Is Fiduciary Liability Insurance The New D&O?

Pension plan fiduciaries are at greater risk than ever before. Will a tidal wave of litigation make coverage unattainable?

Monitoring the fiduciary liability insurance market is like watching a rerun of a bad movie. In the wake of the corporate scandals and bankruptcies of 2001 and 2002 and the wave of lawsuits that followed, organizations of all sizes saw their premiums for directors and officers (D&O) liabili-ty insurance skyrocket. Now the same scenario is playing out in the fiduciary liability insurance arena, much to the chagrin of underwriters as well as the businesses that purchase their products.

Fiduciary liability insurance covers pension fund trustees and retirement plan sponsors' directors and officers for claims asserting violations of fiduciary duty under the Employee Retirement Income Security Act (ERISA). It was a relatively stable line of coverage -- until about 18 months ago. According to the Risk and Insurance Management Society Inc.'s Benchmark Survey, the average cost of fiduciary liability premiums jumped 109 percent from the second quarter of 2002 to the second quarter of 2003. From the third quarter of 2002 to the third quarter of 2003, the rate of increase slowed considerably, to 35 percent. However, in the same period, retention rose 247 percent on average.

The principal driver of the price surge is a new breed of class-action lawsuit: the "tagalong" fiduciary liability suit. The name is appropriate because these actions are usually filed against companies already embroiled in securities litigation. Tagalong claims target organizations whose retirement plans own company stock. In most cases, the plaintiffs are the companies' retirement plan participants. Tagalong complaints typically repackage the allegations that form the basis of the securities litigation -- accounting irregularities and failure to disclose adverse information, for example. The plaintiffs argue that the company's officers and retirement plan fiduciaries violated ERISA by investing plan funds in company stock even though they knew the organization was in trouble.

As the value of securities held in retirement plans plunged with the stock market in 2002 and early 2003, one company after another found itself facing lawsuits alleging breaches of fiduciary duty. And that trend shows no signs of slowing. "This has taken on a life of its own," says John Coonan, vice president and fiduciary liability product manager with the Chubb Group of Insurance Companies, headquartered in Warren, N.J. "Attorneys are now specializing in this area, and the number of cases has expanded."

The result is unprecedented pressure on fiduciary liability insurers. Tagalong lawsuits represent "a marked shift in mind-set about the purpose and coverage potential of fiduciary liability insurance," observes Kirk N. Walsh, vice president of Risk International Services Inc., an insurance and risk management services firm based in Richfield, Ohio.

Cathy Cummins, senior vice president with Marsh Inc. in New York City, agrees. "Fiduciary liability policies never anticipated this kind of exposure," she notes. "These claims require a sophisticated defense, so defense costs are increasing."