Union Fiduciary;
PBGC Underfunding;
Multi-Employer Plans…
Thomas R. Herendeen,
Philadelphia Insurance Cos.
Daniel Aronowitz,
Ulico Insurance Group
Christine A. Dart,
Chubb & Son
Michael Jacobster,
Jackson Lewis
Session Objectives
• Explain the unique underwriting issues
associated with providing fiduciary
liability insurance to multi-employer
plans
• Identify key legal issues that take on
greater significance for multi-employer
plan trustees
• Review significant claims and highlight
trends
“Multi-Employers” Who
Are They?
• Labor Unions – Taft/Hartley – joint
management/labor sponsorship
• Trade Associations – Multiple
Employer Trust – group of similar
employers
• Voluntary Employee Benefit
Association (VEBA) – loose/no
connection between the participants
Union Demographics
• 16.1 Million workers in the U.S. are
represented by a labor union
• 9 Million are represented by unions
within the AFL-CIO
• There are 54 trades represented by
the AFL-CIO including a range of
private and public sector employees
Union Characteristics
• Heightened Fiduciary Responsibility
• Greater scrutiny by outside parties –
DOL, members, employers
• Increased potential for conflicts of
interest – political pressure, economic
clout, vendor selection, etc.
Multi-Employer Plans
panelists
• Christine Dart, Vice President, Chubb
Specialty Insurance
• Michael Jacobster, General Partner,
Jackson Lewis LLP
• Daniel Aronowitz, President, Ulico
Insurance Group
The Underwriter’s
Perspective
Christine Dart, Vice President,
Product Manager
Chubb Specialty Insurance
Multi-Employer Trust
Underwriting Review
Financial Stability
• Industry represented and potential for
future growth
• Growth in plan assets and participants
• Percentage of active/total participant
ratio
• Funding position of the plan
• Increase in withdrawal liability claims
Multi-Employer Trust
Underwriting Review
Types of Trusts
• Pension
• Welfare Plan
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Vacation
Training
Health/Medical/Dental
• Review all service providers
Multi-Employer Trust
Underwriting Review
Medical Plans
• Self-funded
• Self-administered
• Adequate reserves to cover future
medical expenses
• Stop-loss insurance available
• Administrative expenses appear in line
• Retiree medical benefits
Multi-Employer Trust
Underwriting Review
Diversification of Plan Assets
• Be aware of social investing
• Partnerships
• Loans
• Real Estate
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Does the trust use a Qualified Professional Asset
Manager (QPAM) to oversee & implement the
real estate investment strategy?
Do Trustees review the QPAM for potential
conflicts of interest?
Multi-Employer Trust
Underwriting Review
Documentation and Oversight
 Are Trustee meetings regularly scheduled and documented?
 Where there is a delegation of fiduciary duties, do the Trustees
document the qualification and backgrounds of the candidates?
 Does the plan keep a written acknowledgement of the investment
manager’s fiduciary status for its official records?
 Are investment objectives documented, including why particular
options were chosen?
 Are strategies established on an annual basis to meet the
investment objectives of the plan?
 Is there an active and comprehensive monitoring program to
evaluate the performance of appointees, especially in the areas
of administrative and investment management responsibilities?
 Are investment management and advisory agreements carefully
reviewed for conflicts with the plans guidelines or goals?
Multi-Employer Trust
Underwriting Review
Documentation and Oversight
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Trustee meetings
Delegation of fiduciary duties
Written acknowledgement of fiduciary status
Investment objectives documented
Strategies are established on an annual basis
Active and comprehensive monitoring program to
evaluate the performance
Investment management and advisory agreements
reviewed for conflicts
Legal Environment
Michael Jacobster
General Partner, Jackson Lewis LLP
M-E Plans
Legal Environment
• ERISA Definition and Overview
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Fiduciary rules
Withdrawal liability rules
• Taft-Hartley Act
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Structural requirements
Deadlock issues
M-E PLANS
Fiduciary Legal Issues
• Fiduciary Duties

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Exclusive Benefit Rule
Prudence Rule
• “Appropriate consideration”/Procedural
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Diversification Requirement
Plan Document Requirement
M-E Plans
Structural Liability Issues
• Settlor functions – benefit structure claims

Non-fiduciary in single employer (“SE”) plan
world
• In M-E world – distinction sometimes blurred

Pre- and post-Schoonejongen and Spink
decisions
• Converts benefits claim into fiduciary suit
M-E Plan
Specific Problems
• Conflicts of Interest

Not a bargaining representative – duty solely to
participants
• Contribution Collection Issues
• Social Investing Pressures/Job Creation
Pressures
• Disclosure to Other Fiduciaries – When
recusal not enough
• “Laissez-faire” and sleeping fiduciaries
M-E Plans
Basic Due Diligence
• Document Retention Program-Benefit
Claims Issues
• Investment Guidelines
• Investment Decision Process Records
• Investment Review Procedures
• Vendor Contracts
• Vendor Performance Review
• Compliance Audit Issues
Claims Issues and
Trends
Daniel Aronowitz
President, Ulico Insurance Group
Multi-Employer Plans
• Claims –
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Typical Allegations
Most Severe Payouts
Loss Trends in Recent Years
Examples
Multi-Employer Plan
Claims
• Overview of Claim Trends
• Most Severe Payouts – Capital
Consultants and Diplomat Hotel
• Loss Trends
• Claim Examples
Claim Examples
1.
