Fiduciary Duty or Standard of Care: Professionals on the Fiduciary Firing Line MODERATOR: Simon Hodge, Managing Director Wachovia Insurance ServicesMODERATOR: Simon Hodge, Managing Director Wachovia Insurance Services Christine Dart, Fiduciary Liability Product Manager, Vice President Chubb Specialty InsuranceChristine Dart, Fiduciary Liability Product Manager, Vice President Chubb Specialty Insurance Rodger Laurite, Senior Vice President and Unit ManagerRodger Laurite, Senior Vice President and Unit Manager Lockton Financial Services Harold J. Neher, Assistant Vice President AXIS InsuranceHarold J. Neher, Assistant Vice President AXIS Insurance

Presentation Overview A.Fiduciary Liability – What is it? B.Common Fiduciary Liability Claims C.Risk Management for Fiduciaries D.Underwriting Fiduciary Liability E.Fiduciary Coverage Available Today

Employee Retirement Income Security Act (ERISA) History:  Funding problems, e.g. Studebaker  Vesting abuses Purpose:  Encourage employee benefit plans  Minimum standards of conduct  Financial soundness

Fiduciary Liability ERISA  Fiduciary Status  Fiduciary Duties  Exclusive Jurisdiction  No Jury  Limited Plaintiffs / Defendants  Limited Remedies  Fee Shifting Pension Protection Act of 2006 DOL proposed regulations on fee disclosure

Fiduciary Duties  Undivided loyalty to participants  Due diligence  Prudence  Diversification  Compliance with Plan & ERISA

What Is The Exposure?* “A fiduciary shall be personally liable to restore to the plan”  Any losses to the plan resulting from a breach of fiduciary duty;  Any profits made by the fiduciary through the use of plan assets  Equitable or remedial relief as the courts deem appropriate. * Source: ERISA Sec. 409

Indemnification  Often times indemnification provisions are inadequate  An employer may become insolvent or not have adequate cash flow to pay the losses  Due to some statutory limitations, some claims may be insurable but not indemnifiable  Section 410 ERISA Exculpatory Provisions

Common Fiduciary Liability Claims  Denial of Benefits  Negligent E & O  Mismanagement of Investments  Improper Disclosures  Excessive Fees  Implications for underwriting, exposure and claims management

Fiduciary Liability: Claims Claims Examples  ERISA tagalong suits to shareholder class actions  Liability of fiduciaries to monitor and adjust investment alternatives  Age discrimination in cash balance plans  Excessive fees charged to plans by service providers and mutual funds held by plans  ERISA § 510 claims involving employment discrimination Potential Severity  Enron - $37.5 million partial settlement  Is in addition to the earlier $ million partial settlement reached in 2005  Tentative settlements have also been reached with Jeffrey Skilling and the Estate of Ken Lay  HealthSouth - $28.85 million  Williams Companies - $55 million  CMS Energy - $28 million

Risk Management Other Insurance Protection: ERISA Bond  Required by ERISA and protects for theft but not breaches of fiduciary duties under ERISA  Pension Protection Act has increased the bond limit for employer securities in a plan to $1million Employee Benefits Liability  Responds to administrative errors & omissions Directors and Officers  Most policies contain an ERISA exclusion

Underwriting Fiduciary Liability What are some key underwriting issues?  Excess Side A D&O  LaRue case: impact on underwriting and exposure  Tag-along suits  Tie-in with D&O Effect on claims resolution  Side A D&O policies don’t generally have ERISA exclusions  D&O retentions usually much higher than Fiduciary Claims Management

Fiduciary Liability Coverage Available Today Fiduciary Coverage: Key Issues  Benefits Due Exclusion  ESOP Definition and Coverage  Conduct Exclusions  Severability of the Application  Administrative E&O

Fiduciary Liability Coverage Available Today Additional coverage extensions  Side A / Non-Indemnifiable Loss  Order of Payments  HIPAA and COBRA violations  Voluntary settlement programs and compliance  IRS fines/penalties  Informal DOL or Pension Benefit Guaranty Corporation fact finding investigations  Pre- and post-judgment interest & punitive damages where insurable  Foreign equivalents  Waiver of Recourse – Section 410(b)(1)

Fiduciary Liability Coverage Available Today Limit of Liability and retention  Appropriate limits generally based on plan assets and plan participants  Other determining factors:  M&A Activity  Industry  Risk tolerance  Trustees/Fiduciaries desires  Greater exposure for companies with employer stock in the plan(s) and/or ESOP exposure

Audience Q & A

Simon Hodge Chris Dart Rodger Laurite Harold Neher A copy of this presentation will be available on the PLUS website next week. Many Thanks To: