ERISA suits spark liability concerns: With litigation and payouts rising--and not expected to abate soon--employers need to take fiduciary responsibilities seriously, reviewing and revamping their coverage.

• Author: Prussack, Rhonda
• Position: Fiduciary Liability - Employee Retirement Income Security Act

Litigation over Employee Retirement Income Security Act (ERISA) issues shows few signs of abating. Figures aren't in yet for 2003, but 2002 figures from the Department of Labor (DOL) showed 10,787 new ERISA civil actions filed, up 5 percent over the year earlier and 18 percent from 2000.

In 2003, meanwhile, new exposures were significant. These included the mutual fund market-timing and late-trading scandals, court decisions with significant ramifications for companies that have converted their pension plans to cash balance arrangements and a harshly worded amicus brief from the DOL, laying responsibility squarely at the filet of company executives for losses taken by employee benefit plans that hold employer stock.

Looking ahead, 2004 is shaping up to bring even more litigation, as the DOL cements its anti-executive position through the filing of additional amicus briefs in ERISA securities litigation cases, some of which are starting to settle for up to eight figures.

Enron, Global Crossing, First Union and IBM are just a handful of the many companies that have made headlines recently, for, among other things, huge class action lawsuits brought against them by employees alleging breaches of fiduciary duty or violation of ERISA with respect to their employee benefit plans. Suits alleging imprudent investing or misrepresentation by fiduciaries are now becoming commonplace. ERISA, the federal body of law that governs most employee benefit plans, calls for fiduciaries of employee benefit plans to be personally liable for restoring any damage caused a plan through their breach of duty.

The directors and officers of larger companies are typically protected against such personal liability, either through their company's indemnity or through a fiduciary liability policy. Virtually all large companies carry fiduciary liability insurance, and it's not uncommon for policy limits to exceed $100 million.

(Of course, neither indemnity by the company nor fiduciary liability insurance are infallible. Indemnity might not be available in the event of bankruptcy or when a lawsuit is related to an employee stock ownership plan. And now that fiduciary liability insurers are facing limits losses, the claims-paying ability of weaker carriers or those that have not been writing the insurance for very long has to be questioned.)

Directors, officers and owners of small to mid-sized businesses, however, are generally not so well protected. A sizable fiduciary...