THE FIDUCIARY CORNER: Fiduciary Liability Insurance Policies Warrant Careful Review
Kenneth A. Mason, Sunday, January 01, 2006 | Filed under: ERISA Litigation
Sponsors of ERISA-governed plans should pay heed to the experiences of Raytheon Company, which recently learned to its dismay that the fiduciary liability insurance policy for which it had paid thousands of dollars was worthless as a defense to ERISA claims against it.
Former participants in Raytheon’s ESOP filed suit in 2003 against the company and some of its executives, alleging that they breached their fiduciary duty under ERISA by mischaracterizing the strength of the company’s stock, much of which was held in the ESOP. Shortly after that suit was filed, Raytheon’s fiduciary liability insurer brought a separate lawsuit against Raytheon, asking a federal court to rule that Raytheon’s policy did not require the insurer to provide coverage. The lower court agreed with the insurer’s contention that an exclusion in the policy applied, relieving the insurer of any obligation to defend Raytheon or indemnify it if the ERISA plaintiffs prevail. A three-judge panel of the First Circuit Court of Appeals struggled mightily to construe the ambiguous exclusion, but two of the three judges ultimately agreed with the lower court and the insurer. The result is that Raytheon is now on the hook for all of its defense costs, as well as any damages ultimately awarded.
Although the particular terms of Raytheon’s policy dictated the result in that case, the lesson that Raytheon learned applies to all plan sponsors: fiduciary liability insurance policies should be carefully reviewed and negotiated. At a minimum, sponsors should understand which individuals and entities are covered by a policy, what kinds of claims are covered, and the scope of any exclusions. Careful drafting and negotiation in advance can avoid unpleasant surprises in the future.