Insurance Marketplace Realities 2024 Spring Update – Fiduciary liability

Rate predictions: Fiduciary liability

	Trend	Range
Commerical (defined contribution or benefit plan assets up to $50M)		Flat to +10%
Commerical (plans asset $50M to $500M)		Flat to +7.5%
Large public/nonprofit		Flat to +5%
Financial institutions		-5% to +5%

Many underwriters continue to be cautious, but some seek to build their books

• Underwriting focus: Despite conflicting positive and negative judicial decisions and a mostly unacknowledged drop in excessive fee class actions in 2023 (48 compared to 80 in 2022), a recent increase in the number of markets interested in writing primary fiduciary liability policies has been the main driver of a flattening of premium increases; most renewals with stable risk profiles and little year- over -year changes are seeing flat renewals.
• Particularly with commercial and large nonprofit (university and hospital) risks, underwriters are focused on defined contribution pension plans with assets greater than $250 million, where previously the cut-off had been $1 billion (some carriers don’t want to quote plans with assets above $1 billion). Even smaller plans can cause concern because a few smaller plaintiff firms have targeted them, but some carriers are now easing up on retentions for such plans.
• Insurers regularly seek detailed information about fund fees, record keeping costs, investment performance, share class, vendor vetting process and plan governance, causing some insureds to seek assistance from their vendors in filling out applications. Carriers look for frequent RFPs/benchmarking, little or no revenue sharing (with caps), little or no retail share classes, few actively managed funds (not QDIA) and limited M&A activity.
• A recent excessive fee class action involving a health and welfare plan may cause increased scrutiny on such plans (see below re: Johnson & Johnson class action).
• Recently brokers have had some success in getting credit for positive risk factors, including level of delegation, quality of advisors and favorable venues.
• Retentions: Insurers continue to be more focused on retentions than on premiums, although at least one carrier is once again offering first-dollar coverage for plans with less than $200 million in assets. Increased retentions of seven figures remain commonplace for specific exposures, e.g., prohibited transactions/excessive fees and sometimes all mass/class actions, although recently some carriers have offered opportunities to “buy down” the retentions somewhat.
• Coverage breadth seeing some expansions: Other than increasing retentions, carriers have not generally been restricting coverage. It should be noted, however, that terms can vary substantially. Several carriers have become receptive to offering coverage enhancing endorsements.
• Capacity management: Most carriers are closely monitoring the capacity they are putting out, and $5 million primary limits continue to be more common than $10 million.
• Rate prediction qualification: Rate increases may be higher or lower depending on the insured’s existing pricing. Insureds who have already had at least one round of double-digit percentage premium increases may be able to avoid increases entirely. We expect to see flat renewals continuing to be common. Price per million of coverage can vary substantially among risk classifications.

Challenged classes

• Healthcare entities, who continue to be targeted disproportionately by class action plaintiffs, have been seeing premium increases up to 15%, although some are renewing closer to flat.
• Universities are less challenged now due to the lack of recent class actions filed against them.
• Financial institutions still receive extra scrutiny, especially if their plans use proprietary funds, but their premiums have become stable and even decreased recently.
• Carriers have mostly ceased to penalize funds with Black Rock investments since eight of the 11 suits have been dismissed (only one case has managed to fully survive an initial motion to dismiss, while another was only partially dismissed).

Risks to watch are excessive fee class actions, imprudent fund selection class actions, COBRA class actions, class actions challenging ESG investments, DOL investigations and cyber audits, potential claims arising from benefit cutbacks, claims alleging imprudent DB plan buyouts.

