As I noted in a recent post, there recently has been an increase in excessive fee litigation against plan fiduciaries. In the following guest post, Larry Fine takes a look at recent developments in excessive fee litigation, and the implications for the fiduciary liability insurance industry. Larry is the Management Liability Coverage Leader at Willis Towers Watson. I would like to thank Larry for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Larry’s article.
After decades of inattention, suddenly the whole world is paying attention to fiduciary liability and fiduciary liability insurance. Risk managers are suddenly having to highlight the coverage to their bosses, trying to explain why they’re having so much difficulty with their upcoming renewals. Carriers are trying hard to assist these struggling risk managers by publishing articles and white papers that say the sky is falling, and consequently insureds who can secure fiduciary liability coverage on any terms at all should consider themselves lucky. Against this backdrop, brokers have been working overtime on behalf of their clients, zeroing in on insurers who are willing to underwrite individual risks with an open mind and constructive approach.
It is indisputable that fiduciary class action volume is way up from where it was a few years ago (particularly in relation to claims alleging that imprudent excessive fees have needlessly reduced the principle invested and consequently cut into investment returns). Several carriers have paid big losses and anticipate that they may be sitting on many more big liabilities in their current claim inventory. Every insurer on earth has taken note and justifiably raised their premiums and retentions. However, while some carriers have in effect fled the field entirely, others have rolled up their sleeves to partner with their clients to navigate this period of uncertainty. Some thoughtful insurers appreciate that the news isn’t all grim and have shown interest in making cautious inroads into this historically profitable product line (and maybe picking up some related Director and Officers liability business).
For decades, fiduciary liability was one of the most profitable products in financial lines, despite premiums being very low compared to Directors and Officers liability policies whose management liability risks are similar. Even during the heyday of class actions arising from price drops to employer stock in company pension plans (sometimes filed at the same time as securities class actions, which implicated Directors and Officers policies), the book was profitable.
Over the last few decades, plaintiff firms have invented many different claim trends. Initially, judges tend to be reluctant to dismiss new types of fiduciary breach cases at the earliest stages. However, eventually virtually every one of these litigation trends has died out. Some examples include class actions arising from cash balance conversions, early retirement windows, unfunded church plans and employer stock price drops. Most recently, it appears that the outdated mortality table actuarial equivalence cases are also ending due to class cert defenses, which have been successful in two cases so far. There’s no reason to think that excessive fee suits won’t also eventually perish, or at least be severely restricted.
The U.S. Supreme Court, which is much more conservative now than when it heard the Fifth Third Bank case (Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014)) that effectively ended stock drop litigation, has agreed to hear the Northwestern University excessive fee case (Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020), cert. granted sub nom., Hughes v. Northwestern University, No. 19-1401 (July 2, 2021) (“Hughes”)). The legal and equitable underpinnings of the excessive fee cases are much weaker than they were in relation to the employer stock class actions. Employer stock cases often involved the loss of life savings whereas in excessive fee cases the plaintiffs have seldom lost any principal; generally, the plaintiffs have enjoyed substantial investment returns, but their lawyers complain that they should have made more. Employer stock cases involved inherent conflicts of interest, whereas excessive fee cases only involve conflicts when there are financial institutions using proprietary funds or affiliated service providers involved. The plaintiffs in the Northwestern University case didn’t allege any conflicts, just that Northwestern University was one of more than a dozen of the most prestigious universities in the U.S. trying and failing to manage their plans perfectly. If the Supreme Court doesn’t uphold the dismissal of the Northwestern University case outright, they are almost certain to provide some clarity around pleading standards, which will likely discourage some of the weakest cases from being filed.
Many of the articles and white papers spreading the panic focus on the “explosion” of excessive fee filings in 2020. In the absence of an authoritative source of such data, the number of excessive fee filings in 2020 has been estimated to be anything from 80 to 100. No matter what statistics one accepts, it is indisputable that the volume of filings was up substantially in 2020, mainly due to the entry into the field of additional plaintiff law firms. However, while even the most recent articles seem to be implying that filing volume has continued unabated into 2021 (or maybe even increased in frequency), early unofficial indications suggest that 2021 volume is on track to be less than 60 suits, down 40% or more. For perspective, it should be appreciated that every year securities class action filings (the main risk for D&O policies) number more than 300, with 10b-5 class actions alone generally exceeding 200 filings. The percentage of suits being dismissed also seems to be rising.
The articles generally discuss settlements as starting at $10 million and going way up from there. It should be noted, however, that at least 11 of the most recent settlements have been for less than $5 million, many for less than $2 million. There have also been cases that have been dismissed in exchange for modest plaintiff fee payments, although those can’t be tracked because they don’t involve court approval or class notification. Consequently, some carriers’ assumption that all or most of the pending excessive fee claims will settle for 8 figures, or be litigated expensively for long periods of time, does not seem supported.
STRIKING WITHOUT WARNING?
Excessive fee class actions seem to some to strike without warning. Although most carriers suddenly have detailed applications, many insurers seem to lack confidence as to what to do with the information. It is certainly true, especially as the number of plaintiff firms bringing these cases has expanded, that suits have been filed against a broad swath of public, private and non-profit entities in various sectors. It is also true that some suits have been filed against entities with surprisingly small plans (the original excessive fee class actions were all filed in relation to plans with well over $1 billion in assets). However, there are patterns that can be discerned by those who are paying focused attention. While plaintiffs have made a wide variety of fee-related allegations over the last several years, only a few have shown legs. Furthermore, it should be noted that a survey of top ERISA defense lawyers revealed only one suit involving a non-financial institution with plan assets below $1 billion which yielded an 8 figure settlement (that plan had more than $850 million in assets); many of the suits against small plans have been dismissed without payment.
THE WAY FORWARD:
There is no denying that the situation has been tough for some carriers, and that historically low premiums and near zero retentions proved to be unsustainably low in the face of the current excessive fee cases.
There have been a broad range of reactions from carriers. In light of the historic profitability and the pattern in this space that claim trends come and go, it seems that when the smoke clears some carriers will be happy and rewarded for working with their clients while others will find themselves trying to rebuild books (fiduciary and D&O) that may never fully come back to them. Meanwhile, brokers with experience and a fiduciary focus will continue to highlight the positive risk profiles of their clients to achieve the best available coverage from receptive insurers.
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