“If the [fiduciary liability] underwriter says we'll cover this, but we don't want to cover that, then the policy should clearly indicate that,” Mr. Slamar said, explaining the concept of contract certainty.

Giving an example, he said damages arising out of litigation are covered under all fiduciary liability policies, while “benefits due or allegedly due” are excluded under virtually all of them. This distinction has become more important in recent years in light of several court rulings, the first of which was handed down by the U.S. Court of Appeals for the Seventh Circuit in Harzewski vs. Guidant in 2007, he added.

In Guidant, where a central question was whether past participants who had cashed out of an employee stock ownership plan had standing to bring an ERISA-based stock-drop lawsuit, the court ruled the former participants could bring suit, while also addressing the relief sought–and whether it should be characterized as benefits or damages.

“The court effectively made short shrift of this distinction, noting that although former employees eligible to receive a benefit could sue under ERISA, some courts had difficulty seeing this because they strained to distinguish between 'benefits' and 'damages,'” Mr. Slamar explained.

Guidant court and several other following cases blurred the benefits-damages distinction as not being germane. However, “it was extraordinarily significant to fiduciary liability insurance programs,” he said, because of the policy's coverage for damages but absence of coverage for benefits due, whether through a specific policy exclusion or through limiting language in the definition of loss.

After Guidant and several other cases that adopted its holding, insurers reacted to address this dichotomy and add some clarity, with Chartis (then known as American International Group, before the recent rebranding of AIG's property and casualty insurers) leading the way through the introduction of an “Investment Loss Coverage” endorsement.

“They evaluated the exposure and indicated a belief that failure to take appropriate action with respect to an investment, when there was an ERISA fiduciary obligation to do so, was the type of exposure the policy should address.”

Chartis' endorsement, as well as comparable carve-outs to benefits-due exclusions introduced by other insurers, now indicate that the otherwise potentially limiting benefits-due language of the policies does not apply to claims that arise from negative investment results.

The specific language of these carve-outs typically indicates the insurers will cover “claims alleging a loss to either the plan itself, or a loss in the actual accounts of participants by reason of a change in value of the investments held by the plan, including but not limited to the securities of the sponsor organization,” Mr. Slamar said.

Explaining the importance of the last phrase, he noted that although Guidant and other cases prompting these endorsements involved drops in employer stock included in ESOPs and defined contribution plans such as a 401(k), the carve-outs themselves may relate to any plan investments, not just employer stock.

With the financial meltdown severely impacting many employers' plan investments, not only has the number of stock-drop case filings increased, but cases alleging breach of fiduciary duty “for failing to make appropriate changes for other types of investment vehicles in [an] employer's menu of plan options” are also being filed, Mr. Slamar said.

BRACING FOR SEVERITY

In addition to volatile investment markets, Mr. Slamar said the combined impact of Guidant and other court decisions, a host of legislative changes, and the realities of the current economy have produced an environment for class actions against fiduciaries that some underwriters are describing as a perfect storm.

Still, there's been no significant movement on the part of insurers to remove the carve-outs or otherwise tighten the language of fiduciary liability policies, he reported. “There would be tremendous pushback from purchasers and brokers who represent them,” he said.

Instead, a number of underwriters “are looking more closely at the underwriting submissions–at policies, procedures, plan governance and oversight that fiduciaries exercise over the plan, including their review of investment results,” he said.

Mr. Slamar said some fiduciary insurers were already bracing for an onslaught of lawsuits even before last year's meltdown in the financial markets. With roughly 80 million baby boomers nearing retirement, and the anticipated additional strains to the pension industry, some underwriters expressed concerns that lawyers would become “increasingly more vigilant in looking for possible actions” to be filed on behalf of large groups of soon-to-be-retiring plaintiffs.

The economic downturn is adding “new dimensions to the mix,” he said, explaining that plant closings, divestitures and layoffs in increasing numbers are contributing to the ever-expanding growth in the ranks of voluntary and involuntary former benefit plan participants.