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4.
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6.
7.
8.
9.
10.
Imprudent Investment Claims
Real Estate Claims
Withdrawal Liability Claims
Benefit Claims
Funding Claims
Administrative Expense Claims
DOL Voluntary Fiduciary Correction Program
Settlor Claims
Prohibited Transaction Claims
Dishonesty Claims
1. Imprudent Investment
Claims
• Trustees of Pension Plan invested $750,000 for 825
units in the Aspen By Pulp Mill Project to be built in
Upper Peninsula of Michigan.
• DOL filed suit alleging that the Trustees breached
their fiduciary duties (failure to act solely in the
interest of beneficiaries and for the exclusive
purpose of providing benefits and ignoring Fund
Counsel’s advice).
• Plumbers and Pipefitters (UA) – Diplomat Hotel
(invested $800 million – 27% below $587 mil
project value).
2. Real Estate Investments
• Coffee Creek – DOL and participants allege that the
Northwest Indiana District Council of Carpenters
breached fiduciary duties for investing $10 million of
pension fund assets in a 640-acre residential and
commercial land development on Lake Erie.
• Somerset Ridge – DOL lawsuit alleging investment
advisor imprudently invested without appraisal and
proper investigation $10 mil of Laborer pension fund
assets in 120-acre tract of raw land in N. Las Vegas.
• Mason Tenders District Council of NY – trustees of
pension fund found to have breached fiduciary duties in
purchasing NY office building without appraisal for $24
mil ($16.5 mil higher than sale 10 months earlier) and
without QPAM.
3. Withdrawal Liability
• Withdrawal Liability – when benefit fund
asks the employer to pay unfunded liability
• Typical claim alleges that (a) employer(s)
told the plan is financially ok; (b) a recent
increase in unfunded benefits; and (c)
significant investment losses
• Brach’s Confections Inc./Central States
Southeast and Southwest Pension Fund –
Brach’s assessed $31 mil in withdrawal
liability after it closed facility covered by
CBA.
4. Benefit Claims
• Pension Fund (a) miscalculated pension benefits,
or (b) improperly suspended benefits.
• Health and Welfare Fund wrongfully denied medical
treatment or expenses
• Pension Fund: (a) Trustees failed to collect
employer contributions; or (b) trustees increased
Plan benefits without increasing employer
contributions.
• Health and Welfare Fund: (a) financial condition
deteriorated to crisis position; (b) major “incurred”
and “incurred but not reported” liabilities
outstanding.
5. Funding/Reserve
Claim
• Financial distress due to rising health care costs and
greater utilization
• Trustees only partially implemented repeated
consultant’s recommended rate increases
• Exhaustion of Plan reserves
• Forced withholding of claim payments.
• Trustees' actions suggested a willingness to allow the
Plan reserves to shrink in order to maintain low rates
for contributing employers instead of maintaining
reserves for their intended purpose
• Failure to provide adequate funding and maintain
sufficient reserves for the Plan violated ERISA’s
prudent man standard of care (section 404(a)(1)(B)).
6. Administrative
Expense Claims
• Growing category of DOL claims
• Alleged breaches of fiduciary duty for
improper payment of collection
services, improper allocation of payroll
audit fees, improper expenses for
office workers shared with the union
and legal fees.
7. DOL Voluntary Fiduciary
Correction Program
Fiduciary breaches that are eligible for correction under the VFC
program:
● Late Payment of participant contributions to benefit plans;
● Loans to or from parties-in-interest, either at or below market interest
rates;
● Purchase or sale of assets between a plan and a party in interest;
● Sale and leaseback of property to a sponsoring employer;
● Purchase or sale of assets between a plan and an unrelated party, at
below-market value;
● Under- or over-payment of benefits due to inaccurate valuation of
plan assets;
● Payment of duplicative, excessive or unnecessary compensation to a
party in interest; and
● Payment of dual compensation to a fiduciary.
