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Litigation leads to hardening fiduciary liability market

class action

The once “sleepy” fiduciary liability market can no longer be described as such because of a growing number of excessive fee claims lawsuits being filed, insurance executives say.

The fiduciary space recently has taken an abrupt and sudden turn” because of these claims, which are class actions brought against defined contribution plans in connection with allegations that recordkeeping and other expenses that they charge are unnecessary or unreasonable, said Alison Martin, Pittsburgh-based fiduciary product manager and senior vice president at Chubb Ltd.

She spoke Thursday during a session of the Minneapolis-based Professional Liability Underwriting Society’s annual directors and officers symposium, which was conducted virtually.

While these claims are not new, they had been manageable, filed at a rate of about 20 a year, until beginning in late 2019, when “we saw a significant change,” with more than 90 filed against plan sponsors in 2020, Ms. Martin said.

There has also been a broadening of who is targeted in these suits. They have traditionally been filed against large defined contribution plans, but now “you’re seeing much smaller plans sued” and various kinds of plan sponsors, including public and private companies, not-for-profit organizations, financial institutions and manufacturers, Ms. Martin said.

Furthermore, there is a “very low dismissal rate” for these suits, which are expensive to defend, she said. Once plan sponsors lose the motion to dismiss “you’re off to the races” and will be paying millions to settle, she said, adding that settlement values have been climbing. 

Many of these insureds “have very good risk profiles,” but “it doesn’t mean they’re not getting sued,” Ms. Martin said.  This has led to big changes in how these policies are being underwritten, she said.

Nick Landis, Philadelphia-based vice president of American International Group Inc.’s private and not-for-profit financial lines product team, said there has been “a complete re-underwriting of the fiduciary space.”

Underwriters are asking policyholders to fill out in-depth questionnaires, seeking details of investment options, investment fees, expense ratios and overlapping investments in the same category —information that policyholders are not used “to sharing on a regular basis,” Mr. Landis said.

Ms. Martin said the underwriting process used to involve open-ended questions. “It’s become much more granular, and we want much more specific information now,” she said. “It’s a necessary burden, unfortunately.”

The situation means higher rates and reduced capacity, which may include co-insurance, Mr. Landis said. “The reality is, everyone’s going to have to take a piece of the pie at the end of the day,” he said.

Mr. Landis also said that unlike in the past the underwriting process may have to begin as early as five months in advance.