A key consideration during Department of Labor (DOL) audits is whether a TPA acted as a fiduciary. If the DOL believes a TPA does carry out fiduciary duties, potential liability for the TPA is higher. Although most TPAs believe they are not fiduciaries, there are areas of uncertainty that should lead them to consider the option of insurance.
"The TPA should get the broadest possible insurance coverage it can afford," recommends Joe Faucher, Esq., at Reish & Luftman. Whether a TPA needs fiduciary insurance depends on the services it provides. A TPA that renders investment advice or transfers plan assets should certainly consider having the coverage.
The Unknowing Fiduciary
In many instances, a TPA may be acting as a fiduciary without even knowing it. For that reason, it may be advisable to have coverage. "Most TPAs have engagement letters and service agreements stating that they conduct ministerial activities and that they are not fiduciaries. But just because they say they are not fiduciaries doesn't mean they are not fiduciaries," says attorney Les Klein at Sonnenschein Nath & Rosenthal. Many TPAs make decisions regarding the administration and the investment of assets, which could cause then to be fiduciaries. "If there is a risk that a TPA may be sued as a fiduciary, then it's desirable to have fiduciary insurance," says Klein.
Whether or not fiduciary language is in the errors and omissions insurance (E&O) policy depends on the carrier. Some carriers have separate policies; some carriers tend to include coverage in their E&O policies.
"At a minimum, TPAs should secure and maintain professional liability insurance coverage which will provide defense for fiduciary-related allegations. Ideal is a policy that will actually indemnify if the TPA is in fact found to be liable in connection with the TPA's intended covered services," says Shell Simonson of Professional Practice Insurance Brokers, Inc. Maintaining a separate policy may only be necessary if the TPA is exercising full discretionary authority and/or control over the plan's management or disposition of assets. However, TPAs should consult with their brokers on the issue as it relates to the individual TPA, suggests Simonson.
Copyright 1999 Aspen Publishers. All rights reserved. Reprinted with permission from the Pension Plan Administrator, July 1999 (vol 6, issue 7), pages 1 and 4. Copyright 1999 by Aspen Publishers, Inc. www.aspenpub.com