Author: Rebecca Dauparas
Fiduciary Liability insurance historically has been a stable management liability product with minimal premiums and low to no retentions. Insureds began seeing dramatic changes in their renewal programs starting in 2020, raising many questions and resulting in most insureds reevaluating their Fiduciary Liability program. Though the fundamental costs of the product have increased, the premise of the Fiduciary Liability coverage remains intact and valuable protection for plan sponsors, plans and fiduciaries.
What we saw in 2021
The past year was universally challenging for Fiduciary Liability carriers, brokers and insureds due to a significant uptick in excessive fee claim frequency in 2019-2020. Excessive fee claims generally allege plan sponsors and/or plan fiduciaries breached their ERISA fiduciary duties by requiring participants to pay excessive fees, by offering plan investments with high expense ratios or by charging plan participants directly or indirectly high recordkeeping fees.
In response to the increase in claims, insurance carriers universally adjusted Fiduciary Liability insurance terms and conditions. Actions taken include reducing limits offered, increasing retentions and increasing both primary and excess premiums. Additionally, carriers addressed excessive fee exposure by adding separate retentions for excessive fee or class action claims, sub limits for excessive fee claims and/or excessive fee exclusions.
Several carriers limited their Fiduciary Liability appetite to excess only placements. A few carriers exited the market for new business submissions, especially if unsupported by D&O, Employment Practices Liability (EPL) or Crime.
Carriers also required expanded submission materials, including excessive fee questionnaires, 408(b)(2) disclosures and 404(a)(5) participant fee disclosures. This information is now the key component in determining terms and conditions available in the market for an insured with a defined contribution plan.
Plaintiff firms continue to target certain industries such as higher education, healthcare and financial institutions for excessive fee claims resulting in most carriers severely limiting their appetite for these risks or ceasing to offer coverage for these industry segments.
Current state of the market
Per the chart shown below, the excessive fee claim frequency in 2021 was approximately half the volume seen in 2020. However, 2021 filings are still significantly higher than the number of excessive fee claims filed annually from 2006 to 2018.
Speculation by Fiduciary Liability insurance carriers that actively track Employee Retirement Income Security Act (ERISA) litigation is that certain law firms that were very active filers in 2019-2020 are focusing on their open cases. Firms may also be awaiting the pending U.S. Supreme Court decision on Hughes v. Northwestern1. While the decrease in claim frequency is a positive development, the Fiduciary Liability insurance market is still dealing with the impact of the open caseload.
The number of plaintiff firms pursuing these cases continues to expand. Historically excessive fee lawsuits targeted Fortune 500 companies and plans in excess of $2 billion in plan assets. Now excessive fee cases are being filed against all plan sponsors with plan assets of all sizes and in all industries. Approximately 46% of the lawsuits filed between 2018 and 2020 were against plans with less than $1 billion in plan assets.1
Source: Information derived from numerous publications and sources including but limited to Groom Law Group, Seyfarth Shaw LLP, Chubb, Euclid Specialty and PLANSPONSOR
The increase in excessive fee filings has resulted in a corresponding increase in settlements. Between 2016 and 2020, there was almost $1 billion paid in excessive fee settlements. This figure does not include defense costs.2
Defense costs incurred for excessive fee claims are trending higher than traditional benefit due claims due to the utilization of specialized ERISA counsel. Exasperating this issue is the low dismissal rate for excessive fee cases. Approximately 1/3 of excessive fee cases are granted a motion to dismiss. Average defense costs to reach a final determination on a motion to dismiss range from $1 to $3 million. For cases that survive a motion to dismiss, defense costs exponentially increase and can exceed $10 million.
The Fiduciary Liability insurance market has not seen an increase in rates since the early 2000s. Carriers are adjusting policy premiums on both primary and excess policies at varying levels depending on the specific risk characteristics and premium increases obtained in the past 24 months. We do not anticipate primary Fiduciary rates to decrease in the next 12-18 months.
What we are watching
In a highly anticipated excessive fee case ruling, the Supreme Court held in Hughes v. Northwestern that offering prudent investment options does not preclude claims alleging that other options are imprudent. Specifically, the court expanded their prior "duty to monitor" holding in Tibble to find that a vast list of investment options does not prevent the fact-specific inquiry as to whether fiduciaries were prudent in offering certain investments. From an underwriting standpoint, excessive fee cases will likely continue to survive motions to dismiss at higher rates than the insurance marketplace would like and increase costs due to discovery and class certification. It remains to be seen the extent to which this ruling will impact the fiduciary liability insurance market.
In addition to excessive fee litigation, the Fiduciary Liability market is seeing cases against plan sponsors for utilization of out-of-date mortality tables when calculating retiree benefits in defined benefit plans. Noteworthy settlements in 2021 include $59.2 million paid by Raytheon to resolve a class action complaint filed by retirees in 2019 alleging the company used a 1971 mortality table to calculate annuities for pension plan participants.3
Health plans are experiencing claims surrounding COBRA notice adequacy, including expansions under the American Rescue Plan Act. The Department of Labor (DOL) and private plaintiffs are also scrutinizing plan compliance with Mental Health Parity and Addiction Equity Act.
Cyber incidents that impact employee benefit plans are a growing area of interest and concern as plans can be targets for cyber theft. In response, the DOL, in 2021, issued cybersecurity "best practices" for plan sponsors and fiduciaries to maintain in respect to employee benefit plans. Fiduciary Liability insurance does not typically cover actual loss or theft of plan assets due to a cyber breach. However, in most instances, it will respond to allegations of breach of a fiduciary duty, such as maintaining adequate cybersecurity practices.
In 2022, we expect to see some stabilization in Fiduciary Liability insurance terms, conditions and premiums for insureds who experienced significant changes to their programs in 2021.
Fiduciary carriers continue to adjust their underwriting strategies and appetites. We are seeing carriers move to a maximum Fiduciary limit of $5 million or less for primary and excess. Excessive fee or class action retention levels and/or premiums are still increasing for those insureds who received partial adjustments in 2021.
Carrier appetites for primary and excess will continue to evolve as 2022 progresses. We anticipate new entrants in the Fiduciary Liability insurance market in 2022 given the rate adequacy and retention adjustments made in the market over the past two years.
The Fiduciary Liability insurance market will continue to be challenging to navigate for most plan sponsors in 2022. Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your specific challenges.
Please note: A client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals.