Fiduciary and E&O Liability Insurance: What’s the difference?

By Kenneth Golsan
Yet another common question posed to us from advisors across the country, it seemed a good idea to address this question.

The insurance industry has their own independent glossary of definitions that generates understandable confusion to the advisor community. Specific to this ia360 Risk Tip newsletter, confusion in that insurer’s usage of the term “fiduciary” does not match the investment advisor communities’ usage of the same.

Concerned that a gap exists in their primary risk-transfer strategy (purchase of E&O insurance), advisors will commonly ask if they should additionally purchase “fiduciary liability insurance”. As an RIA under the 1940 Act, you understand that you are unavoidably fiduciaries for your client (note: no distinction made between whether the client/account is subject to ERISA or not). Therefore, it would only make sense that fiduciary liability insurance be purchased… right? Well, unfortunately the insurance community, years back and in their immeasurable wisdom, decided to label/name liability coverage for a plan-sponsor Trustee’s ERISA imposed liabilities “Fiduciary Liability”. At that moment, once again we in the insurance industry added to the puzzlement heap! Why our industry doesn’t simply call it “Trustee Liability” or “ERISA Liability” coverage is a quandary? Guess that would be too straightforward?

Moving forward with what we are forced to employ, know that “Fiduciary Liability”, as the insurance industry defines it, is coverage for a Trustee’s breach or breakdown of fiduciary obligations established by the Employee Retirement Income Security Act (ERISA). The insurance provides legal protection for Trustees (typically owners of an employer entity) from third-party legal claims (normally brought by an employee/plan participant or their estate) of breach of fiduciary duty as defined within ERISA.

As an RIA, you may then ask: “But as an investment advisor to various ERISA and or retirement plans… don’t I need fiduciary liability coverage as well?” Yes, absolutely. Yet, for you, the insurance industry defines it as “Errors & Omissions/Professional Liability” and/or “Investment Advisors E&O/Professional Liability Insurance”.

The ‘cornerstone’ to grasp, though, is that no two E&O contracts of insurance are alike. Most contracts speak to and are centered on the 1940 Act, yet there are some that miss this all important distinction of your profession and may not recognize you as a fiduciary. A gap in coverage could exist. Some contracts may be “silent” while others can clearly exclude the ERISA exposure.

One side-note… for those advisors possessing relatively medium to large (tough to earmark a threshold) ERISA plan clients, it can be a healthy pro-active risk-management defense to promote (require?) plan Trustees to purchase and maintain Fiduciary Liability for themselves. In the event of a participant lawsuit, might that be helpful to the possible targeting by the claimant in their search for responsible parties?

Details, details! Each contract of insurance possesses varying language and there is no such thing as all-inclusive or “umbrella” coverage. As always, we remain available to the RIA community to assist in protecting each firm’s practice properly.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors.. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.