For sponsors and fiduciaries of employee benefit plans, the Amara case has presented many interesting and important issues that have been discussed at length in this blog and elsewhere. However, the most recent chapter in this long-running dispute has not garnered nearly as much attention as either the Supreme Court or Second Circuit decisions that came before it. Nonetheless, this latest decision, Cigna Corporation v. Executive Risk Indemnity, raises a critical issue for plan sponsors and fiduciaries: what is and, perhaps more importantly, what is not, covered by fiduciary and other liability insurance policies.

The facts of the Executive Risk case are relatively straightforward. Cigna sought a declaratory judgment that it was entitled to coverage under its fiduciary liability policies for claims asserted in the Amara case. The insurers denied coverage, relying on a policy exclusion for “deliberately fraudulent or criminal acts or omissions.” The trial court ultimately applied the exclusion and denied coverage.

Given the considerable amount at stake, the decision is undoubtedly important to Cigna, Executive Risk, and the other insurers who were defendants in the case. However, other plan sponsors and fiduciaries would be wise to understand the significance of this decision as well: insurance coverage cases often turn on the language of the insurance policies in question and there generally is not “standard” policy language on many critical issues.

As a result, plan sponsors and fiduciaries should carefully review their insurance coverage, taking into account a number of issues, such as:

  • Some “fiduciary” policies also cover settlor activities, but many do not. Plan sponsors should review their policies to determine if they cover settlor activities and, if not, whether other sources of insurance are available for claims brought against the plan sponsor in its settlor capacity.
  • ERISA requires plan fiduciaries to obtain a fidelity bond, but does not require them to carry insurance. Plan sponsors and fiduciaries should consider the extent to which they need insurance and, in light of the potential exposure they face, the amount of insurance that they need.
  • Some insurance policies cover only employee benefit plans maintained by the named insured (typically the parent company) and do not cover plans sponsored by the insured’s subsidiaries. Plan sponsors and fiduciaries should review all policies to make sure that they understand which plans are covered.
  • Many policies do not cover claims under plans that are adopted after the effective date of the policy. This could be critical to employers that frequently acquire companies that sponsor their own plans and might not have adequate coverage of their own. Plan sponsors and fiduciaries should review their coverage to ensure that there are no gaps for newly-created or newly-acquired plans.
  • Fiduciary insurance policies are generally written on a “claims made” basis, meaning that the insurance applies only to claims made while the policy is in effect, rather than to acts or omissions that occur while the policy is in effect. However, these policies often have a grace period that provides coverage for claims made during a limited window after the policy expires. The duration of the grace period is not standardized, and plan sponsors and fiduciaries should understand how long it is and, if possible, seek to get it extended.
  • Most insurance policies cover defense costs, often subject to a deductible. Plan sponsors and fiduciaries should review their policies to confirm that defense costs are covered and the amount of the deductible. While a company might, as a matter of corporate governance, indemnify its officers and employees for defense costs incurred by a fiduciary, that indemnity is not necessarily as desirable as one provided under an insurance policy maintained by a third party.
  • Even if the insurance policy covers defense costs, many policies limit the plan sponsor’s or fiduciary’s choice of counsel to a group of law firms that the insurer has approved, rather than permitting the plan sponsor or fiduciary to choose its own counsel to defend the claim. The right to choose counsel can often be inserted into a policy when it is renewed. Many policies cover defense costs even if the insurer ends up denying coverage for the underlying claim. In such cases, the right to choose counsel becomes critical since the insurer has little incentive to fund the best defense if it believes it is not on the hook to cover the underlying claim in the first place.
  • Some insurance policies pay “on behalf of” the policyholder, others require the policyholder to pay its own costs, settlement, and judgments, subject to being reimbursed by the insurer. It is advantageous to the plan sponsor and fiduciaries to have a pay “on behalf of” policy so that they are not required to pay amounts out of pocket and then seek reimbursement.
  • Some policies cover expenses and fees incurred in government-approved compliance programs, while other do not. Given the popularity of these programs, plan sponsors and fiduciaries should understand whether their policies apply to these types of corrections.
  • All policies have exclusions, such as the “deliberately fraudulent or criminal acts or omissions” exclusion at issue in the Executive Risk However, there generally is no uniform set of exclusions or wording of particular exclusions. Plan sponsors and policyholders should review their policies to ensure that they understand what is excluded and to try to negotiate more favorable language when possible.
  • The Amara decision itself adds a wrinkle to what is nowadays a standard exclusion for “benefits due under the plan” in many fiduciary insurance policies. As some courts have interpreted Amara, participants can sue to reform a plan to provide benefits that were not due them under the plan but that defective disclosure in the SPD led them to believe would be provided. Query whether such a claim is for “benefits due under the plan.”