Developments and market-driving issues

Defined contribution plan excessive fee class actions

• In 2023, excessive fee claim frequency dropped from the high 2022 volume. For over a decade, a growing number of plaintiff firms have been suing diverse public, private and non-profit entities, alleging excessive investment and/or recordkeeping fees that resulted in reduced investment principle and reduced returns; many of these class actions also alleged sustained periods of underperformance by specific investment options. However, excessive fee class action volume was down in 2023 (48 compared to 89 in 2022). Several recent excessive fee settlements have been in the low seven figures. In the initial aftermath of the U.S. Supreme Court’s pro-plaintiff Northwestern University decision, few excessive fee cases were dismissed, but subsequent positive precedents from the Sixth, Seventh, Eighth and Tenth Circuits (CommonSpirit, Oshkosh, MidAmerican Energy Co. and Barrick Gold respectively) have led to an increase in motions to dismiss being granted, particularly in those circuits (see discussion in previous Marketplace Realities).
• Most recent appellate decision: On November 14, 2023 the Second Circuit affirmed the grant of summary judgment to Cornell University in its excessive fee case. Although Cornell had been forced to go through discovery (and demonstrated a prudent procedure which resulted in reduced fees over the years), the court wound up holding that, in relation to their prohibited transaction claim, plaintiffs should have been required in the first instance to plead the lack of a relevant exemption. This decision could help future defendants in the important Second Circuit (which includes New York) to dismiss prohibited transaction claims on initial motion. For more discussion concerning the implications of the Cornell University decision, see “Second Circuit decision offers new hope for defending prohibited transaction claims.”

Health and welfare plan excessive fee class action

• On February 5, 2024, a Johnson & Johnson employee filed a proposed class action alleging that J&J employees have been overcharged for prescription drug benefits. The complaint alleges that non-defendant Express Scripts, J&J’s Pharmacy Benefits Manager (PBM), drastically overcharges for prescription drugs, and provided several purported examples. The lawsuit is structured similarly to defined contribution retirement plan excessive fee litigation, alleging that J&J’s failure to negotiate lower prices constitutes a breach of its fiduciary duties under ERISA. The complaint also alleges that non-defendant Aon was a conflicted employee benefits consultant who steered J&J toward Express Scripts against their client’s interest.
• The claimant seeks to make the health plans whole (despite not having brought the suit on a derivative basis), plus “surcharge,” a form of equitable relief for herself and the purported class. She also brings a count on her own behalf seeking $110/day statutory penalties for failure to provide requested plan information on a timely basis.
• Defendants in such class actions relating to health and welfare plan prices are likely to have strong defenses based on the plantiff’s lack of standing.
• This suit was filed against a backdrop of recent amendments which made section 408(b)(2) disclosure requirements applicable to welfare benefit plans in addition to retirement plans, as well as a trend of welfare plans becoming more aggressive in suing their third-party administrators to access complete employee medical claim data and ascertain whether they are owned money.

Other litigation

• Other types of class actions persist: Although fewer suits against defined benefit plans alleging reduced benefits due to the use of outdated mortality table assumptions were filed in 2023, such cases continue to be litigated, as well as class actions involving COBRA notice deficiencies or improper benefit reductions.
• Employer stock class actions against public companies have remained virtually nonexistent for the last several years, but private companies with ESOPs can still see claims. In the continuing aftermath of the U.S. Supreme Court’s decision in Fifth Third Bank v. Dudenhoeffer, very few employer stock drop class actions have been filed, and those few continue to be dismissed and affirmed on appeal. Nonetheless, carriers remain concerned about employer stock in plans; they will often exclude employer stock ownership plans or include elevated retentions. Meanwhile, private plaintiffs and the DOL sometimes bring claims against private companies with employer stock plans, mostly arising from valuation issues in connection with establishing or shutting down such plans. In 2023, at least one substantial settlement ($8.7 million) involving a private company ESOP was reached.
• Litigation arising from pension buyouts: In the midst of positive news about defined benefit pension plan funding and a rise in plan sponsors arranging with insurers for buyouts of their pension liabilities (in order to gain access to the surpluses), plaintiffs have filed class actions against two plan sponsors who have arranged for such transactions (Lockheed Martin and AT&T). The defendants may have strong defenses to plaintiff’s efforts to achieve standing based on a stated concern that their benefits will not be paid in the future if and when the relevant insurer becomes insolvent. Both cases involve the same insurer, who is described in the Lockheed complaint as “a private equity controlled insurance company with a highly risky offshore structure.”
• New plaintiff theory: In recent months, one two-person California plaintiff firm has filed four lawsuits against four different sponsors of defined contribution plans, alleging that it was impermissible self-dealing for companies to defray future plan contributions by using forfeited funds related to departing employees who didn’t vest in their employer match. These allegations seem to contradict long-established practices, seemingly endorsed by both the Internal Revenue Service and the Department of Labor. Just this year, the IRS proposed regulations concerning the timing for reallocating forfeiture, without raising any concerns.

