Memorandum. Recommendations. Background/Discussion

Transcription

1 Memorandum DATE: January 6, 2016 TO: Members of the Board of Retirement FROM: Robert Valer, Chief Legal Officer SUBJECT: INDEMNITY AND DEFENSE POLICY AND FIDUCIARY INSURANCE Recommendations Approve the Governance Committee recommendation regarding changes to the Indemnity and Defense Policy; and take appropriate action regarding whether to procure fiduciary insurance. Background/Discussion At the Board meeting held on October 19, 2015, Mr. Leiderman gave a presentation on fiduciary liability and insurance. The first attachment to this memorandum is the slide deck from that presentation. Mr. Leiderman will open the discussion of this agenda item by providing a brief overview of the earlier discussion on fiduciary liability and insurance. In October, the Board instructed staff to (A) Propose changes to the Indemnity and Defense Policy (to the Governance Committee) that are consistent with Mr. Leiderman s recommendations and (B) Invite an insurance broker to the January Board meeting to provide information regarding brokerage services and third party fiduciary insurance coverage. Staff invited is Michele Cowen, Vice President, Aon Risk Solutions, Financial Services Group. ITEM A: GOVERANCE COMMITTEE RECOMMENDATION REGARDING THE INDEMNITY AND DEFENSE POLICY Normally, Governance Committee recommendations are consent agenda items. The Governance Committee, however, instructed staff to present this item with the fiduciary insurance presentation at the January Board meeting. At the December Governance Committee meeting, Mr. Valer stated that the proposed changes to the Board s Indemnity and Defense Policy clarify the Board s approach to issues involving Board member and employee statutory rights to indemnity and defense of claims against them. The existing Indemnity and Defense Policy is narrow in that it addresses indemnity and defense issues for only certain types of personal injury and property damage claims. The proposed changes to that policy (i) expand the scope to include other types of covered claims (e.g., fiduciary breach claims) that might be brought against OCERS Board members and employees, (ii) provide a procedure for the Board to make a determination regarding whether to indemnify and/or accept the defense of the claims on behalf of a Board member or employee, and (iii) clarify that OCERS will provide for first dollar payment of attorneys fees and costs incurred on behalf of the Board member or employee before the Board makes the determination of whether to indemnify and/or accept the individual s defense. The second and third attachments to this memorandum are redline and clean versions of the proposed policy. However, because there are many proposed changes to the policy wording, reviewing the redline version is tedious. Therefore, we recommend focusing your review on the clean version. Recommendation: The Committee voted unanimously to recommend that the full Board approve changes to the Indemnity and Defense Policy. See third attachment. I-3 Indemnity and Defense Policy; and Fiduciary Insurance 1 of 2 Regular Board Meeting

2 ITEM B: FIDUCIARY INSURANCE Memorandum Michele Cowen is an officer of Aon Risk Solutions, Financial Services Group. Aon has extensive experience in securing fiduciary liability and other insurance coverages for public employee pension funds in California and elsewhere. The last attachment to this memorandum is her slide deck. Ms. Cowen will make a brief presentation and address a number of topics including: What is available in the marketplace in terms of third party insurance coverage to, among other things, transfer the risk of loss from the assets of the system and the personal assets of the Trustees and employees to a third party insurer; General parameters of the scope of coverage, policy limits, retention amounts and premium costs obtained by comparable public pension funds; and The role of the insurance broker (i.e., the services that the broker provides and options for compensating the broker). If the Board decides to proceed, the next step would be to provide staff with direction as to (i) issuing an RFP or RFI for insurance brokerage services and/or (ii) obtaining third-party insurance coverage. Recommendation: Take appropriate action. Attachments Submitted by: Robert Valer Chief Legal Officer I-3 Indemnity and Defense Policy; and Fiduciary Insurance 2 of 2 Regular Board Meeting

3 FIDUCIARY INSURANCE: PITFALLS & PROTECTIONS Board of Retirement Orange County Employees Retirement System January 19, 2016 Harvey L. Leiderman

4 OVERVIEW Types of claims Immunity and indemnity Why buy insurance? Insurance as allowed administrative cost Policy and coverage issues Self-insurance alternative Board decision-making process *

5 TYPES OF CLAIMS MADE AGAINST PLAN, TRUSTEES AND STAFF Breach of contract MOUs, investment agreements, software licenses and contracts, vendor contracts Breach of fiduciary duty Calculation and payment of benefits Calculation and collection of contributions Actuarial methodologies and assumptions Due process violations re disability applications Investment decisions and fees Participation on private equity advisory committees *

6 TYPES OF CLAIMS, cont d Intentional wrongful acts Employee claims -- wrongful termination, harassment, age/race/sexual orientation discrimination Conflicts of interest and improper personal gain Defalcations Brown Act violations Public Records Act violations Personal torts, misdemeanors, felonies Negligence Failure to supervise staff for delegated duties Failure to maintain safe premises *

7 STATUTORY RIGHTS OF IMMUNITY, INDEMNITY AND DEFENSE Plan is immune from certain claims against itself, its trustees and employees Trustees and employees are immune from certain claims OCERS must indemnify and defend trustees and employees from civil liability for acts within the scope of their duties and employment OCERS may indemnify and defend trustees and employees in other circumstances *

