Waiver of Recourse: Don't Get Caught Holding the Bill

ERISA trust funds are required by law to purchase a fidelity bond covering breaches of honesty by covered individuals. Fiduciary liability coverage on the other hand is not required by ERISA. Nonetheless, it is prudent, and considered a “must,” for trust funds to have this coverage. 

ERISA holds trustees to a heightened level of care. They are personally liable for failing to meet their fiduciary duty. Moreover, trustees can be held responsible for the actions of their co-fiduciaries. 

Fiduciary Liability Insurance covers losses that occur because of a breach of fiduciary duty. Some of the acts this type of insurance covers include improper investment of plan assets and imprudently choosing or monitoring a service provider. However, unlike a fidelity bond, this type of insurance does not cover dishonesty or fraud. Multiemployer fiduciary liability insurance typically covers acts by the plan, the trustees, and the trust fund employees.

Even when a plan is insured against breach of fiduciary duty, a trustee can still be held personally liable for losses. This is because fiduciary liability insurance policies contain provisions that permit the insurance company to recover the payments it has made under the policy against the fiduciary who breached his/her duty.

There is protection for trustees available through a waiver of recourse endorsement or rider. Under a waiver of recourse rider, the insurer waives its subrogation rights against the fiduciary. The waiver of recourse rider cannot be paid for with plan assets.

The trustee can pay for the premium from his or her personal assets, and the plan sponsor that appointed the trustee is also permitted to pay for the waiver of recourse rider. This premium is typically very small, often less than $100 a year. Therefore, it makes sense for either the trustee or the plan sponsor who appointed the trustee to pay for a waiver of recourse rider.

It is sometimes asked, who really should pay for the waiver or recourse rider – the plan sponsor or the trustee? If legal services are provided under the policy in defending a breach of fiduciary claim, is there different tax treatment depending on who paid for the rider? The Internal Revenue Service has argued that legal fees paid on behalf of a trustee who was engaged in criminal behavior can be includable in gross income in certain circumstances. However absent criminal conduct legal fees provided under a policy will not be treated as income, without regard to who paid the waiver of recourse premium.

In conclusion:

• Trust funds should carry fiduciary liability insurance.
• Trustees should ensure that a waiver of recourse rider is purchased along with the fiduciary liability insurance.
• The trust fund should never pay for waiver or recourse rider.
• Either the trustee or the plan sponsor can pay the waiver of recourse rider premium.

Trustees should not construe these resources as legal advice and are urged to consult with their own fund counsel to determine whether any action is permissible or advisable.