1. Fiduciary Liability
Fiduciary liability insurance has, up until recently, been
one of those small, inexpensive and easily overlooked
policies you buy that gets little thought or attention.
Designed to cover liabilities created by the Employee
Retirement Income Security Act (ERISA), including the
personal liability of plan fiduciaries, it’s basically sleep
at night insurance for anyone with fiduciary
responsibility, as defined by ERISA, for their company’s
employee benefit plans. Many if not most of our
readers fall into that category.
Premiums for these policies have always been quite
low, in large part because of a perceived lack of serious
exposure, especially when the benefit plans in question
were defined contribution type plans such as 401(k)
plans. Unlike with defined benefit plans, in defined
contribution plans investment choices are made by
individual participants (albeit from a list of pre-
approved options selected by plan sponsors) rather than
by the plan sponsors themselves, so it was thought
there was relatively little risk to plan sponsors from
complaints from participants about investment returns
or results.
To a degree, that’s still true, but there have recently
been several factors combining to create new risks for
plan sponsors. The first is the reported tendency of
often unsophisticated individual 401(k) plan participants
to choose relatively safe, conservative investment
vehicles for their plans, such as money market or bond
funds. The second is the prolonged recent history of
very low interest rates and investment returns for these
more conservative investment options. The third is the
fees that are charged by the investment funds offered
by 401(k) plans that are part of any investment option.
In an era of low interest rates and investment returns
such fees, even if comparatively low, can eat into
net returns to the investor, reducing plan asset growth and,
ultimately, the retirement benefits available to plan
participants.
As we have reported in the past, the plaintiff’s bar has been
testing the waters for almost a decade now with fiduciary
liability lawsuits promoting a variety of theories of liability,
most of which are tied to the idea that plan participants
saw their investment returns on funds in company
sponsored retirement plans reduced by excessive fees built
into investment options, and over which participants had
no control. Initially these types of fee based suits were
directed at very large plans, such as those offered by
Verizon, American Airlines, Chevron, Oracle and such, all
plans with assets measured in ten figures or more.
Fiduciaries and plan sponsors had some early success in
defending these suits, but there have been cracks in that
dam as some high profile settlements have been reported.
Even more worrisome recently is what appears to be a
trend toward legal attacks against much smaller plans.
Plaintiffs seem to be lowering their sights, with claims
reported against plans with assets measured in millions,
not billions of dollars. Recently a Minnesota auto body
repair company with barely 100 participants and less than
$10 million in assets was subjected to a fiduciary liability
suit based on the same theory of excessive fees in their
plan.
As a legal strategy for a hungry and ambitious lawyer this
could make sense. Industry sources report there are nearly
75,000 401(k) plans nationally with assets totaling $25
million or less, with more than 4.2 million workers (an
average of 56 workers per plan) participating in these
plans. Smaller employers might not be as diligent in
managing their plans as larger ones, and in fact research
shows that smaller plans typically do have higher fees than
larger plans (who can presumably use their size as leverage
to negotiate better deals). With less staff and resources
THE INSURANCE NEWSLETTER
(401) 714-9048
JBelek@SRFM.com
660 Roosevelt Avenue
Pawtucket, RI 02860

2. (plan oversight typically being a part time job for
someone) and less meticulous oversight and
documentation, smaller employers and plans may be quite
vulnerable to lawsuits claiming excessive fees, and could be
a target rich environment for attorneys with mortgages
and college tuitions to pay for.
There are common sense things you can do to better
manage your 401(k) and minimize the risk of litigation,
and now is a good time to think about doing them. You
might also want to review the coverage in your fiduciary
liability policy to be sure you are properly covered for
claims like these. Remember, personal assets of plan
fiduciaries could be at risk. We’ll be happy to review all
this with you, give us a call.
Commercial Auto Claim Trends
One of the toughest lines of commercial insurance is that
written on heavy, long haul tractors and trailers. A fully
loaded eighteen wheeler traveling at highway speed has
tremendous amounts of potential energy and enormous
power to kill or maim, or cause massive amounts of
property damage, and serious accidents and large claims
occur regularly.
