Aon | Financial Services Group
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Fiduciary liability insurers are concerned with a myriad of class action litigation risks.
The alleged use by defined benefit plan sponsors of outdated mortality tables is an issue we observed in 2022. Since 2018, 20 cases have been filed that challenge purportedly outdated actuarial and interest rate assumptions that employers use to calculate certain optional Defined Benefit pension formats (e.g., joint and survivor benefits), thus failing to account for changes in life expectancy and thereby depriving plan participants of the appropriate level of benefits. Notably, one of these cases settled for $60M.
The purported failure by health plan sponsors to provide timely and adequate notices under the Consolidated Omnibus Budget Reconciliation Act (COBRA) to former participants also poses a litigation risk. Failure to provide timely and adequate notice may subject the employer to certain penalties and excise taxes. Since 2016, over 55 COBRA Notice suits have been filed. While 30 of these suits have resulted in settlements, only three have settled for more than $1M, and most have been resolved for relatively nominal or ‘undisclosed’ amounts.
The most significant concern, however, remains the continued frequency and severity of excessive fee litigation. Excessive fee cases, which generally focus on fees that 401(k) and 403(b) plan participants pay for investment management or administration, generally allege that plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by overpaying for third-party plan administration or investment services. Plaintiffs typically contend that fees are excessive relative to performance. Over 70 excessive fee cases were filed in 2022 alone.
These factors are the driving force behind a continued firming of the fiduciary liability marketplace in 2022 that included reduced capacity, increased pricing, higher retentions, and heightened underwriting scrutiny.
With excessive fee litigation still a concern, it is anticipated that fiduciary liability insurers will continue to manage capacity while requiring a large excessive fee or mass/class retention. Pricing, however, is likely to stabilize by mid-2023 because of rate increases imposed over the past 18-24 months, the excessive fee or mass/class retentions (as retentions have been the avenue that insurers have cited as most appropriate for managing the excessive fee exposure), and the increased competition from several new market entrants for primary and low excess layers.
Read more about management liability marketplace trends as we look ahead to 2023 here.
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.