com.