8 WHY BUY FIDUCIARY INSURANCE? Shift risk of claims against the Plan, the Board, individual trustees, officers to third party Cover attorneys fees and costs of litigation Cover claims not covered by other insurance or indemnities Attract qualified individuals to serve Degree of comfort avoid risk of OCERS delaying or refusing to indemnify *

9 INSURANCE AS ALLOWED ADMINISTRATIVE EXPENSE System may provide fiduciary insurance Government Code secs. 990, 7511 Recourse against individual reserved Waiver of recourse premium must be paid by individual Proper expense of administration Going bare alternative Reserve ( self insurance ) alternative But may not relieve from personal liability for certain breaches of fiduciary duty *

10 POLICY AND COVERAGE ISSUES Who are the Insureds? Tail coverage for former trustees, employees What is a covered Claim or Loss? What triggers coverage? Claims made during policy period Occurrence during policy period What is the retention (deductible) amount? Per claim or cumulative? What is the coverage Limitation? Per claim or cumulative? *

11 POLICY AND COVERAGE ISSUES What Wrongful Acts are usually covered? Acts in course and scope of duties, employment Negligence in plan administration Ministerial errors What Wrongful Acts are usually not covered? Dishonesty, fraud, criminal conduct, willful violation of statute, fines and penalties Defamation, bodily injury, property damage Errors in calculating and paying benefits Errors in calculating and collecting contributions Obtaining wrongful personal gain *

12 POLICY AND COVERAGE ISSUES What are covered Damages? Compensatory damages Non-monetary writs, injunctive relief Not fines, penalties, taxes, punitive damages What Costs of Defense are usually covered? Attorneys fees Costs Burning the Coverage Limit or not? Impact of a reservation of rights Who controls the defense and settlement? Choice of counsel negotiable Authority to settle, and consequences ( hammer clause ) *

13 SELF-INSURANCE ALTERNATIVE Protection not dependent on the marketplace Establish reserve account on books (verify GASB compliance) Tailor coverages to OCERS unique needs Provide coverage after Board service ends Eliminate risk of political considerations May provide for neutral, objective third-party claims evaluation Zero premium, zero deductible ( first dollar coverage) *

14 BOARD DECISION-MAKING Trustees personal financial interest in insurance is not a disqualifying conflict of interest Determine what risks you want to cover Determine likely claims, amounts, costs to defend Hire an independent, capable broker Evaluate available coverage, exclusions, retentions, premia Evaluate strength of insurers, underwriting criteria Determine importance of controlling defense, settlement and consequences of settlement *

15 QUESTIONS? *

16 OCERS Board Policy Indemnity and Defense Policy Style Definition: Normal: Font: Calibri, 11 pt, Space Before: 6 pt, After: 6 pt Purpose and Background 1. In general, OCERS OCERS provides indemnification and defense to itsocers employees and Board Membersmembers for damagesclaims arising fromout of their conduct occurring within the course and scope of their duties to the retirement system duties and for associated legal costs. This includes injuries to themselves. OCERS provision of indemnity and others and certain property damagedefense is required by state law. In certain circumstances other employing public agencies are also responsible for indemnifying and/or defending OCERS employees and Board Members. members. The purpose of this policy is to ensure that OCERS Board Members establish the manner in which OCERS shall process and manage such claims, and to assure covered employees are providedand Board members of the appropriate indemnity and defense to which they are entitled. For purposes of this Policy, employees includes OCERS direct employees and employees of the County of Orange who work at OCERS; provided, however, that OCERS reserves subrogation rights against the County of Orange in any cases where OCERS steps in to provide an indemnity or defense for damages arising from their conduct occurring within the course and scope of their retirement system duties, and to set forth the process for seeking it.an employee or Board member, but the County, in fact, would be the responsible entity under applicable law for indemnifying and defending the employee or Board member Policy Objectives 2. The objectives of this policy are to: a. a) Provide a mechanism for reporting injuries to claims against Board Members,members and employees or third parties arising outwithin the course and scope of the performance of a Board member s or employee s retirement systemtheir duties to OCERS; b. b) Ensure claims are appropriate for indemnification and/or defense, (i.e.., that the alleged conduct causing injury is not intentional, criminal, willful, fraudulent or malicious so that staff can make a recommendation to the Board;, criminal or due to wrongful personal gain; or is otherwise excluded from indemnity and/or defense under law); c. c) Identify the appropriate agency responsible for indemnifying and/or defending OCERS Board Membersmembers and employees for actions arising out ofwithin the performancecourse and scope of their retirement system duties; d. d) Coordinate processing of claims between OCERS and other employing agencies as necessary.; and Style Definition: Heading 1: Font: +Body (Cambria), 22 pt, Font color: Dark Teal, English (Australia), Right, Space After: 3 pt, Border: Bottom: (Single solid line, Custom Color(RGB(51,102,153)), 2.25 pt Line width), Lock anchor, Position: Horizontal: 0.96", Relative to: Page, Vertical: 0.2", Relative to: Paragraph, Vertical: 0.13", Width: Exactly 6.9", Wrap Around Style Definition: Body Text: Font: Calibri, 11 pt, Left, Space Before: 6 pt, After: 6 pt Style Definition: Header: Font: Cambria, 22 pt, Bold, Font color: Accent 1, Right, Space Before: 6 pt, After: 6 pt, No widow/orphan control, Tab stops: 3.35", Centered + 6.7", Right + Not at 3" + 6" Style Definition: Footer: Font: Calibri, 9 pt, Space Before: 6 pt, After: 6 pt, Tab stops: 0.38", Left ", Centered ", Right + 6.7", Right + Not at 3" + 6" Style Definition: Balloon Text: Space Before: 6 pt, After: 6 pt Formatted: List NumberIndent, Left, Numbered + Level: 1 + Numbering Style: 1, 2, 3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" + Indent at: 0.5" Formatted: English (Australia) Formatted: Body Text First Indent 2, Left, Indent: Left: 0", First line: 0" Formatted: English (Australia) Formatted: List NumberIndent, Left, Numbered + Level: 1 + Numbering Style: 1, 2, 3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" + Indent at: 0.5" Formatted: ListNumberPLUSAlphaorAlphaOnly, Left, Numbered + Level: 1 + Numbering Style: a, b, c, + Start at: 1 + Alignment: Left + Aligned Formatted: Font: Italic Indemnity and Defense Policy Page 1 of 4 Adopted April 16, 2007 Last Revised March 17, 2014, 2016

