Even at the outset of an investigation, fiduciaries need representation because they face liability for losses to the plan resulting from their breach of fiduciary duty. They may also face additional civil consequences such as penalties, disgorgement of profits and banishment from working with Employee Retirement Income Security Act (ERISA) plans in the future. Moreover, fiduciaries can be subject to a number of criminal penalties.
However, fiduciaries also realize that, due to the costs of defense and the length of time an investigation can take, they lack the resources to pay for their own legal fees. They often expect that their plan's fiduciary insurer will pay for an attorney to represent them during a DOL investigation. Unfortunately for fiduciaries, there is often a gap between when a fiduciary needs an attorney and when an insurer recognizes that it has a duty to defend the fiduciary and absorb the costs of legal representation.
What Is the 'Gap'?
Some insurers argue that there is no "claim" until there has been a written allegation of wrongdoing. This creates a problem for fiduciaries, as the DOL typically requests documents or interviews before making any such written allegations. Thus, insurers may wait until the department issues a voluntary charging (VC) letter, which sets forth findings of fiduciary violations and also states that the department has concluded its investigation, before recognizing its duty to defend a fiduciary.
This creates a gap between the time a fiduciary first needs representation and when a fiduciary insurer may recognize its obligation to pay for defense costs.
Consequences of the Gap Problem
DOL investigations can place an enormous financial burden on a plan or its fiduciaries. Investigations may go on for years, result in significant legal fees and impose high levels of personal risk. In the absence of another source, such as plan or corporate indemnification, to pay legal fees during an investigation, many fiduciaries would simply refuse to serve, recognizing that, even in the absence of wrongdoing, defense costs may be ruinous.
If an insurer declines to cover the fiduciary's legal fees during an investigation, the fiduciary can only turn to the plan sponsor or the plan to pay those fees. However, in some circumstances-including multiemployer plan and employee stock ownership plan (ESOP) contexts-the DOL maintains that plan indemnification and advancement of fees is inappropriate. Consequently, it is important that fiduciary insurers provide coverage for legal defense costs during an ongoing investigation rather than wait until the investigation has ended and a VC letter has been sent.
Are There Solutions?
At least two insurers offer some types of endorsements to their policies that address the gap problem. The endorsements are styled as "pre-claim investigation" coverage of defense costs that begin at the start of or during the investigation, with respect to document production or interviews. Additionally, the endorsement provides advantages to the fiduciary insurers offering the pre-claim investigation coverage of fiduciary legal fees.
Fiduciary insurers who offer the gap coverage may do so because they recognize the advantages associated with a fiduciary's counsel's involvement from the beginning of a DOL investigation. Counsel is often able to address an issue about which an investigator is concerned before it escalates to the level of an allegation included in a VC letter. Gap coverage also increases the insurer's understanding of the situation from the beginning. Thus, it is better able to assess risk and the possibility of litigation or settlement, as well as offer input about a possible settlement strategy. In short, gap coverage decreases the risk that a claim will arise, better assesses and manages its risk, and promotes a far better appreciation by the insured of the value of the coverage. Offering the pre-claim investigation defense cost coverage makes sense for insurers from a legal, risk-management and marketing perspective. For a plan fiduciary, it will be important to determine if gap coverage provides better financial protection to the plan and whether it helps the plan attract more qualified fiduciaries.
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