Four Ways Digital Exposures Are Making Fiduciary Liability Risks More Fearsome

By: Patrick Mitchell | April 14, 2023

Patrick Mitchell is the Executive Risks Lead at Coalition. He can be reached at [email protected].

Planning for the future is an essential part of financial wellbeing.

Under the Employee Retirement Income Security Act (ERISA) of 1974, fiduciaries can be held personally liable for a breach of duties. Negligence, mismanagement or actions not in an employee’s best interest can all lead to lawsuits and regulatory fines and penalties.

Fiduciary liability insurance helps businesses manage the risks related to their employee benefits plans. These incidents can be challenging to understand and might be inadvertently triggered by a human or technological error. Similar to cyber incidents, they can be set off by human action (or inaction).

With the rise in the use of technology in financial services and FinTech companies, many fiduciaries may not be aware that the risks and liabilities carry over to the digital world.

The Rise of Technology in Fiduciary Responsibilities

Before the digital age, fiduciaries relied on their personal financial savvy and industry knowledge to pick the right investments for pension plans or advise employees on their retirement plans.

With technology, that process has become much easier: Fiduciaries can compare potential investment options with a few simple clicks and provide employees with a detailed list of possibilities from a single automated hub.

However, while this process requires less manual input from the fiduciary, the digitization of the process opens up new risks. These automated investment tools often leverage big data, artificial intelligence and machine learning to make recommendations and help compare funds.

While making investments easier, this integrated technology approach often lacks transparency when it comes to how that data is collected and analyzed. Additionally, biased algorithms and programming errors could result in significant losses or inaccurate recommendations.

Any error in these systems or errors that come out of using these systems could be deemed a fiduciary’s responsibility for not properly evaluating and selecting the platform or services in question.

Third-Party Vendors and Digital Portals

Widespread use of technology in financial services also means employees can easily access their financial, investment, wealth and benefits information online via portals.

These services are often set up using third-party vendors selected by the fiduciaries and integrated into an organization’s systems.

While these tools can aid in increasing transparency for employees in wealth planning (since they can access their financial information and benefits in real time), this also poses a risk.

In this instance, one of the best practices for fiduciaries is to ensure diverse investment options — from aggressive to conservative.

If an employer only offered more aggressive options and the economy entered a recession, plan participants could allege that not having more conservative investment options led to significant financial losses.

Since participants no longer need to wait for annual statements to evaluate the performance of their 401(k) investment portfolio, employees can now see the performance of their 401(k) plan in real time and make immediate changes. Consequently, fiduciaries can face claims faster than they would have in the past.

Digital Communication Channels

The rise of remote or hybrid work and the push to go paperless for environmental reasons mean important information is often sent via digital communication channels rather than physical methods.

Not only does this unlock the possibility of important documents and sensitive information being hacked via email or other virtual messaging systems, but it also allows for potential miscommunications.

When interacting online, it is not as easy to pick up on subtle communication nuances and cues vital to understanding. This opens up fiduciaries and employees to miscommunication and misunderstandings in their explanations of benefit plans and investment advice, which could disastrously impact someone’s financial well-being.

As a best practice, employers should hold informational sessions to help explain details that might be otherwise lost if communicated through an online portal.

Changing Laws and Regulations

New compliance requirements on fiduciaries — like data protection laws, cybersecurity regulations and rules surrounding the use of digital assets — can impact fiduciaries and employees.

For example, some 401(k) plans allow participants to invest in alternative assets like cryptocurrencies.

In light of the recent crypto-related scandal with the collapse of FTX, we may see the alternate currency fall under more scrutiny and face regulatory challenges and changes that could affect how they are treated in retirement accounts.

Fiduciaries need to be intimately aware of any regulatory changes that could impact employees’ investments or affect how the fiduciaries themselves ensure their employees’ financial stability in the future, or else they could be liable.

Looking Ahead

Fiduciary liability coverage can often be overlooked, but it is a crucial layer of protection. Some organizations may think they’re too small to need coverage, while others may simply think their risk level is too low to need it. Additionally, many of these businesses often lack the resources to manage a benefit plan, which opens up the possibility of making a mistake with significant financial repercussions.

In fiduciary liability cases, one claim can incapacitate a company financially. According to Coalition research, despite 72% of businesses intending to purchase fiduciary coverage, only one in four actually do so, which is shockingly low compared to the high likelihood of a costly claim.

Any business that offers employee benefits can find itself facing a lawsuit, and in some cases, plan fiduciaries can be held personally liable, even for an unintentional error. Not only are the costs of defending an alleged fiduciary liability claim high, but the chances of losing or settling with the plaintiff are also substantial.

As the world becomes more digitized, fiduciary liability is shifting. Navigating this volatile, uncertain, complex and ambiguous environment means that not everything can be accounted for and due diligence may suffer — but it’s where fiduciary liability insurance is at its strongest. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

Four Ways Digital Exposures Are Making Fiduciary Liability Risks More Fearsome