Fiduciary Liability Loss Scenarios From Chubb
When your employees' nest egg is threatened, they just might sue. Today's employees don't feel as secure about retirement funds as they used to. The future of social security benefits is in doubt. Companies are shifting to profit sharing plans, which do not guarantee a specific retirement income. And with most employees changing companies every few years, it's no wonder they are disappointed when their retirement income is not what they might expect.
You can help mitigate the risks, but at the end of the day employees and ex-employees can still file a lawsuit. Individual fiduciaries, the sponsor organization and the plan can all be held (personally) liable under the Employees Retirement Income Security Act of 1974 (ERISA).
Are you and your company at risk? Consider these fiduciary liability loss scenarios, and then talk to your broker or independent agent about fiduciary liability insurance from Chubb, a leading provider of fiduciary liability coverage since 1978.
Failure to adequately inform participants, Department of Labor
The U.S. Department of Labor sued the individual plan administrator, the 401 (k) plan and the sponsor organization. They allegedly failed to inform employees when they switched guaranteed income contract (GIC) companies from ABC Life Insurance Company to XYZ Life Insurance Company, and had misled participants by continuing to use ABC Life Insurance Company's enrollment forms.
Indemnity. $1,000,000
ESOP Class Action
Excluded employees formed a class action and sued individual plan fiduciaries, the plan and the sponsor organization to recover forfeited wages, and to gain the ability to participate in the sponsor organization's Employee Stock Ownership Plan (ESOP). The financially troubled organization had negotiated wage reductions with its employees in exchange for the establishment of an ESOP. However, when the ESOP was finally established, the effective date of the plan excluded former employees and those who had been promoted to management since the resolution of the wage negotiations. After several years, the parties reached a settlement.
Defense costs. $535,000
Miscalculation of benefits, Class Action
Approximately 10,000 current and former employees formed a class action and sued the individual plan administrator and the sponsor organization for miscalculating their pension benefits. For years, the sponsor organization had used estimates of social security, which ultimately proved to be inaccurate. After two years, the sponsor organization settled with its employees for approximately $70,000,000 in benefits and administrative costs.
Indemnity. $1,160,000 Defense costs. $1,850,000
Error in administration of the plan, Single plaintiff
A retired employee sued the plan administrator and the pension plan alleging an error in administration of the plan and a miscalculation of plan benefits. The employee had announced plans to retire and requested in writing a pension calculation. The plan administrator took over 45 days to value the plan assets. During this time there was a substantial drop in the stock market (Black Monday), which adversely affected the value of the employee's retirement funds.
Indemnity. $89,000
Liquidated ESOP, Class Action
Former employees formed a class action and sued the directors, officers, the Employee Stock Ownership Plan (ESOP) trustee and the sponsor organization. While in financial difficulty, the sponsor organization had bargained for a 15% wage reduction and promised in return to establish an ESOP. Shares acquired by the ESOP were valued at $10 per share, while the wage reductions were valued at $44 per share. When the employer sold the company, the acquirer liquidated the ESOP at $2 per share. Employees argued their former employer misrepresented the value of ESOP shares at the time of wage reduction, and the trustee gave too much consideration per share when the ESOP was first established. This allegedly allowed the acquirer to purchase the shares for an inadequate amount. It took nine years to resolve this case.
Defense costs. $1,800,000
Miscalculation of benefits, Class Action
Current and retired female employees formed a class action and sued the plan administrator, the plan and the sponsor organization. They alleged that the defendants failed to account for maternity leave when calculating time in service for pension calculations.
Indemnity. $1,875, Mg Defense costs. $680,DW
Error in Administration of benefits, single plaintiff
The spouse of a plan participant sued the plan administrator and the sponsor organization for the spousal pension rights. The plaintiff alleged that the plan participant forged the signature on the spousal release form, which the plan administrator had notarized, releasing the spouse's retirement funds to the plan participant.
Indemnity. $400,000
Violated terms of the trust agreement, Class Action
Union and non-union employees who participated in a 401 (k) plan formed a class action and sued the investment committee, the plan administrator, the plan and the sponsor organization. They alleged that the $120,000,000 investments in ABC Life Insurance Company GICs were imprudent because of the company's extensive junk bonds holdings. They further alleged the investment violated the terms of the master trust agreement, which authorized GIC investments underwritten by companies doing business in Massachusetts and Connecticut. ABC Life was not authorized to do business in either state and was eventually placed in receivership. It took three years to settle the case.
Indemnity. $13,000,000 Defense costs. $770,000
Chubb Group of Insurance Companies Warren, New Jersey 07059 http://www.chubb.com
This literature is descriptive only. The precise coverage afforded is subject to the terms, conditions and exclusions of the policies as issued.