Fiduciary Duty or Standard of Fiduciary Duty or Standard of Care: Professionals on the Care: Professionals on the

Fiduciary Firing LineFiduciary Firing Line• MODERATORMODERATOR: : Simon HodgeSimon Hodge, Managing Director, Managing Director

Wachovia Insurance ServicesWachovia Insurance Services

• Christine Dart, Christine Dart, Fiduciary Liability Product Manager, Fiduciary Liability Product Manager, Vice President Vice President

Chubb Specialty InsuranceChubb Specialty Insurance

• Rodger Laurite, Rodger Laurite, Senior Vice President and Unit ManagerSenior Vice President and Unit ManagerLockton Financial ServicesLockton Financial Services

• Harold J. Neher, Harold J. Neher, Assistant Vice President Assistant Vice President AXIS InsuranceAXIS Insurance

Presentation OverviewPresentation Overview

A. Fiduciary Liability – What is it?B. Common Fiduciary Liability ClaimsC. Risk Management for FiduciariesD. Underwriting Fiduciary LiabilityE. Fiduciary Coverage Available Today

Employee Retirement Income Security Act

(ERISA)History:

Funding problems, e.g. Studebaker Vesting abuses

Purpose: Encourage employee benefit plans Minimum standards of conduct Financial soundness

Fiduciary Liability

ERISA Fiduciary Status Fiduciary Duties Exclusive Jurisdiction No Jury Limited Plaintiffs / Defendants Limited Remedies Fee Shifting

Pension Protection Act of 2006DOL proposed regulations on fee disclosure

Fiduciary Duties

Undivided loyalty to participants Due diligence Prudence Diversification Compliance with Plan & ERISA

What Is The Exposure?*

“A fiduciary shall be personally liable to restore to the plan”

Any losses to the plan resulting from a breach of fiduciary duty;

Any profits made by the fiduciary through the use of plan assets

Equitable or remedial relief as the courts deem appropriate.

* Source: ERISA Sec. 409

Indemnification

Often times indemnification provisions are inadequate

An employer may become insolvent or not have adequate cash flow to pay the losses

Due to some statutory limitations, some claims may be insurable but not indemnifiable

Section 410 ERISA Exculpatory Provisions

Common Fiduciary Liability Claims

Denial of Benefits Negligent E & O Mismanagement of Investments Improper Disclosures Excessive Fees Implications for underwriting, exposure and

claims management

Fiduciary Liability: Claims

Claims Examples ERISA tagalong suits to shareholder class actions Liability of fiduciaries to monitor and adjust investment

alternatives Age discrimination in cash balance plans Excessive fees charged to plans by service providers and mutual

funds held by plans ERISA § 510 claims involving employment discrimination

Potential Severity Enron - $37.5 million partial settlement

Is in addition to the earlier $356.25 million partial settlement reached in 2005

Tentative settlements have also been reached with Jeffrey Skilling and the Estate of Ken Lay

HealthSouth - $28.85 million Williams Companies - $55 million CMS Energy - $28 million

Risk Management

Other Insurance Protection:

ERISA Bond Required by ERISA and protects for theft but not

breaches of fiduciary duties under ERISA Pension Protection Act has increased the bond limit for

employer securities in a plan to $1million

Employee Benefits Liability Responds to administrative errors & omissions

Directors and Officers Most policies contain an ERISA exclusion

Underwriting Fiduciary Liability

What are some key underwriting issues? Excess Side A D&O LaRue case: impact on underwriting and exposure Tag-along suits Tie-in with D&O

Effect on claims resolution Side A D&O policies don’t generally have ERISA

exclusions D&O retentions usually much higher than Fiduciary

Claims Management

Fiduciary Liability Coverage Available Today

Fiduciary Coverage: Key Issues Benefits Due Exclusion ESOP Definition and Coverage Conduct Exclusions Severability of the Application Administrative E&O

Fiduciary Liability Coverage Available Today

Additional coverage extensions Side A / Non-Indemnifiable Loss Order of Payments HIPAA and COBRA violations Voluntary settlement programs and compliance IRS fines/penalties Informal DOL or Pension Benefit Guaranty

Corporation fact finding investigations Pre- and post-judgment interest & punitive

damages where insurable Foreign equivalents Waiver of Recourse – Section 410(b)(1)

Fiduciary Liability Coverage Available Today

Limit of Liability and retention Appropriate limits generally based on plan assets

and plan participants Other determining factors:

M&A Activity Industry Risk tolerance Trustees/Fiduciaries desires

Greater exposure for companies with employer stock in the plan(s) and/or ESOP exposure

Audience Q & A

• Simon Hodge• Chris Dart• Rodger Laurite• Harold Neher

A copy of this presentation will be available on the PLUS website next week.

Many Thanks To:Many Thanks To: