Fiduciary Liability vs. D&O Insurance: What Are the Key Differences?
Managing an organization requires extensive safeguards against risks, including the risk of potential lawsuits from third parties such as clients, customers, shareholders or others.
Key among these protections are fiduciary liability insurance and directors and officers (D&O) insurance – two types of liability coverage intended to provide protection to organizations and their management from risk.
While they may seem similar at a glance, fiduciary liability and D&O insurance serve distinct purposes, addressing specific exposures related to financial and managerial responsibilities surrounding fiduciary duty and corporate governance.
Below, we summarize the key differences between these two coverages, helping you determine which option (or combination of both) is right for your business.
Background
Operating a business has always required risk management. However, with regulatory pressures and stakeholder expectations growing over time, companies now face a particularly complex legal environment. Lawsuits can potentially emerge from a wide range of stakeholders – including employees, clients or investors. This exposure increases the need for liability insurance solutions like fiduciary liability and D&O insurance, designed to protect management from personal and organizational financial risk.
Fiduciary liability insurance protects the trustees and administrators of employee benefit plans, while D&O insurance protects individuals who serve on the board of a company, or act as officers. These policies also serve to help businesses attract skilled leaders without placing them at unnecessary personal or financial risk.
What is fiduciary liability insurance?
Fiduciary liability insurance provides coverage specifically for those managing employee benefit plans, such as retirement or health plans, where they are legally bound to act in the best interest of plan participants.
In Canada, trustees of these plans are held to a high standard, and even a minor oversight can lead to significant financial and legal consequences. For instance, if a trustee of an employee retirement plan makes a decision that results in a loss of benefits for employees, they could be accused of breaching their fiduciary duty.
Fiduciary liability insurance is intended to respond to cover the costs of defending against and resolving such claims, helping to protect both the individual and the organization from potentially debilitating financial losses. Examples include:
Changes to a benefit plan
If participants believe that terms of a benefit plan have been unfairly altered, they may seek legal recourse, even if such changes were in the best interest of the organization.
Processing and administration errors
Mistakes can happen in the processing or management of benefit plans, leading to incorrect payouts or benefits being withheld. These errors can lead to significant claims and fiduciary liability coverage can help to mitigate the costs.
Improper advice or conflicts of interest
Plan administrators may be sued if participants believe they have provided incomplete or biased advice or acted in their own interest rather than that of the plan participants.
Failures in selecting and monitoring third-party providers
Many organizations rely on third-party providers to administer their benefit plans. Fiduciary liability insurance helps cover potential claims if there are failures in selecting or monitoring these providers, resulting in financial loss for participants.
What is D&O insurance?
Directors and officers (D&O) insurance is designed to protect executives and boards in case of claims alleging wrongful acts committed in the course of their duties. Unlike fiduciary liability insurance, which centres around benefit plan administration, D&O insurance protects a broader set of actions and is relevant to anyone who serves on a board or holds a senior management position in a company.
D&O claims can arise from a variety of allegations, including mismanagement, regulatory non-compliance, or breach of fiduciary duties in the context of company management. In addition, directors and officers can be held personally liable for their action/inaction making their personal assets at risk in the event of a lawsuit. If a director or officer is named in a lawsuit, D&O insurance will cover legal costs, settlements, or judgments, ensuring that their personal assets remain protected.
What does D&O insurance cover?
Side A Coverage: Protecting individual directors and officers
Side A coverage protects individual directors and officers by covering legal expenses and settlements when the company cannot indemnify them. This may occur in cases of bankruptcy or if company’s assets are legally restricted from covering such claims.
Side B Coverage: Reimbursing the organization for indemnification
Side B reimburses the organization when it indemnifies directors and officers against claims, allowing the company to offset the financial impact of such indemnification without tapping into its working capital.
Side C Coverage: Entity coverage
Also known as “entity coverage,” Side C covers the organization itself in the event it is sued alongside its directors and officers. This protection often applies in shareholder actions, where both the company and its directors are named as defendants.
Additional details on the different sides of D&O coverage can be found here.
Which liability insurance coverage is right for your business?
Choosing between fiduciary liability and D&O insurance ultimately depends on the exposures your business faces. Companies with employee benefit plans should consider fiduciary liability insurance as it specifically addresses the risks associated with plan management. This coverage can be particularly critical in industries where benefit plans are central to employee retention and satisfaction.
Businesses looking to protect their directors and officers from claims related to corporate governance, regulatory compliance, or investor disputes will likely find significant value with D&O insurance.
It is common for companies to carry both fiduciary and D&O insurance, providing robust protection for their leadership for key operational activity exposures and reducing the financial impact of lawsuits while safeguarding the ability to attract and retain strong leadership.
Axxima can help you find the right policy
Our team at Axxima works with clients to understand the needs of a businesses and helps to tailor insurance solutions that offer maximum protection.
Whether you’re looking for fiduciary liability insurance, D&O insurance, or a combination of both, Axxima can help guide you to the policy that fits your organization’s specific requirements.
Contact Axxima today to ensure your company and leadership are well-protected in the face of potential claims.
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