A significant ruling in Guidant, (which gained further support in a footnote to a 2008 U.S. Supreme Court decision in LaRue vs. DeWolff Boberg & Associates) said that former employees eligible to receive a benefit from a defined-contribution plan could sue under ERISA, even though they had already cashed out of the plans.

According to Mr. Slamar, the Guidant ruling allowed some lingering stock-drop cases to gain traction–cases hanging over from the turn-of-the-21^st-century corporate meltdowns brought on behalf of retired former participants of 401(k) plans that were heavily invested in employer stocks.

In the current economic environment, the Guidant logic “could simplify the means by which competent plaintiffs' firms conversant with ERISA can seek to pursue class actions on behalf of former participants for a variety of perceived ERISA breaches,” Mr. Slamar said.

He offered as examples, employer decisions to lay off employees for the purpose of trimming ongoing benefit obligations, as well as more direct decisions to freeze, amend or terminate benefit plans.

If the plaintiffs' bar can allege staff reductions or plan freeze, amendment or termination decisions were not in accordance with ERISA or plan documents (or that the steps and processes followed in reaching these decisions were not), they may be able to pursue class-action claims on behalf of plaintiffs. In the wake of Guidant, these classes could include large groups of former plan participants, he said.

This potential for more and bigger class actions doesn't even consider suits typically pursued that relate to companies that have failed or are otherwise unable to meet their obligations, he said.

Bankruptcies and employer financial struggles set off more alarm bells for Christine Dart, vice president and global fiduciary liability product manager at Chubb in Warren, N.J. She listed several situations that could fuel suits against fiduciaries:

o Underfunded defined-benefits plans.

If a company with a defined-benefit plan goes into bankruptcy and subsequently into liquidation, and if that plan is not funded 100 percent, then those benefits will be assumed by the Pension Benefit Guaranty Corp., Ms. Dart explained, noting that the PBGC has a multibillion-dollar deficit.

When those liabilities are assumed by PBGC, she noted, “people mistakenly think they'll get every cent on the dollar” that they were promised at retirement. “That's not necessarily the case. It's dependent on your salary” and other factors.

When such facts come to light, those employees are more likely to bring an action for the failure of the fiduciaries to properly fund the benefit plans, she said.

(Unlike defined-contribution plans, which have separate accounts for individual participants and investment options and procedures by which employees and employers make contributions to the accounts, under defined-benefit pension plans employers guarantee a specific benefit amount to participants at retirement.)

o Deferred compensation plans.

Unlike 401(k) assets, which are protected against creditors coming after them in a bankruptcy situation, deferred compensation plans are not, Ms. Dart said. In a bankruptcy situation, individuals who may have deferred their compensation for two or three years now stand in line with other creditors.

o Workforce reductions.

A struggling company that lays off some workers can face allegations of fiduciary breaches tossed into employment practices liability suits that primarily allege discriminatory workforce reductions, she said. “You laid me off improperly and you did so not to pay my benefits,” she added, describing the argument in these cases.

o Severance pay.

Struggling companies can set workforce reductions in motion by offering incentives for employees to take early retirement packages. In some cases, there may be a second downsizing, with enhanced packages offered at the second stage.

“We have seen those claims in the past,” she said, where participants accepting the first plan questioned when companies knew they were going to enhance their offers, and whether they had a duty to disclose this, since such disclosures would have prompted some workers to wait to become eligible for higher benefit amounts instead of taking the first package.

Like Mr. Slamar, she also referred more generally to suits brought in the wake of defined-benefit plan terminations, freezes and decisions to eliminate matching contributions for defined-contribution plans.

Terminations of retiree medical benefits can also fuel suits, she said–highlighting, in particular, situations that may arise for firms involved in mergers and acquisitions. If such firms don't have the previous company's plan documents, they may not know exactly what was promised to retirees.

“It might have been communicated to them verbally that they were going to have lifetime benefits,” she said.