17 OCERS OCERS Board Policy Indemnity and Defense Policy e. 3. Provide for the payment of attorneys fees and costs incurred from inception to and including the date on which OCERS determines whether to indemnify and/or accept the defense of the claims on behalf of the affected Board member or employee. Policy Guidelines 3. The Board adopts the following approach for all indemnity and/or defense claims made by Board Membersmembers or employees arising within the course and scope of OCERS for damages caused by conducttheir retirement system duties: a. As soon as practicable after a claim is made against a Board member or employee based on acts or omissions arising out of the performance of retirement system duties:, such individual shall notify the Legal Department and provide the Legal Department with all documents provided by the claimant. a) As soon as practicable after an incident causing injury to a Board Member, employee, or third party due to conduct arising out of the performance of retirement system duties, the Board Member or employee will notify the Legal Department; b. b) The Legal Department will review the claim, in conjunction with fiduciary counsel where appropriate, determine whether it is proper for a recommendation to the Board for indemnification and/or defense, and identify the appropriate indemnifying/defending agency;. c) The Board will determine whether the Board Member or employee should be indemnified and/or defended; c. d) If notthe Legal Department determines that the claim is not appropriate for a recommendation of indemnification and/or defense, the Legal Department will promptly notify the individual of the reasons indemnification and/or defense is not proper. If the individual wishes to contest the determination of the Legal Department, the matter shall be agendized during a closed session at the next regular Board meeting, and the Board shall comply in all respects with the requirements of the Brown Act. d. If the Legal Department determines that the claim is appropriate for indemnification and/or defense, the Legal Department will promptly notify the individual of its recommendation to the Board Member or employee of the reasons indemnification and/or defense is not proper;. The Board shall agendize consideration of the matter during a closed session held at the next regular Board meeting and shall comply in all respects with requirements of the Brown Act. e. e) If appropriate for indemnification and/or defensethe Board will have sole and exclusive authority to determine whether the individual should be indemnified and/or defended. That determination shall consider whether indemnity and/or defense is/are (a) mandatory, (b) discretionary or (c) prohibited under law. If the Board determines that OCERS will not indemnify and/or defend the individual against the claim, the Board will notify the individual in writing within 72 hours of making the determination. The individual will then have the right to seek recourse as permitted by law. If the individual commences a legal action challenging the Board s determination, and until a final determination on the right to indemnification and/or defense is made, OCERS will advance defense costs on behalf of the individual on terms satisfactory to OCERS. Indemnity and Defense Policy Page 2 2 of 24 Adopted April 16, 2007 Last Revised March 17, 2014Month DD, 2016 Formatted: ListNumberPLUSAlphaorAlphaOnly, Left, Numbered + Level: 1 + Numbering Style: a, b, c, + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 0.75" Formatted: ListNumberPLUSAlphaorAlphaOnly, Left, Numbered + Level: 1 + Numbering Style: a, b, c, + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 0.75" Formatted: ListNumberPLUSAlphaorAlphaOnly, Left, Numbered + Level: 1 + Numbering Style: a, b, c, + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 0.75" Formatted: Font: Calibri Formatted: Page Number Formatted: Page Number Formatted: Border: Top: (No border)