Until a few years ago insurance companies and large self-
insured fleet operators had a pretty good handle on
commercial auto claims and costs arising from such heavy
vehicle accidents. Claim frequency was pretty steady and
predictable, and calculating damages and costs from bodily
injuries was a fairly straightforward process. This made
insurance for this type of exposure possible and profitable;
insurers are not afraid of severe exposures as long as claim
experience is predictable and allows for setting premium
rates sufficient to pay claims and still make a profit. The past
few years, however, have seen a series of very large and
unexpected judgements that have upended old calculations,
and which are having a negative impact on the heavy
commercial auto insurance market.
A large part of the reason for recent disruptive changes in
the commercial auto insurance segment is attributable to
changing strategies by attorneys representing folks injured
in big rig accidents. Up until recently damages from such
accidents were mostly in the form of (relatively) easy to
calculate compensatory damages, such as payments for lost
wages, medical bills, pain and suffering, etc. More recently,
suits include allegations that companies operating these
vehicles violate or fail to enforce safety regulations,
improperly maintain their vehicles, overload trucks and
similar such allegations.
A suit that succeeds in proving such allegations opens
up the possibility for millions of dollars of additional
punitive damages on top of any compensatory
damages directly attributable to the accident that
might be awarded. Punitive damages can be a real wild
card, with the sky the limit. News headlines about
serious truck accidents don’t help either. Comedian
Tracy Morgan was in a vehicle hit by a Wal-Mart truck
in 2014, only one of several high profile accidents
recently. That accident and others have resulted in a
burst of eight and nine figure judgements in the past
few years. The Wall Street Journal ran an article last
October reporting on the increase in what it called
“nuclear” verdicts, judgements of tens or even
hundreds of millions of dollars.
The result has been a contraction in the insurance
market for heavy trucking risks, with a couple of major
insurance companies completely withdrawing from
this space. So far the reported impact has been felt
mostly by for-hire carriers, trucking companies in the
business of hauling goods for others, and not by
companies transporting their own goods on their own
vehicles. The potential for a severe claim obviously
exists wherever heavy vehicles are operated, though, so
those types of companies should not think they are
immune to the types of claims driving this market
contraction, or their effect on insurance rates.
We are keeping an eye on these trends, but if you
operate heavy commercial over the road equipment, be
aware of what’s going on with claim trends and
insurance costs. Now would be a good time to review
your vehicle maintenance and fleet safety program.
Insuring Key People
We have written often about the need for properly
written property insurance to insure such physical
assets as buildings, machines or equipment, stock,
inventory and so forth, upon which the continued
operations and profitability of an enterprise depends.
Aside from such tangible physical assets, though,
many businesses, especially smaller businesses with
fewer employees and/or thinner management ranks,
may depend on a single person or a few key
individuals for their success. If a key person, vital to
the success of an enterprise, suddenly and
unexpectedly passes away or becomes disabled

3. and unable to work the enterprise could suffer significant
financial losses in many ways. Unfortunately, businesses
often overlook the need to insure their important human
resources.
Who are such key people? That answer will be different for
every business, but in general anyone who directly
contributes to a company’s top or bottom line, is
fundamental to its success and could not be easily or
quickly replaced should be considered a key person.
Examples might include:
• C-Suite executives, especially a CEO or COO.
• Top sales personnel.
• Heads of product development.
• Engineers or other such highly skilled and difficult to
replace technical personnel.
Take a look around your own organization. Chances are
there are some folks you could pinpoint as being
important to the continued success of the business, and
who would be difficult to replace if they were to suddenly
be gone. Loss of revenue or new sales, disruption to or
inefficiencies in manufacturing or business processes, loss
of important technical expertise or business contacts, the
negative impact on a business from sudden loss of the
services of such a key person can take many forms.
Key person insurance can cushion the impact on an
operation from the sudden loss of key people, make up for
lost revenue, enable a business to continue paying its bills
and fund the search for a new employee to replace the lost
key individual. In a worst case scenario where a business
simply cannot continue without the key employee, the
funds from key person insurance can be used to pay
severance to employees, distribute funds to investors and
wind down the business in an orderly manner.
There are two basic types of key person insurance:
Key Person Life Insurance. This is life insurance covering
individuals in a business who are vital to a company’s
operations and success. As beneficiary the business
receives an immediate infusion of cash if an insured key
employee dies, whether work related or not, and regardless
of cause or place of death. These funds can help
compensate for revenue lost as a result of the death of the
key person, or for any other legitimate business purpose.
