Litigation leads to hardening fiduciary liability market

The once "sleepy" trust market can no longer be called such as lawsuits for excessive fee claims continue to grow, insurance managers say.

The escrow room has recently taken off "an abrupt and sudden turnaround "due to these allegations, which are class action lawsuits against defined contribution plans related to allegations that records and other charges imposed by them are unnecessary or inappropriate," said Alison Martin, Pittsburgh-based escrow product manager and senior vice president at Chubb Ltd.

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

While these claims are not new, they were manageable and filed at the rate of about 20 per year until they started in late 2019 when "we saw a significant change" and in 2020 more than 90 were filed against plan sponsors. Said Martin.

It also expanded who is addressed in these suits. They have traditionally been filed against large defined contribution plans, but now "much smaller plans are being sued" and various types of plan sponsors including public and private corporations, nonprofits, financial institutions and manufacturers. Said Martin.

In addition, there is a "very low discharge rate" for these lawsuits, which are expensive to defend, she said. As soon as plan sponsors lose the "You are on your way to the races" firing request and are going to pay millions for the billing, she added that billing values ​​have increased.

Many of these insured “have very good risk profiles”, but “that doesn't mean they won't be sued,” said Ms. Martin. This has resulted in major changes in the way these guidelines are signed, she said.

Nick Landis, Philadelphia-based vice president of the product team for private and nonprofit finance lines at American International Group Inc., said there had been "a complete rewrite of the trust room."

Underwriters are encouraging policyholders to complete detailed questionnaires and look for details of investment options, investment fees, expense ratios and overlapping investments in the same category - information policyholders are not used to "regularly sharing," Landis said.

Ms. Martin said the drawing process included open questions. "It's gotten a lot more detailed and we want a lot more specific information now," she said. "Unfortunately it is a necessary burden."

The situation means higher rates and reduced capacity, which may include co-insurance, Landis said. "The reality is that everyone has to have 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 need to start five months in advance.

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