18 OCERS Board Policy Indemnity and Defense Policy f. If the Board determines to indemnify and/or defend against the claim on behalf of the individual, the Legal Department, in conjunction with Administrative Services, will undertake the necessary steps to ensure that the claim is properly resolved;. g. f) The Legal Department and/or Administrative Services will communicate with the Board Member or employeeindividual involved in the claim throughout the defense and resolution process;. h. g) All Board Membersmembers and employees who seek indemnification and/or defense from OCERS or the appropriate employing agency shall fully cooperate throughout the defense and resolution process. i. 4. Prior to the determination of indemnification and/or defense (as further set forth in the following subparagraph) and thereafter if OCERS accepts the defense, OCERS shall select capable and competent legal counsel, subject to approval of the individual to be indemnified which approval shall not be unreasonably withheld, at the expense of OCERS. Alternatively, the Board of Retirement may permit the individual to select his or her own counsel under circumstances OCERS deems appropriate. j. Prior to the determination of indemnification and/or defense, OCERS shall advance all funds necessary to enable the subject individual to obtain effective defense to the claim, including attorneys fees and costs reasonably incurred prior to such determination, subject to such recourse as is provided by law or contract. In the event that it is ultimately determined that OCERS correctly denied indemnity and/or defense of the individual under this policy, OCERS and the individual shall meet and confer to arrange the repayment of any such sums advanced to or on behalf of the individual. Failing an amicable resolution being reached within 60 days of the determination, either party may commence legal action to resolve the dispute. k. In the event that OCERS obtains third party fiduciary insurance covering claims against Board members, employees, and OCERS itself, OCERS will timely and appropriately tender such claims and take all necessary actions in order to preserve the benefits of such insurance for the insureds. l. Board members and employees who have ceased their duties with OCERS prior to receiving a claim arising out of their former duties for OCERS shall be entitled to the determination of indemnity and/or defense of the claim as set forth under this policy and at law in the same manner as if they had continued in their duties with OCERS. In the event that OCERS obtains third party fiduciary insurance covering claims against Board members and employees, OCERS shall secure continuing coverage as well for Board members and employees who have ceased their duties with OCERS, on commercially reasonable terms. 4. Notwithstanding this policy, OCERS reserves all rights under law (including subrogation rights against the County of Orange in cases where the County is the appropriate agency responsible for indemnifying and/or defending OCERS Board members and employees) and any applicable employment contract with regard to the terms and conditions of its acceptance of indemnification and/or defense of Board members and employees. In the event of any conflict between such laws, contracts and this policy, the law shall prevail. OCERS Indemnity and Defense Policy Page 2 3 of 24 Adopted April 16, 2007 Last Revised March 17, 2014Month DD, 2016 Formatted: ListNumberPLUSAlphaorAlphaOnly, Left, Numbered + Level: 1 + Numbering Style: a, b, c, + Start at: 1 + Alignment: Left + Aligned Formatted: Font: Calibri Formatted: Page Number Formatted: Page Number Formatted: Border: Top: (No border)

19 Policy Review OCERS Board Policy Indemnity and Defense Policy 5. The Board will review this policy at least every three years to ensure that it remains relevant and appropriate. Policy History 6. The Board adopted this policy on April 16, The Board reviewedamended this policy on January 18, 2011 and, March 17, 2014, and, Secretary s Certificate I, the undersigned, the duly appointed Secretary of the Orange County Employees Retirement System, hereby certify the adoption of this Policypolicy. Formatted: List NumberIndent, Left, Numbered + Level: 1 + Numbering Style: 1, 2, 3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" + Indent at: 0.5" Formatted: English (Australia) Formatted: English (Australia) Formatted: List NumberIndent, Left, Numbered + Level: 1 + Numbering Style: 1, 2, 3, + Start at: 1 + Alignment: Left + Aligned at: 0.25" + Indent at: 0.5" Formatted: English (Australia) Formatted: English (Australia) Formatted: Body Text, Left, Indent: Left: 0", First line: 0" Formatted: English (Australia) 3/17/14 Steve Delaney Secretary of the Board Date Formatted: Left OCERS Indemnity and Defense Policy Page 2 4 of 24 Adopted April 16, 2007 Last Revised March 17, 2014Month DD, 2016 Formatted: Font: Calibri Formatted: Page Number Formatted: Page Number Formatted: Border: Top: (No border)

20 Purpose and Background OCERS Board Policy Indemnity and Defense Policy 1. In general, OCERS provides indemnification and defense to OCERS employees and Board members for claims arising out of their conduct occurring within the course and scope of their duties to the retirement system. OCERS provision of indemnity and defense is required by state law. In certain circumstances other employing public agencies are also responsible for indemnifying and/or defending OCERS employees and Board members. The purpose of this policy is to establish the manner in which OCERS shall process and manage such claims, and to assure covered employees and Board members of the indemnity and defense to which they are entitled. For purposes of this Policy, employees includes OCERS direct employees and employees of the County of Orange who work at OCERS; provided, however, that OCERS reserves subrogation rights against the County of Orange in any cases where OCERS steps in to provide an indemnity or defense for an employee or Board member, but the County, in fact, would be the responsible entity under applicable law for indemnifying and defending the employee or Board member Policy Objectives 2. The objectives of this policy are to: a. Provide a mechanism for reporting claims against Board members and employees arising within the course and scope of their duties to OCERS; b. Ensure claims are appropriate for indemnification and/or defense (i.e., that the alleged conduct is not fraudulent, criminal or due to wrongful personal gain; or is otherwise excluded from indemnity and/or defense under law); c. Identify the appropriate agency responsible for indemnifying and/or defending OCERS Board members and employees for actions arising within the course and scope of their retirement system duties; d. Coordinate processing of claims between OCERS and other employing agencies as necessary; and e. Provide for the payment of attorneys fees and costs incurred from inception to and including the date on which OCERS determines whether to indemnify and/or accept the defense of the claims on behalf of the affected Board member or employee. Policy Guidelines 3. The Board adopts the following approach for all indemnity and/or defense claims made by Board members or employees arising within the course and scope of their retirement system duties: a. As soon as practicable after a claim is made against a Board member or employee based on acts or omissions arising out of the performance of retirement system duties, such individual shall notify the Legal Department and provide the Legal Department with all documents provided by the claimant. Indemnity and Defense Policy 1 of 3 Adopted April 16, 2007 Last Revised Month DD, 2016

