Tuesday, January 26, 2010

Indemnification Garrotte
Are you indemnified for a fiduciary breach? 
…The beginning of the year is a good time to examine or assess your indemnification and insurance coverage. It … appears that the position recently taken by the Labor Department … has put into question the ability of plans … to indemnify plan fiduciaries in instances where there has been an allegation of fiduciary breach. …
In one recent 9th Circuit decision, the court actually admitted that prohibiting the advancement of attorneys’ fees created difficult hardships for fiduciaries who are trying to defend themselves. Nevertheless, the court concluded that advancement was precluded and the defendant trustees would have to fend for themselves. …
Moreover, it gets worse. We had always thought that, while the provision of indemnification by a plan is tricky, primarily because “plan assets” are being used to defend fiduciaries of plans, indemnification using corporate funds would not be subject to the same level of ERISA scrutiny. However, in some recent cases, courts have been willing to go much further and actually impose fiduciary responsibility on decisions not directly involving plan assets. In that 9th Circuit decision, which involved an ESOP, the appeals court said that, while decisions relating to corporate matters generally do not fall within ERISA’s purview, where an ESOP fiduciary also serves as a corporate officer or director, “imposing ERISA duties on business decisions” does not “seem unworkable.” …
In summary, I am worried that, in cases involving a Labor Department investigation and the like, the agency or plaintiffs around the country will now try to cut off the payment of legal fees for plan fiduciaries from a company’s assets because such payment would adversely affect, albeit indirectly, the financial strength of the plan. If other courts jump on this bandwagon, continued reliance on corporate indemnification by fiduciary members of plan boards of trustees or investment committees will be undermined.

Stephen M. Saxon is a Partner with the Washington-based Groom Law Group. Groom is one of the preeminent employee ­benefits firms in the country. Steve and his colleagues have worked on virtually every major legislative and regulatory initiative affecting employee benefits since the enactment of ERISA.