Guest Post: Settlor Capacity v. Fiduciary Capacity -- Does Wearing Two Hats Mean You May be Denied Coverage?
I am pleased to publish below a guest post from Rhonda Prussack, Executive Vice President and Product Manager, Fiduciary Liability, for Chartis, and her colleague at Chartis, Larry Fine, Global Head Professional Liability Claims, Financial Lines Claims. Rhonda’s and Larry’s guest post is written in response to a recent guest post on this blog about the scope of fiduciary liability insurance, written by Kim Melvin and John Howell of the Wiley Rein law firm. Kim and John’s prior guest post can be found here.
I would like to thank Rhonda and Larry for their willingness to publish their article on this site. I welcome guest posts from responsible commentators on topics of interest to readers of this blog. Any readers who are interested in publishing a guest post on this site are encourage to contact me directly. Here is Rhonda’s and Larry’s guest post:
In Ms. Melvin’s and Mr. Howell’s article on the IBM coverage denial decision posted here on September 19th, several good points were made, notably that plan fiduciaries typically wear “two hats” – one as settlor (i.e. the party making a business decision about a plan – for instance to terminate benefits or amend the terms of a plan) and the other as plan fiduciary (i.e. the party implementing the plan changes). However, Ms. Melvin and Mr. Howell then concluded that policyholders should not expect or necessarily want their policies to cover settlor capacity matters, even for an insured that wears two hats.
The IBM Case
In the plan participant class action against IBM, the plaintiffs alleged that IBM’s conversion of a traditional pension plan to a cash balance pension plan violated ERISA. An excess fiduciary liability carrier denied having any coverage obligations on the grounds that the underlying suit related to “settlor capacity” acts as opposed to “fiduciary” acts. A federal district court (and more recently a circuit court of appeals) upheld the carrier’s denial. As the authors correctly asserted, these decisions did not create a gap in coverage. Nevertheless, they exposed an existing gap which carriers have been handling differently.
Is the Defendant a Fiduciary?
The question of whether a defendant is a fiduciary at all, or whether they were acting as a fiduciary when performing the acts in question, is often the main disputed question in an ERISA suit. For many years, certain carriers were narrowly interpreting their policies for clients that wore two hats and taking coverage positions based on opinions on the underlying merits of cases and defenses raised therein. These carriers have presented a Hobson’s choice in which successful defenses based on lack of fiduciary status have led to the threat of lost coverage. More customer-focused carriers, concerned that insureds get the benefit of their bargain, have been interpreting their policies more broadly, and some are now clarifying by means of endorsements.
Coverage Denials Based on Settlor Capacity
Ms. Melvin and Mr. Howell also pointed out that lawsuits “involving purely settlor issues are rare,” although in our experience, many carriers commonly reserve the right to deny coverage on that basis. Often the result of these two facts is that insureds have to either fight with their carrier concerning allocation, or live in fear of future efforts by the carrier to recoup what it has paid, especially if the insureds are successful in a “settlor act” defense.
Coverage Not Traditionally Limited to Individuals
The authors also made the point that fiduciary liability insurance arose at least in part from the desire to protect individuals against the personal liability imposed under ERISA for breaches of fiduciary duty. However, despite the individual fiduciary coverage at its core, fiduciary liability insurance for commercial insureds has traditionally included coverage for the organization sponsoring the plans, as well as for the plans themselves - even when individual fiduciaries are not named in a suit. Yes, individual plan fiduciaries should definitely be concerned about their exposures (and the fact that they are expressly excluded from D&O policies). To address that concern, the most cutting-edge policies provide ample protections for individuals, including advancement of defense costs when the corporate sponsor fails to do so. However, the reality is that fiduciary liability policies cannot compete in today’s market if they limit their protections solely or even primarily to individual fiduciaries.
Costs in Settlor Matters Can Be Significant
It is true, as the authors maintained, that fiduciary policies do not step in to pay “benefits” owed pursuant to a plan, so that the coverage for “settlor act” claims, which some carriers provide, will generally be limited to defense costs. It should be noted, however, that defense costs alone in purported “settlor act” cases can be in the substantial 8-figure range. It is clear that carrying sufficient fiduciary liability insurance is eminently prudent and turning down broad coverage is ill-advised, since the product is still relatively inexpensive and offers substantial protection to corporate bottom lines.
Insureds have a right to expect that their fiduciary liability policies will protect all Insureds (including the plan itself and the corporate sponsor) from the various types of suits alleging breaches of ERISA and similar laws.