21 OCERS Board Policy Indemnity and Defense Policy b. The Legal Department will review the claim, in conjunction with fiduciary counsel where appropriate, determine whether it is proper for a recommendation to the Board for indemnification and/or defense, and identify the appropriate indemnifying/defending agency. c. If the Legal Department determines that the claim is not appropriate for a recommendation of indemnification and/or defense, the Legal Department will promptly notify the individual of the reasons indemnification and/or defense is not proper. If the individual wishes to contest the determination of the Legal Department, the matter shall be agendized during a closed session at the next regular Board meeting, and the Board shall comply in all respects with the requirements of the Brown Act. d. If the Legal Department determines that the claim is appropriate for indemnification and/or defense, the Legal Department will promptly notify the individual of its recommendation to the Board. The Board shall agendize consideration of the matter during a closed session held at the next regular Board meeting and shall comply in all respects with requirements of the Brown Act. e. The Board will have sole and exclusive authority to determine whether the individual should be indemnified and/or defended. That determination shall consider whether indemnity and/or defense is/are (a) mandatory, (b) discretionary or (c) prohibited under law. If the Board determines that OCERS will not indemnify and/or defend the individual against the claim, the Board will notify the individual in writing within 72 hours of making the determination. The individual will then have the right to seek recourse as permitted by law. If the individual commences a legal action challenging the Board s determination, and until a final determination on the right to indemnification and/or defense is made, OCERS will advance defense costs on behalf of the individual on terms satisfactory to OCERS. f. If the Board determines to indemnify and/or defend against the claim on behalf of the individual, the Legal Department, in conjunction with Administrative Services, will undertake the necessary steps to ensure that the claim is properly resolved. g. The Legal Department and/or Administrative Services will communicate with the individual involved in the claim throughout the defense and resolution process. h. All Board members and employees who seek indemnification and/or defense from OCERS shall fully cooperate throughout the defense and resolution process. i. Prior to the determination of indemnification and/or defense (as further set forth in the following subparagraph) and thereafter if OCERS accepts the defense, OCERS shall select capable and competent legal counsel, subject to approval of the individual to be indemnified which approval shall not be unreasonably withheld, at the expense of OCERS. Alternatively, the Board of Retirement may permit the individual to select his or her own counsel under circumstances OCERS deems appropriate. j. Prior to the determination of indemnification and/or defense, OCERS shall advance all funds necessary to enable the subject individual to obtain effective defense to the claim, including attorneys fees and costs reasonably incurred prior to such determination, subject to such recourse as is provided by law or contract. In the event that it is ultimately determined that OCERS correctly denied indemnity and/or defense of the individual under this policy, OCERS and the individual shall meet and confer to arrange the repayment of any such sums advanced to or on behalf of the Indemnity and Defense Policy 2 of 3 Adopted April 16, 2007 Last Revised Month DD, 2016

22 OCERS Board Policy Indemnity and Defense Policy individual. Failing an amicable resolution being reached within 60 days of the determination, either party may commence legal action to resolve the dispute. k. In the event that OCERS obtains third party fiduciary insurance covering claims against Board members, employees, and OCERS itself, OCERS will timely and appropriately tender such claims and take all necessary actions in order to preserve the benefits of such insurance for the insureds. l. Board members and employees who have ceased their duties with OCERS prior to receiving a claim arising out of their former duties for OCERS shall be entitled to the determination of indemnity and/or defense of the claim as set forth under this policy and at law in the same manner as if they had continued in their duties with OCERS. In the event that OCERS obtains third party fiduciary insurance covering claims against Board members and employees, OCERS shall secure continuing coverage as well for Board members and employees who have ceased their duties with OCERS, on commercially reasonable terms. 4. Notwithstanding this policy, OCERS reserves all rights under law (including subrogation rights against the County of Orange in cases where the County is the appropriate agency responsible for indemnifying and/or defending OCERS Board members and employees) and any applicable employment contract with regard to the terms and conditions of its acceptance of indemnification and/or defense of Board members and employees. In the event of any conflict between such laws, contracts and this policy, the law shall prevail. Policy Review 5. The Board will review this policy at least every three years to ensure that it remains relevant and appropriate. Policy History 6. The Board adopted this policy on April 16, The Board amended this policy on January 18, 2011, March 17, 2014, and, Secretary s Certificate I, the undersigned, the duly appointed Secretary of the Orange County Employees Retirement System, hereby certify the adoption of this policy. Steve Delaney Secretary of the Board Date Indemnity and Defense Policy 3 of 3 Adopted April 16, 2007 Last Revised Month DD, 2016

23 Orange County Employees Retirement System Fiduciary Liability Insurance Discussion January 19, 2016 Proprietary & Confidential January 2016

24 Table of Contents Section I Fiduciary Liability Overview 3 Section II Fiduciary Liability Insurance Contract Response 6 Section III Fiduciary Liability Insurance Program Design Considerations 11 Section IV Other Executive Liability Insurance Coverages 18 Appendix A Aon Financial Services Group 20 Proprietary & Confidential January