Key person life insurance can be purchased as permanent
insurance or as term insurance lasting for a specific period
of time. Another option for key person life insurance is to
cover a group of executives together on a “first-to-die”
policy that covers just the first of the group who passes
away. Once the policy is used to cover the loss from the
first key person to die, other members of the group become
eligible for coverage. The insurance continues for
remaining members of the leadership group, but
premiums should reflect the fact that only one life is being
covered at a time.
Key Person Disability Insurance. This provides funds to a
business if an insured key employee becomes disabled and
unable to work. Standard disability insurance covers an
employee’s lost salary and income, but a business owned
key person disability policy makes the business the
beneficiary, providing funding to make up for revenue lost
or expenses increased by the key person’s disability and
absence.
Key person insurance is usually owned by the business; the
business pays the premiums and is the beneficiary. In
addition to the common sense need for such protection,
this coverage may also be a requirement of banks or
lenders when applying for financing or credit. This type of
insurance can also be a useful tool when it comes to
succession planning for your business.
Like other disability and life insurance policies, the cost of
premiums for key person insurance depends on the age
and health of the key employee, as well as pursuits the
employee may undertake in their personal life. A CEO who
races stock cars or sky dives on weekends will cost more to
insure than one who collects stamps.
You insure your physical assets, but give some thought to
your valuable human resources; you have an insurable
interest in them, too.
Oakland Warehouse Fire
You may have seen the headlines about the recent fire at a
warehouse in Oakland, California. While designed and
built for use as a warehouse, the tenant renting the
building had reportedly converted it to use as an artist’s
collective and dwelling units. A second floor space,
accessed by only two stairways (one of which was
reportedly a makeshift affair constructed out of wooden
pallets), was also used for musical and other

4. performances, one of which was underway when the fire
broke out. The interior space was reportedly cluttered
with makeshift dwelling units and artist work spaces, and
packed with combustible furniture, art, and supplies.
There were only two exits from the building, both far from
the stairways to the second level and with no clear path to
them. The building was reportedly not sprinklered, and no
smoke alarms were found.
Thirty-six people died in the fire, making it the largest
such mass fire casualty event since 2003. Tragic as that is,
that’s not the real news. What is notable is how infrequent
and unusual events like these have become over the past
century, due primarily to the development and
enforcement of modern fire codes.
The Triangle Shirtwaist factory fire on March 25, 1911 in
New York City was probably the most infamous such
event, killing 146 young garment workers working on the
upper floors of the building. Occurring over a century ago,
it had much in common with the recent Oakland fire:
overcrowding, inadequate exits, highly combustible
occupancy, no fire protection, etc. While not the largest
such mass fire event of that era the Triangle fire captured
the imagination of the public due to the youth of most
victims, and the fact that they were mostly young women
at work in a space where they should have been safe. It
gave an impetus to the development of modern fire codes
and fire safety standards.
We take these for granted these days. If you are at your
desk as you read this take a look around you. You are
likely in an office building constructed to modern fire
safety standards and codes, out of noncombustible or
fire retardant materials, and equipped with sprinklers
and smoke or fire alarms. Look around and you’ll see
several clearly marked fire exits with paths to them clear
and unobstructed. These, and other standards less visible
(electrical codes, occupancy limits, etc.) minimize the
likelihood of an event like Triangle, or Oakland.
It’s human nature to not think too much about things
like fire risk, and it’s clear the operator of the Oakland
warehouse gave fire safety little thought. It has also been
reported that municipal authorities responsible for
enforcing local codes may have failed in their jobs as
well, with no records of recent inspections of the
building despite complaints by neighbors. Had the
building been inspected and codes enforced the outcome
of this fire might arguably have been much different.
Code enforcement can certainly be an irritation and a
headache, and if you have ever dealt with a building
inspector focused on nit-picking details it might be easy
to lose sight of the overall goals of the codes he’s
enforcing. The Oakland fire is a good reminder of the
reasons for such rules, what results can be expected by
failure to follow them, and the benefit we derive,
individually and as a society, from them.
The information, suggestions and techniques contained in this newsletter are believed to be accurate but are of
no warranty of any kind, whether expressed or implied, as to t purpose.