Enforcement

• Department of Labor/Employee Benefit Security Administration (EBSA) enforcement results were similar in 2023 to what they had been in 2022 (recoveries of approximately $1.4 billion in both years), having dipped from the high of 2021 ($2.4 billion recovered). While recoveries from enforcement actions were less than half what they were in 2021, recoveries from voluntary correction programs were more than double what they were in 2021 and 10 times what they were in 2022.
• The main components of the recovery were:
  • Enforcement actions: $844.7 million ($931 million in 2022) ($1.9 billion in 2021)
  • Informal complaint resolution: $444.1 million ($422.1 million in 2022) ($499.5 million in 2021)
  • Voluntary fiduciary correction program: $84.5 million ($8 million in 2022) ($34 million in 2021)
  • Abandoned plan program: $61.2 million ($83.9 million in 2022) ($50.8million in 2021)

ESG developments

DOL rule

• The DOL’s proposed rule regarding environmental, social and governance (ESG) investing achieved final rule status and is still in effect, despite substantial opposition.
• On October 14, 2021, the DOL published for comment a new rule to modify the previous administration’s 2020 rule that was perceived as discouraging retirement plans from investing in ESG-related investment options by putting a burden on fiduciaries to justify such investments. As the DOL explained in the supplemental information provided when they published the rule in the Federal Register, the change was “intended to counteract negative perception of the use of climate change and other ESG factors in investment decisions caused by the 2020 Rules, and to clarify that a fiduciary’s duty of prudence may often require an evaluation of the effect of climate change and/or government policy changes to address climate change on investments’ risks and returns.”
• On November 22, 2022, the DOL published the final rule and a summary fact sheet. The official press release was titled: “U.S. Department of Labor Announces Final Rule to Remove Barriers to Considering Environmental, Social, Governance Factors in Plan Investments.” The final rule retained the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries.
• The rule became effective on January 30, 2023. To date, the rule has survived a legislative effort to block it (which was vetoed by President Biden in March 2023) and a lawsuit filed by 25 state attorneys general in federal court in Texas in January 2023 (which was dismissed in September 2023 and is currently on appeal to the Fifth Circuit). Another challenge was filed in federal court in Wisconsin in February 2023 and is still pending.

Developments in the first ESG investment class action

• American Airlines was sued in Texas federal court in June 2023 for allegedly offering imprudent and expensive ESG-oriented investments. American Airlines has stated that it did not actually include such investment options in its main menu, but the motion to dismiss was denied on February 21, 2024, with the judge finding to be sufficient the allegations that “Defendants’ public commitment to ESG initiatives motivated the disloyal decision to invest Plan assets with managers who pursue non-economic ESG objectives through select investments that underperform relative to non-ESG investments.” Defendants subsequently filed a pending motion for summary judgment, but as of now the trial date is still set for June 2024.

Legislation

• SECURE ACT 2.0: Securing A Strong Retirement Act (SECURE 2.0) was signed into law on December 29, 2022, with parts taking effect immediately and others being phased in over time.
• The law expanded automatic enrollment, as well as opportunities for making “catch up” contributions.
• Among other things, SECURE 2.0 also enhanced the retirement plan start-up credit, making it easier for small businesses to sponsor a retirement plan (for more detail, see Secure 2.0 signed into law as part of 2023 federal spending package).
• The legislation further increased the required minimum distribution age to 75 and it allows employers to match employee student loan repayments with retirement account contributions.
• However, many ERISA practitioners remained uncertain about certain practical details relating to the actual implementation of some provisions of SECURE 2.0. The ERISA Industry Committee (ERIC) sent an open letter to the Department of the Treasury and Internal Revenue Service on June 8 asking for clarification on various provisions of SECURE 2.0, including the student loan match, Roth catch-up contributions and Roth matching contributions.
• As a result of the confusion, the IRS recently released Notice 2024-2, the long-awaited “grab bag” notice that provides Q&A guidance on various provisions; for details see “IRS guidance on SECURE 2.0 provisions.”

Contacts

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Lawrence Fine

Management Liability Coverage Leader
FINEX North America

email Email phone +1 212 309 3623

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John M. Orr

D&O Liability Product Leader
FINEX North America

email Email phone +1 415 955 0196

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