What Is Fiduciary Liability Insurance?
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Fiduciary liability insurance is a type of insurance that covers financial losses that may result from a fiduciary's failure to fulfill their legal and ethical obligations. Fiduciaries can include trustees, executors, guardians, investment advisors, brokers or insurance agents. Covered losses include those resulting from a breach of fiduciary duty, failure to disclose conflicts of interest and errors in the administration of a trust or estate.
Keep reading to see who should consider fiduciary liability insurance, how it works and what it costs.
What Is a Fiduciary?
A fiduciary is a person or entity that has a legal and ethical responsibility to act in the best interests of another party. For example, a fiduciary may include a financial advisor who manages assets and provides advice on investing. Fiduciaries are held to a high standard of care, called the "fiduciary standard."
Other examples of fiduciaries include trustees, executors of wills and guardians of minors. In the financial industry, investment advisers, brokers and insurance agents may also be considered fiduciaries if they provide investment advice or manage assets for their clients.
Keep in mind that professionals may need to meet certain state or federal requirements before they can be considered fiduciaries. For example, in California, fiduciaries must be licensed, which would require passing an examination, 30 hours of approved education courses plus 15 hours of continuing education credit annually to renew the license.
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What Does Fiduciary Liability Insurance Cover?
Fiduciary liability insurance coverage pays when third parties allege that financial losses resulted from a fiduciary's failure to fulfill their legal and ethical obligations. This type of insurance is typically purchased by trustees, executors, guardians and other financial professionals who have a fiduciary duty to protect their clients' or beneficiaries' assets and interests.
Examples of what fiduciary liability coverage might cover include:
- Breach of fiduciary duty: Losses resulting from a fiduciary allegedly failing to fulfill their legal and ethical obligations to act in the best interests of their clients or beneficiaries. For example, a beneficiary may accuse a will executor of breaching their fiduciary duty because they were allegedly embezzling their trust fund.
- Failure to disclose conflicts of interest or from self-dealing: Losses resulting when the fiduciary is accused of placing their personal interests over those of their clients or beneficiaries. For example, a financial advisor may push a product that may not be the best option for their client but does so anyway because the advisor gains a commission.
- Errors or omissions in the administration of a trust or estate: Losses resulting from a professional error or a failure to disclose important information. For example, if an executor fails to file tax returns, resulting in penalties, this coverage would help to reimburse those penalties.
- Failure to comply with regulations or laws. This coverage helps to protect against financial losses that may occur due to a failure to comply with regulations such as ERISA requirements.
What Isn’t Covered by Fiduciary Liability Insurance?
Fiduciary liability insurance is designed to protect financial professionals from losses resulting from failing to fulfill their legal and ethical obligations, but it is not a catch-all coverage. While fiduciary liability insurance may cover legal costs incurred when the company is accused of wrongdoing, it may not cover expenses if the company is actually found guilty of certain crimes, like deliberate fraud or embezzlement.
Other examples of what is not covered by fiduciary liability insurance include:
- Criminal fines and penalties
- Bodily injury
- Property damage
- Poor investment performance
- Natural disasters, war or other catastrophic events
How Much Does Fiduciary Liability Insurance Cost?
Fiduciary liability insurance costs can range from $500 to $2,500 per year. Actual costs will consider several factors, including the limits of the policy, the total value of the assets being managed and your claims history — if you’ve filed multiple claims recently, you will likely face higher rates.
Who Is a Fiduciary Insurance Policy Best For?
A fiduciary liability insurance policy is best for individuals and organizations with a legal and ethical responsibility to act in the best interests of another party. Below is a list of professionals who would benefit from such coverage:
Trustees have a legal and ethical responsibility to manage assets on behalf of the beneficiaries of a trust
Executors of wills
Executors manage assets on behalf of the beneficiaries of a will, which may include paying debts and taxes owed and distributing assets to the beneficiaries
Guardians of minors
Guardians manage assets on behalf of minors until they turn 18, which may include spending installment payments from their inheritance on expenses outlined in the will
Investment advisors and brokers
Investment advisers have a legal and ethical responsibility to provide investment advice to the best of their knowledge that will aid the client in their financial goals
What Other Business Insurance Types Should a Fiduciary Consider?
In addition to fiduciary liability insurance, fiduciaries may want to consider other insurance policies to protect their business and assets, such as cyber liability insurance and workers’ compensation insurance if they employ workers.
- Professional liability insurance: This type of insurance, also known as errors and omissions insurance, provides coverage for financial losses resulting from mistakes or oversights in the rendering of professional services such as consulting or accounting.
- Cyber liability insurance: This type of insurance provides coverage for financial losses resulting from cyber attacks, data breaches and other cyber-related incidents. Fiduciaries that have access to their client’s sensitive and private information should strongly consider this coverage.
- General liability insurance: This type of coverage provides coverage for financial losses resulting from third-party claims of bodily injury or property damage. If you have a physical office that accepts walk-in visitors, you should carry general liability insurance.
- Directors and officers liability insurance: This type of insurance provides coverage for financial losses resulting from claims made against the directors and officers of a company for wrongful acts committed in their official capacity.
- Workers’ compensation insurance: If you employ your state’s minimum number of workers, you are legally required to carry workers’ compensation insurance. This coverage will pay for employee injuries and illnesses sustained while working.
The specific insurance needs of a fiduciary will depend on the nature of their business, the risks they face and the regulations they must comply with. It's always important to review the specific needs and assess the risk exposures in order to choose the right coverage.
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- Beacon Pointe. “Does Your Advisor Use The Right Standard? Fiduciary vs. Suitability.” Accessed Jan. 14, 2023.
- Department of Consumer Affairs. “Professional Fiduciaries Bureau.” Accessed Jan. 17, 2023.
- IN.gov. “Fiduciary Income Tax FAQs (Frequently Asked Questions).” Accessed Jan. 14, 2023.
- AdvisorSmith. “What Is Fiduciary Liability Insurance?” Accessed Jan. 14, 2023.