There has been a lot of media coverage concerning the Department of Labor’s new rule officially issued on April 6, 2016.
The rule outlines the new definition of fiduciary and the types of communications that are considered recommendations. A recommendation is broadly defined as a communication that will reasonably viewed as a suggested course of action.
From an errors & omissions insurance perspective the new rule may create certain additional exposures that are not specifically addressed by current investment advisers’ errors and omissions [“E&O] insurance policies.
Because of the objections and appeals, the insurance industry has been taking a wait and see attitude toward the new rule and has yet to make any changes to coverage offered. There have been few discussion in the E&O insurance industry and no coverage determinations have been issued by underwriters.
An exception is in the current issue of the Professional Liability Underwriting Society newsletter that featured an article by the law firm, Winget, Spadafora, Schwartzberg, LLP, about the rule and its ramifications.
A copy of the article is available at:
Conventionally, coverage is provided for fiduciary activities via an E&O policy’s definition of professional services. Additionally, a fiduciary liability endorsement may be appended to the policy to clarify coverage. The definition usually expands the policy to include…
Fiduciary Act means any actual or alleged:
- breach of the responsibilities, obligations or duties imposed upon the Insured in the Insured’s capacity as a fiduciary of any Plan, other than a Plan organized for the benefit of the Insured or the Insured’s employees, by: (i) ERISA; (ii) HIPAA; or (iii) any law of the United States or other jurisdiction; or
- other matter claimed against the Insured solely because of the Insured’s service as a fiduciary of any Plan; or
- act, error or omission solely in the Administration of a Plan; or
- Professional Services as a fiduciary for others for a fee, including ERISA 3(38) professional services to others for a fee.
However, there has been some recent movement in the insurance industry towards specific coverage for any additional liability arising from the rule. At this time, only one insurer has revised their fiduciary liability endorsement to expand coverage by adding the following wording to the definition of Fiduciary:
Fiduciary Act means any actual or alleged: …………..
- activities as a fiduciary as defined in Section 2510.3-21. of the U.S. Department of Labor regulations.
The crucial additional sub-section to the definition affirmed that liability arising from the U.S. Department of Labor regulations is covered.
At this time this coverage is only available through the AdvisersGold™ program (www.advisersgold.com) underwritten by QBE Insurance.
Dependent upon the outcome of the various challenges to the rule, other insurers may follow this lead and either issue a coverage determination, revise their investment advisers E&O policy or design a new coverage endorsement.
It may be prudent to contact your insurance agent to ensure your current E&O coverage expands to include any ability arising from the new rule. Although the E&O insurance industry is slow to change, agitation from policyholders may motivate carriers to move more quickly.
Rickard Jorgensen, FCII, ACIArb, ARM is a specialist professional liability agent and risk management consultant. He can be contacted at (201) 345 2440 or firstname.lastname@example.org