Fiduciary Liability Insurance in Pension Land

Travelers Canada announced a hard hat of sorts for money managers. According to the September 21, 2006 press release, the goal is to provide additional protection to "investment advisers, mutual funds and hedge funds for risks associated with providing asset management products and services to investors." Specific policy terms include coverage for incidents such as the ones listed below:

1. "Failure to adhere to investment guidelines and restrictions

2. Misrepresentations and failure to adequately disclose risks

3. Mismanagement of investments by an adviser on behalf of a pension fund

4. Breach of fiduciary duties to clients or pension plan participants

5. Unintentional errors committed in the course of performing regular investment adviser duties."

New pension laws, heightened scrutiny of fiduciary advisors and a surge in litigation would seem to make this type of enhanced coverage appealing to investment professionals in Canada, the U.S. and elsewhere.

Some interesting questions come to mind.

1. Should pension fiduciaries ask money managers for proof of insurance if they don't do so already?

2. Should pension fiduciaries eliminate a fund from consideration if they do not have this type of insurance?

3. Should the fund selection decision be tied to type and amount of insurance coverage? For example, would a fund with lots of liability protection be perceived as less of a risk-taker and perhaps more likely to deliver lower returns? Alternatively, would a money manager with ample coverage be seen as more of a risk-taker since insurance provides a safety net in the event that something goes awry?

4. Does the carrier matter? Specifically, do pension fiduciaries ask about the insurance underwriter and its financial capabilities to pay a claim?

5. Should a money manager ask pension fiduciaries if they are covered by liability insurance if they don't already inquire?

6. How would proof of plan fiduciary insurance be evaluated by the money manager? Is it an indication that a pension fund is inclined to have an established governance process that includes regular detailed assessments of money managers' risk controls? Would that discourage a more freewheeling money manager from doing business with that retirement plan?

It is our view that scant research has been done about the behavioral aspect of fiduciary insurance in pension land. Analysis of the insurance purchasing decision would be enlightening in several ways. First, it could shed light on process-related risks associated with pension plan investing. Second, it could (and probably already does) encourage a self-selection process that is directly tied to probability of loss on both sides of the fence. Few would argue that rational pension fiduciaries and investment professionals alike seek to avoid monetary losses and reputation-related harm.

Editor's Note: If you know of a study that examines these issues, please email pension@bvallc.com. Let us know if you would like to be credited for providing information. posted by Susan Mangiero at 9/24/2006 04:07:00 PM