25 Section I Fiduciary Liability Overview Proprietary & Confidential January

26 Fiduciary Liability Exposure Analysis Although OCERS and its board, officers and employees are not subject to ERISA, California law applicable to OCERS and its board, officers and employees is very similar to the provisions of ERISA in its scope. Who is a Fiduciary? Determining who is a fiduciary is based on function not name or category so fiduciaries include far more than simply the Named Fiduciaries under the Plan. Fiduciary responsibilities are created if: An individual exercises any discretionary authority or discretionary control with respect to the management of the plan, or exercises any authority or control with respect to management or disposition of plan assets An individual renders any investment advice for a fee or other compensation or has authority or responsibility to do so An individual exercises discretionary authority or responsibility for plan administration Under this definition, a plans fiduciaries would include: trustees individuals active in the administration of the plan with discretionary authority (including directors and officers) members of the investment committee persons who select these individuals investment advisors Fiduciary Duties: Duty of Loyalty Perform duties for the exclusive purpose of providing benefits to members and beneficiaries and defraying reasonable expenses of administering the plans Duty of Prudence Act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with those matters would use in the conduct of an enterprise of a like character with like aims Duty to Diversify Investments Diversify investments so as to minimize the risk of large losses, unless under the circumstances it is clearly not prudent to do so Duty to Adhere to Plan Documents Proprietary & Confidential January

27 Fiduciary Liability Exposure Analysis Public pension trustees are increasingly a target of breach of fiduciary duty claims involving: Imprudent investments / Failure to properly manage investments Insufficient funding Reduction of benefits or increase in contributions Selection and monitoring of service providers Excessive fees paid to service providers Self dealing / Conflicts of Interest Dishonesty / Pay to Play Failure to collect contributions Denial or improper calculation of benefits False, inaccurate or incomplete communications to members Administrative errors Board members and officers face personal liability for breach of fiduciary duties. Potential liability is not limited to statutorily enumerated duties and breach of fiduciary duty and may include gross negligence or fraud in the investment of the plan assets or in the administration of a plan Statutory indemnification provisions are limited Governmental immunity is limited Proprietary & Confidential January

28 Section II Fiduciary Liability Insurance Contract Response Proprietary & Confidential January

29 Typical Fiduciary Liability Coverage Typical Coverage Terms Who is Insured? All employees (including D&O s and natural person trustees of a plan) The Public Entity The Plan What are they insured for? For any breach of fiduciary responsibilities under applicable law governing plans Any negligent act, error, omission in the Administration of any plan Any other matter claimed against an insured solely by reason of the insured s service as a fiduciary of any sponsored plan Settlor capacity coverage is now readily available How is the policy triggered? Written demand for monetary damages or non-monetary relief Civil, criminal or arbitration proceeding Formal administrative or regulatory proceeding Written notice of fact-finding investigation by DOL, PBGC or other similar government body What does loss include? Defense costs, settlements, judgments, pre- and post-judgment interest Punitive and exemplary damages if insurable Punitive Damages Wraps available in Bermuda What is typically excluded? Claims previously noticed under another policy Claims related to or part of prior litigation pending before insurance purchased Bodily injury or property damage Pollution clean-up costs Violation of workers compensation & disability laws Fraud, personal profit and criminal acts (if established by a final, non-appealable adjudication) Any benefits due the plan participant or beneficiary (except where benefits payable are personal obligation or based upon a covered wrongful act) Coverage format: Claims made and reported Indemnification or Duty to Defend Proprietary & Confidential January

30 Fiduciary Liability Insurance Overview Non-Indemnifiable Loss Non-indemnifiable loss coverage No retention Examples of potential coverage response: Entity s insolvency Indemnification not permitted by statute or other governing provisions Indemnifiable Loss Indemnifiable loss coverage Reimbursement coverage for the insured entity s indemnification of insured persons Retention applies Entity / Plan Loss Entity / Plan coverage Entity / Plan Claim retention applies No Retention Retention for Indemnifiable Loss, Plan Loss and Entity Loss Proprietary & Confidential January

31 Dedicated Non-Indemnifiable Loss (Side A) Coverage Overview What is Side A Difference in Conditions (DIC) Coverage? Side A Difference in Conditions Coverage is dedicated to protecting the personal asset exposures of the Insured Persons for Non-Indemnifiable Claims. The Side A DIC limits cannot be diluted by loss incurred by the entity or plans. Non-Indemnifiable Loss is defined differently in a Side A DIC policy. The Side A DIC Policy will respond in the event of any failure to indemnify (including a refusal to indemnify situation) Coverage is structured to drop down when the underlying policies do not respond, including where: A bankruptcy court freezes traditional Fiduciary Liability policy limits as an asset of the bankruptcy estate potentially exposed to liquidation in satisfaction of creditors Underlying traditional Fiduciary Liability Policies are rescinded Underlying insurers fail to perform under the terms of their contracts ( contract frustration ) Underlying insurer becomes insolvent Underlying insurance has been exhausted by reason of payment No Retention applies for Side A DIC coverage Policy features allow this layer to drop down and serve as primary if the underlying insurance does not respond. Side A / DIC Limit $0 Retention for Non- Indemnifiable Loss Dedicated Side A Limits Traditional Fiduciary Liability Insurance Retention for Indemnifiable Loss and Entity / Plan Loss Proprietary & Confidential January