Mr. Slamar noted that while there's a long-held notion that the major exposure in fiduciary litigation is “almost the exclusive domain of the pension side,” class-action statistics compiled by a Chicago-based employment law firm last year revealed a number of ERISA class-action settlements related to health and welfare benefits.

According to the “Workplace Class-Action Litigation Report” published by Seyfarth Shaw in January, four of the top-ten suits (including two of the top-three settlements, which involved automotive companies and exceeded $1 billion) dealt with attempts to transfer retiree health benefits to retirees through the creation of a voluntary employee beneficiary liability association, or VEBA, Mr. Slamar said.

Although the report revealed that ERISA class actions were the most costly employment actions last year, with the top-10 settlements totaling $17.7 billion (compared to just $118.4 million for the top-10 employment discrimination suits), claims frequencies should be lower on the fiduciary side, according to Carrie Brodzinski, fiduciary and EPL product manager for Beazley Group in Farmington, Conn.

“With fiduciary, it's a lot more black and white as to whether something went wrong,” Ms. Brodzinski said, noting that personal interactions and conduct allegations typify employment practices lawsuits.

Fiduciary liability is based on “a statutory scheme, and there's only one–in employment practices, you can have federal and state [violations], and all the states are different,” she explained. “With fiduciary, there's one law–ERISA–and it's dealt with in federal court. It's harder to bring an ERISA claim, because you have to really point to something much more concrete and say there was a breach of fiduciary duty.”

LAWMAKERS MOVE IN

Even in instances where federal courts have ruled in favor of fiduciaries, federal lawmakers are moving to impose new rules on plan fiduciaries, experts said, pointing to recent fallout from a case known as Hecker vs. Deere.

Giving some background, Ms. Dart and Mr. Slamar described a February ruling by the Seventh Circuit, affirming a lower court's dismissal of a case against John Deere. The appeals court found that fiduciaries for Deere's 401(k) plan did not breach their duty by offering investment options with Fidelity mutual funds–funds that allegedly charged excessive fees.

Ms. Dart explained that Deere also had an open-end brokerage account, allowing participants to choose to invest in 2,500 other funds that may have had lower fees, in addition to options to invest in any of the 20 Fidelity funds offered.

Deere prevailed by offering what is known as a 404(c) defense–a safe-harbor defense, which Ms. Dart said is available for plans offering at least three investment choices and allowing participants to move between those choices, among other things.

The court said Deere's plan offerings were prudently diversified, and that “nothing in ERISA requires every fiduciary to scour the market to…offer the cheapest possible fund.”

Following the decision by a three-judge panel, plaintiffs–joined by the U.S. Department of Labor–petitioned the full court to rehear the case. In the petition, the DOL argued that the court “had not given its position–that ERISA fiduciaries are always potentially liable for selecting 401(k) plan investment options–sufficient deference,” according to a bulletin issued by Morgan Lewis, the law firm representing Deere.

The court denied the petition and issued a supplemental opinion in July, Mr. Slamar reported. In the new opinion, the court stated that this “wasn't a case of not giving appropriate deference…, but instead a matter that could be easily addressed in the regulatory process.”

The Hecker plaintiffs have since filed a petition for certiorari with the U.S. Supreme Court, and U.S. Rep. George Miller, D-Calif., chair of the House Education & Labor committee, introduced the 401(k) Fair Disclosure & Pension Security Act of 2009, requiring greater disclosure of fees for service providers that offer investment alternatives for plan participants, Mr. Slamar reported. (For more information, see “House Bill Targets 401(k) Advice,” at http://bit.ly/2s4oG9.)

Mr. Slamar noted that Rep. Miller had introduced similar legislation late in the Bush administration that did not gain much traction. President Barack Obama's administration has already given clear signals that there will be a strong emphasis on the rights of employees, Mr. Slamar said, noting that one of the president's first actions after his inauguration was to sign the Ledbetter Fair Pay Act–a law put in place to remedy what many lawmakers saw as a judicial wrong arising from a 2008 Supreme Court ruling severely limiting the window to file a pay discrimination suit.