Fiduciary liability insurance offers important protections for retirement plan fiduciaries. In addition to purchasing fiduciary liability insurance, many retirement plan sponsors also agree to indemnify plan fiduciaries against liability for fiduciary acts. A simple rationale for using both fiduciary liability insurance and indemnification may be that "more is better," and that it helps fiduciaries to have both types of protection against fiduciary liability. The intended result of this "doubling up" on protection is to assure fiduciaries that they will not face unwanted legal exposure for taking on fiduciary duties.
This approach may backfire for the plan sponsor if the terms of the fiduciary liability policy and the indemnification are not carefully reviewed. Fiduciary liability insurance policies often contain subrogation provisions, which give the insurer the right to pursue and collect other sources of reimbursement available to the fiduciary. If the subrogation provision gives the insurer the right to pursue indemnification the fiduciary receives from the plan sponsor, the result is not what the plan sponsor intended. Instead of "extra" protection, the indemnification and subrogation provisions may combine to make the fiduciary liability policy worthless to the plan sponsor.
In my experience, this bad result may be easily overlooked because the insurance broker is not aware of the plan sponsor's indemnification provision, and the plan sponsor does not understand the details of the insurance policy. To avoid the possibility of this problem, plan sponsors should insist on clearly understanding how fiduciary indemnification provisions and fiduciary liability insurance interact.
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