32 The Fiduciary Liability Insurance Contract Response PLAINTIFF = Plan Participants or Beneficiaries, Regulatory or Governmental Agencies, Plan Fiduciaries, etc. Insured Persons Claim is made by PLAINTIFF against: (Defendants) OCERS and/or Insured Plans $0 Retention NO Is Indemnification by OCERS permitted or required for covered loss (Is covered loss indemnifiable)? YES Entity / Plan Retention Applies Fiduciary Liability Insurance pays for covered Loss (Defense and Indemnity) from the first dollar, up to the Aggregate Limit of Liability Fiduciary Liability Insurance pays for covered Loss (Defense and Indemnity) in excess of the Retention, up to the Aggregate Limit of Liability Remaining Loss to be paid by Individual Personal Assets NO Insurer shall have a right of recovery against an Insured who caused or contributed to such Loss If Loss was paid by the Fiduciary Liability Insurance, was a Waiver of Recourse Purchased? Remaining Loss to be paid by Individual Personal Assets or by OCERS / Plan Assets (as applicable) YES Insurer shall have no right of recovery against an Insured who caused or contributed to such Loss 10 Proprietary & Confidential January

33 Section III Fiduciary Liability Insurance Program Design Considerations Proprietary & Confidential January

34 Fiduciary Liability Insurance General Program Construction Considerations Topic Is Fiduciary Liability Insurance Coverage Required / Authorized? Who are desired Insureds? Discussion / Considerations California Government Code Section 7511 provides for the purchase of Fiduciary Liability Insurance as follows: A public retirement system may purchase insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary, if the insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by the fiduciary. A fiduciary may purchase insurance to cover liability under this section from and for his or her own account. An employer or an employee organization may purchase insurance to cover potential liability of one or more persons who serve in a fiduciary capacity with regard to an employee benefit plan. Insured Persons (plan fiduciaries and trustees and administrators) OCERS? Plans? Factors to consider in determining whether to include coverage for OCERS and the Plans include: Purchasing coverage for the system and the plans is more expensive than purchasing coverage only for individuals. In claims alleging breach of fiduciary duty, individual fiduciaries are the likely defendants, but the system and the plans can also be named as defendants in such actions. Administrative errors could result in claims against individuals, the system or the plans. Purchasing Fiduciary Liability Insurance for the system and the plans protects plan assets in the event the system or the plans are defendants in a claim and where the system / plans indemnify individual insureds in a claim. Most claims against individuals are indemnifiable. Proprietary & Confidential January

35 Fiduciary Liability Insurance General Program Construction Considerations Topic Coverage Construction Discussion / Considerations Traditional Fiduciary Liability Insurance Additional Dedicated Non-Indemnifiable Loss (Side A) Coverage Non-Indemnifiable Loss (Broad Form Side A) Only Coverage Source and scope of indemnification and governmental immunity are key factors in designing a Fiduciary Liability program Limits of Liability There are numerous factors to consider in determining appropriate limits of liability, including peer benchmarking data, loss history, risk profile, risk philosophy, overall premium cost budget and expectations, etc. Peer purchasing data for entities with plan assets between $10B and $50B indicates median total limits of $50M Discuss warranty / pending & prior litigation dates for new limits Retentions Indemnifiable Loss and Entity retention will depend on total plan assets under management, loss history and risk profile Peer purchasing data for entities with plan assets between $10B and $50B indicates a median retention of $1M Lower retention indicates insuring for higher frequency claims Higher retention indicates insuring for lower frequency of claims Examine the economics of various retention options Proprietary & Confidential January

36 Fiduciary Liability Insurance General Program Construction Considerations Topic Discussion / Considerations Premiums Total plan assets under management is the primary underwriting factor insurers consider in determining pricing. Other factors underwriters consider include: number of plan participants funding level of defined benefit plans and investment return assumptions investment allocation and investment performance changes to plan contributions or benefits information and disclosure requirements use of third parties and fee structure / monitoring scope of indemnification and governmental immunity regulatory inquiry risk management and investment staff industry and specific loss history Insurer Selection Potential Primary Insurers: ACE, AIG, Arch, Axis, Berkshire Hathaway, Chubb, Endurance, Euclid (Hudson), Hartford, RLI, Travelers, XL and Zurich Potential Excess Insurers: ACE, AIG, Arch, AWAC, Aspen, Axis, Beazley, Berkley Pro, Berkshire Hathaway, Chubb, CV Starr, Endurance, Euclid (Hudson), Everest, Freedom Specialty, Great American, Hartford, HCC, Ironshore, Liberty, Lloyds of London, Markel, Navigators, Old Republic, RLI, RSUI, Swiss Re, Travelers, Ullico Casualty, XL, Zurich, ACE Bermuda, Arch Bermuda, AWAC Bermuda, Axis Bermuda Chubb Bermuda, and XL Bermuda Priorities for OCERS Discuss OCERS priorities: coverage, premium, retention Proprietary & Confidential January