8. Settlor Claims
• Settlor Functions – lie outside the
fiduciary requirements of ERISA
• Involve plan design – creation,
modification or termination
• But are they covered under a fiduciary
liability policy? LaFata v. Cement
Workers example of plan amendments.
9. Prohibited Transactions
Claims
• Most common is the failure to collect contributions
• Using plan assets to advance union interests
• Payment of compensation to trustees for “services”
allegedly rendered
• Transfers of assets between related plans (to prop
up financially troubled plans)
• Use of plan assets to benefit friends and families of
union officers and companies owned by Trustees
• Kickbacks and other improper payments to pay
trustees – ex., Capital Consultants hunting and
fishing trips
10. Fraud/Dishonesty
Claims
• Teamsters Union 25 Health Services & Insurance
Plan – two trustees of the Plan were indicted and
pled guilty to theft and embezzlement from the
pension plan; false statements made in ERISA plan
documents; mail fraud.
• U.S. v. International Longshoremen’s Assoc., et al.
(E.D.N.Y.) – DOJ alleges that the ILA Fund Trustees
“rigged” the awarding of its pharmacy benefit
manager and mental health benefits contracts
(choosing a less desirable vendor because of ties
to the contractor and organized crime).
Sample Claim 1:
Withdrawal Liability Claim
• Withdrawal Liability – when benefit
fund asks the employer to pay
unfunded liability
• Assumed facts: (a) employer(s) told
the plan is financially ok; (b) a recent
increase in unfunded benefits; and (c)
significant investment losses
Withdrawal Liability
Coverage Issues
• Was there a potential breach of fiduciary
duty?
• Does telling the employer(s) everything is
OK improve or hurt coverage?
• Does the increase in benefits and
investment losses affect coverage?
• What scope of coverage might be provided?
• What happens if arbitration is invoked by
either party?
Sample Claim 2:
Benefit Claims
• Assumed facts:
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
Pension Fund (a) miscalculated pension
benefits, or (b) improperly suspended
benefits.
Health and Welfare Fund wrongfully
denied medical treatment or expenses
Sample Claim 3:
Funding Claims
• Pension Fund: (a) Trustees failed to collect
employer contributions; or (b) trustees increased
Plan benefits without increasing employer
contributions.
• Health and Welfare Fund: (a) financial condition
deteriorated to crisis position; (b) major “incurred”
and “incurred but not reported” liabilities
outstanding
• Are employer contributions a fiduciary exposure?
• Do benefit improvements without increased
employer contributions increase risk?
• What is the risk of deteriorating financial condition
in an H&W or Pension Plan?
Sample DOL
Funding/Reserve Claim
• Financial distress due to rising health care costs and
greater utilization
• Trustees only partially implemented repeated
consultant’s recommended rate increases
• Exhaustion of Plan reserves
• Forced withholding of claim payments.
• Trustees' actions suggested a willingness to allow the
Plan reserves to shrink in order to maintain low rates
for contributing employers instead of maintaining
reserves for their intended purpose
• Failure to provide adequate funding and maintain
sufficient reserves for the Plan violated ERISA’s
prudent man standard of care (section 404(a)(1)(B)).
Sample Claim 4:
DOL Voluntary Fiduciary
Correction Program
• Payment of benefits without properly valuing
plan assets on which payment is based.
• DOL Description of Transaction: “A defined
contribution pension plan pays benefits
based on the value of the plan’s assets. If
one or more of the plan’s assets are not
valued at the current value, the benefit
payments are not correct. If the plan’s
assets are overvalued, the current benefit
payments will be too high. If the plan’s
assets are undervalued, the current benefit
payments will be too low.”
Sample Claim 5:
Settlor Claims
• Settlor Functions – lie outside the
fiduciary requirements of ERISA
• Involve plan design – creation,
modification or termination
• But are they covered under a fiduciary
liability policy – LaFata v. Cement
Workers example
Sample Claim 6:
Prohibited Transactions
Claims
• Skeleton employees to secure pension
or H&W benefits
• “Trustee-directed” real estate
investments
• Capital Consultants Claims
Sample Claim 7:
Fraudulent Transaction
Claims
• Security transaction brokerage
commission kickbacks
• Other fraudulent claim examples