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Words of wisdom from our business insurance experts.

What Insurance Does an ESOP Need? Fiduciary Liability, D&O, EPLI, and More.

8 min read
December 12, 2022
What Insurance Does an ESOP Need? Fiduciary Liability, D&O, EPLI, and More.

An employee stockownership plan (ESOP) is a type of employee benefit plan that provides workers with an ownership stake in the company they work for. ESOPs can be a powerful tool for businesses, as they can help to align the interests of employees and the company, encourage long-term thinking, and provide a way for owners to sell their shares in a tax-efficient manner. However, like any other employee benefit plan, ESOPs come with their own set of risks and obligations, and it's important for companies to have the right insurance in place to protect themselves and their employees.


What insurance does an ESOP need?


One of the most important insurance policies for an ESOP is Fiduciary Liability Insurance. This can protect the company against potential lawsuits arising from the operation of the ESOP, such as claims of breach of fiduciary duty or misrepresentation. Fiduciary liability Insurance can also be useful, as it can provide protection for the trustees of the ESOP in the event of a lawsuit alleging improper management of the plan. We go into more detail below, so keep reading to learn more.


Another important type of insurance for an ESOP is Life Insurance. This can provide a financial benefit to the ESOP and the employee's beneficiaries in the event of the employee's death. This can help to ensure that the employee's shares in the company are distributed according to their wishes, and can provide financial security for the employee's family.


In addition to these types of insurance, companies with ESOPs may also want to consider Disability Insurance. This type of insurance provides income replacement for employees who are unable to work due to a disability, ensuring that they can continue to receive a portion of their salary even if they are unable to perform their job duties. Disability insurance can be particularly important for ESOP participants, as they may have a larger financial stake in the company and may be more reliant on their income from the ESOP.

Last, an organization providing an ESOP structure should consider Directors and Officers Insurance and Employment Practices Liability Insurance. A Directors & Officers (D&O) policy protects the personal assets of directors, board members, and other managing members if they are personally sued for mismanagement. Learn more about D&O Insurance at the link here. An Employment Practices Liability Insurance (EPLI) policy protects the business if a lawsuit is filed from an employee for things like sexual harassments, wrongful termination, discrimination, wage & hour claims and more. Learn more about EPLI at the link here.

ADVISOR TIP: package Fiduciary Liability, Directors & Officers, Crime, and Employment Practices Liability Insurance into a single policy called Management Liability in order to reduce costs and broaden coverage.


Why do ESOPs need Fiduciary Liability Insurance?

Fiduciary liability insurance is a type of insurance that protects an organization's fiduciaries (such as directors, officers, and trustees) against claims made by employees or other stakeholders for alleged breaches of fiduciary duty. This type of insurance is particularly important for organizations that have employee stock ownership plans (ESOPs), as ESOP fiduciaries have a unique set of responsibilities and potential liabilities.


An ESOP is a retirement plan that allows employees to acquire ownership in the company through the purchase of company stock. ESOP fiduciaries are responsible for managing the plan and ensuring that it is operated in the best interests of the plan participants. This includes tasks such as selecting and monitoring plan investments, ensuring compliance with relevant regulations, and providing information and education to plan participants.


Fiduciary liability insurance can help protect ESOP fiduciaries against a wide range of potential liabilities, including claims of improper management of plan assets, failure to provide required information to participants, and failure to follow the terms of the plan. Without this insurance, ESOP fiduciaries may be personally liable for any losses or damages resulting from a claim against them.


One of the key benefits of fiduciary liability insurance for ESOPs is that it can help protect the personal assets of the fiduciaries. In the event of a claim against an ESOP fiduciary, the insurance policy will typically cover the costs of legal defense, settlements, and judgments. This can provide peace of mind to ESOP fiduciaries and allow them to focus on their duties without worrying about the potential financial consequences.


Fiduciary liability insurance is not required bylaw, but it is highly recommended for organizations with ESOPs. In addition to protecting individual fiduciaries, it can also help protect the organization itself by mitigating potential losses and reducing the risk of litigation.


Overall, fiduciary liability insurance is an important consideration for organizations with ESOPs. By providing protection against potential claims of breaches of fiduciary duty, this insurance can help ensure that ESOP fiduciaries can fulfill their responsibilities without fear of personal liability.


How much does Fiduciary Liability Insurance cost for an ESOP?

The cost of fiduciary liability insurance for an employee stock ownership plan (ESOP) will vary depending on a number of factors, such as the size of the organization, the number of plan participants, and the specific provisions of the insurance policy. In general, smaller organizations with fewer plan participants may pay less for fiduciary liability insurance than larger organizations with more participants.

Our analysts took the average of 20 clients and calculated the ranges below. The number of employees, plan size, type of operation, and other factors will cause these numbers to fluctuate.

  • 10-20 Employees: $1,500
  • 20-50 Employees: $2,500
  • 50-100 Employees: $3,500
  • 100-200 Employees: $5,000
  • 200+ Employees: $10,000


It is difficult to provide an exact cost for fiduciary liability insurance for an ESOP without more information. It is best to contact an insurance provider to get a quote specific to your organization and its needs. Additionally, it is important to carefully review the terms of any insurance policy to make sure it provides the right level of protection for your organization and its fiduciaries.


How to get insurance for an ESOP?


An Employee Stock Ownership Plan (ESOP) is a type o employee benefit plan that provides employees with an ownership stake in the company. In order to get insurance for an ESOP, you will need to first establish the plan with your company and determine which type of insurance coverage is appropriate for your business.


Once you have established the plan, you can begin the process of getting insurance by researching different insurance providers and comparing their policies and rates to find the best option for your business. You will need to consider consulting with an insurance broker who can help you identify the right coverage for your company's needs and assist you with the application process. There are a lot of layers each policy and an experienced broker can explain complex terms, negotiate the best pricing, and provide additional services.


Once you are ready to apply for coverage, you will need to complete an application for insurance and provide any required documentation, such as financial information and details about your business and its operations. The insurers will review your application and may require you to provide other information before issuing a policy.


After your application has been approved, you will need to pay the premiums for your insurance policy in order to keep it active. It is important to regularly review your insurance coverage to ensure it continues to meet the needs of your business and its employees.

Get in touch with a Fullsteam advisor today and learn more about ESOP insurance.

Tyler Crawford
by Tyler Crawford
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