The Department of Labor (DOL) issued a final conflict of interest rule in April regarding the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA). The ruling is likely to prompt a review of E&O insurance (errors & omissions) policies as well as D&O coverage for officers and directors.

The DOL rule describes the kinds of communications that would constitute investment advice. The rule also defines when fiduciary investment advice responsibilities apply to plan communications, based on whether a “recommendation” occurred.

E&O InsuranceThe revised fiduciary definition takes effect on April 10, 2017. In the meantime, several trade groups have filed lawsuits to challenge the ruling. The American Council of Life Insurers and the National Association of Insurance and Financial Advisors are among several plaintiffs in various legal actions.

Insurance industry experts are suggesting that financial advisors and plan sponsors may want to review insurance policy coverage in view of the rule.

Insureds can speak with their insurance carrier or insurance agent to determine what kind of coverage is needed and/or included in E&O insurance as well as D&O insurance policies that would offer protection from liability associate with the new fiduciary rule.

Background on E&O Insurance

Errors & Omissions insurance (E&O) covers the insured’s business entity or the insured individually, in the event that a third party (typically a client or customer) alleges that the insured is responsible for a service the insured has provided, or failed to provide, that did not have the expected or promised results and caused damages.

For doctors, dentists and chiropractors, this coverage is often called malpractice insurance. For lawyers, accountants, insurance agents, architects, engineers and investment advisors E&O coverage is often referred to as professional liability insurance. Whatever it is called, it covers the insured for errors (or omissions) that the insured has made.

Most E&O policies cover judgments, settlements and defense costs. Even if the allegations are found to be without merit, significant dollars will be required to defend the related lawsuit. This can bankrupt a smaller company or individual and have a lasting effect on the bottom line of larger companies.

In short, E&O coverage provides protection for the insured in the event that an error or omission on the part of the insured has caused damages to a third party, typically a client or customer of the insured.

Third Party Administrators and ERISA Plans

In general, an insurance company (or self-insured business or entity and employee benefit plan) can contract out certain of the traditional insurance company functions to organizations such as Third Party Administrators (TPAs).

TPAs handle many aspects of employee benefit plans such as the processing of retirement plans and flexible spending accounts. Many employee benefit plans have highly technical aspects and complex administration that can make using a specialized entity such as a TPA more cost-effective than doing the same processing in house.

Investment companies may also contract with a TPA to handle much of the administrative work associated with managing 401(k) retirement plans, including employee plan contributions, distributions to employees, and other aspects of plan processing.

Industry experts advise that retirement plan sponsors need to review their contracts with third party administrators on a periodic basis, in part to insure compliance with new regulatory requirements such as might be included in the pending DOL fiduciary rule.

About E&O Insurance Expert Bill Hager

Bill Hager is an Errors & Omissions insurance expert, including the following areas:

  • Errors and omission (E&O) insurance coverages overall,
  • Regulation of E&O policies including their terms, conditions, exclusions and coverages,
  • Marketplace as to E&O policies
  • Insurer claim settlement obligations as to E&O claims,
  • Responsibilities of insurance agents as to E&O policies and their duties and obligations in particular as to making their services available to insureds as to E&O coverages, and
  • Duties and obligations of insureds as to such matters.

Click on the link to read more about Bill Hager’s E&O insurance expertise.


Material for this article was taken from a collection of industry sources relating to the subject.

In all of the general statements here, see the state law of the controlling jurisdiction. Every case is different and circumstances vary widely depending on the governing state law, policy provisions, and related considerations.

This blog is provided for educational purposes only. It is not intended to provide legal advice or an opinion in regard to any topic discussed. The blog should not be used as a substitute for legal advice from a licensed attorney in your state.