Thursday, May 29, 2008

Unintended Consequences -- Or Ooops! What did that exclusion just do to my insured? (5/22/08 Knowledge Knugget)

....and speaking of fiduciary liability.....

What happens if your professional liability policy excludes claims arising from plans or activities subject to ERISA, and your insured is a third party administrator, payroll administrator, management consultant, human resources consultant....and their work necessarily touches on those same plans and impacts the administration of same?

The ERISA exclusion in a professional liability may be so broad as to negate desired coverage for your insured's activities.

For example, it may exclude claims "...arising out of...any responsibility or obligation in connection with any employee or benefit plan....". Could this exclusion apply to your insured's "responsibility or obligation" to perform services in administering clients' plans?

Or, it could exclude "...any of Your acts related to any pension, healthcare, welfare, profit sharing, mutual or investment plans....."

Pretty broad, right? Maybe too broad for your insured's safety and intended scope of coverage?

Preferred wording will exclude *only* the insured's fiduciary duty under ERISA, or will exclude only their involvement in their *own* plans, not those of clients. This can be accomplished by a narrow exclusion, or by a carveback to the exclusion for claims arising from the insured's professional services. (In the rare case that your insured is actually acting as a fiduciary and has been written on a normal professional liability policy, even more modification is needed.)

The ERISA exclusion wording varies widely from policy to policy. Read it carefully and ask for appropriate modifications if you have the least little concern that it is too broad for your insured. Chances are the underwriters are not really trying to throw the baby out with the bathwater. They just haven't ready their policy recently with your insured's operations in mind.

More "Ooops!" moments to follow in future Knowledge Knuggets. Be sure to put in your request if you've seen exclusions that trouble you.

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