Understanding Fiduciary Duty

Understanding Fiduciary Duty

“Fiduciary duty” is a term that describes a relationship between two parties in which one party – designated as the fiduciary – is authorized to act solely in the interest of the other party, known as the principal. The fiduciary owes legal duty to a principal, and should be extremely careful in ensuring that conflict of interest does not arise between the fiduciary and his or her principal. Under the legal system, fiduciary duty may be established in a variety of relationships, including but not limited to:

  • Trustee and Beneficiary – For situations such as estate arrangements and implemented trusts, the individual named as the trust or estate trustee is the fiduciary, while the beneficiary of said arrangement is the principal. In this relationship, the fiduciary has legal ownership of the property and holds the necessary power to handle assets, but must make decisions that are in the best interest of the beneficiary.
  • Guardian and Ward – In this type of relationship, legal guardianship of a minor is transferred to an appointed adult. The guardian is designated as the fiduciary, and is thus tasked with ensuring the ward (principal) has appropriate care. In most states, this relationship remains intact until the minor child reaches the age of legal adulthood.
  • Principal and Agent – The principal/agent relationship describes any agent – such as an individual, a corporation or a government agency – that is legally appointed to act on behalf of a principal without conflict of interest. Common examples of principal/agent relationships include investors (principals) and fund managers (agents) and shareholders (principals) with C-suite individuals acting as agents.
  • Attorney and Client – The relationship between attorney and client is considered a fiduciary relationship by law and is one of the most regulated. According to the U.S. Supreme Court, the highest level of trust and confidence must exist between an attorney and his or her client. An attorney, as fiduciary, must act in complete fairness, loyalty and fidelity in each representation of or dealings with their client. Attorneys are liable and held accountable for breaching their fiduciary duties to their client.

A very common fiduciary relationship is the management or selection of retirement plans, health plans, life insurance plans, long and short term disability benefits and other employee benefits. This type of relationship falls under the principal/agent category, with the principal typically being an employee and the fiduciary being the employer. For many employers, offering an employee benefit plan is a way to attract and retain talented, but in doing so they are subject to the obligations set forth in the Employee Retirement Income Security Act (ERISA) of 1974. ERISA was passed to assure that employees receive certain benefits that they are obligated to, and as a result it created fiduciary liability exposures for employers.

Over the last few years there has been a spike in the severity and frequency of fiduciary claims against employers. The average fiduciary claim has reached beyond $800,000 (up from $700,000 in the last five years) with defense costs during this same period having risen 471%.

Fiduciary Liability coverage is important for the wellbeing of any company and its fiduciaries. This type of insurance protects the insured against allegations that the fiduciary has breached their duty, and can cover expenses associated with civil lawsuits, written demands for damages that haven’t proceeded to court, administrative or regulatory actions, investigations by the government or other official agency, legal defense fees, awards to or settlements with claimants and more.

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