37 Fiduciary Liability Insurance Program Design Considerations: Program Structure Options Option I. Traditional Fiduciary Liability Program Coverage for Non-Indemnifiable Loss, Indemnifiable Loss and Entity / Plan Coverage Option II. Traditional Fiduciary Liability Coverage with Additional Excess Side A / DIC Coverage $10M - $15M Side A DIC Option III. Non-Indemnifiable Loss (Broad Form Side A) Only Fiduciary Liability Coverage $0 Retention for Non- Indemnifiable Loss Fiduciary Liability $50M Retention: $250K - $5M Each Loss for Indemnifiable Loss and Entity / Plan Loss Difference-in-Conditions $0 Retention for Non- Indemnifiable Loss Fiduciary Liability $50M Retention: $250K - $5M Each Loss for Indemnifiable Loss and Entity / Plan Loss Fiduciary Liability Non-Indemnifiable Loss Only (Broad Form Side A) $50M $0 Retention for Non-Indemnifiable Loss Indemnifiable loss and Entity / Plan Coverage in addition to Non- Indemnifiable Loss Coverage Broad set of circumstances would trigger coverage Protection of plan assets Potential erosion of limits for Non- Indemnifiable Loss of Insured Persons by a claim against OCERS or the plans Indemnifiable Loss and Entity / Plan Coverage in addition to Non- Indemnifiable Loss Coverage Additional dedicated limits for Non- Indemnifiable Loss of Insured Persons that cannot be eroded by a claim against OCERS or the plans Includes protection of plan assets Broad set of circumstances would trigger coverage Higher total premium due to additional coverage / limits Broad form coverage for Non- Indemnifiable Loss only Dedicated limits for Non-Indemnifiable Loss of Insured Persons Coverage for Insured Persons cannot be eroded by a claim against OCERS or the plans No retention No protection of plan assets Lower total premium Proprietary & Confidential January

38 Peer Purchasing Analysis Fiduciary Liability Insurance Limit of Liability Millions Total Limits and Retention Fiduciary FID Total Plan Assets: $10 Billion to $50 Billion Sample Size = 14 $120 $100 $80 $60 $40 $20 $40,000,000 $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 Retention Key Points for Consideration: Total plan assets are indicative of potential severity of risk (e.g. from a potential loss in value perspective). Insureds with plan assets between $10B and $50B purchase an average of $58.2M and a median of $50M in Fiduciary Liability coverage. Peer purchasing data is only one of several factors to consider in making limit purchasing decisions. Claims history, legal trends and risk tolerance / philosophy should also be considered. $0 3rd Minimum 1st Quartile Median Average Quartile Maximum Limit $10,000,000 $46,250,000 $50,000,000 $58,214,286 $75,000,000 $100,000,000 Retention $0 $312,500 $1,000,000 $4,125,000 $2,125,000 $35,000,000 $0 Proprietary & Confidential January

39 Peer Purchasing Analysis Fiduciary Liability Insurance Limit of Liability Millions $120 $100 $80 $60 $40 $20 Total Limits and Retention Fiduciary FID Plan Participants 25,000 50,000 Sample Size = 29 $0 Minimum 1st Quartile Median Average 3rd Quartile Maximum Limit $3,000,000 $25,000,000 $30,000,000 $35,965,517 $50,000,000 $100,000,000 Retention $0 $25,000 $250,000 $698,276 $1,000,000 $10,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 Retention Key Points for Consideration: Total plan participants are indicative of potential severity of risk (e.g. from a breach of fiduciary duty or administrative error affecting all or a large subset of participants even if individual participant loss is relatively small, the total loss could be significant given the number of affected individuals). Other Insureds with plan participants between 25,000 and 50,000 purchase an average of $36M and a median of $30M in Fiduciary Liability coverage. Peer purchasing data is only one of several factors to consider in making limit purchasing decisions. Claims history, legal trends and risk tolerance / philosophy should also be considered. Proprietary & Confidential January

40 Section IV Other Executive Liability Insurance Coverages Proprietary & Confidential January

41 Other Executive Liability Insurance Coverages Public Officials Liability Employment Practices Liability Crime / Fidelity Cyber Liability Proprietary & Confidential January

42 Appendix A Aon Financial Services Group Proprietary & Confidential January

43 Aon Financial Services Group FSG Overview Aon s Financial Services Group ( FSG ) is the premier team of executive liability brokerage professionals with extensive experience in representing buyers of complex insurance products including fiduciary liability, directors and officers liability, employment practices liability, professional and cyber liability as well as, fidelity, and transactional insurance. Aon s Financial Services Group has over $2.5 billion in annual premium under management, has resolved in excess of $3.5 billion in claim settlements, and uses its unmatched data to support the diverse business goals of its clients. Specialized Focus for Fiduciary Liability As one of the largest brokers in the world, Aon is able to leverage existing relationships as well as our market clout to achieve the most competitive pricing and coverage terms available Aon has one of the largest global networks of brokers in the industry not only gauging the pulse of the marketplace, but also striving to push innovative coverage items to further provide best in class coverage Aon specializes in addressing emerging litigation exposures, regulations, new case law, and evolving market trends Data Driven Culture Largest database of proprietary data in the industry Resources to make informed decisions based on empirical data Customized Reports unique to client specific sector Legal Support & Leverage 37-person Legal Team = Legal leverage Legal Resources incorporated into the broking model Continuous research/claims experience ensures contract knowledge remains state-of-the-art Strong partner for our clients in the event of a claim Innovation & Service Policy manuscripting and customization for each individual client is essential for differentiation Claims and Pricing reports prepared for clients to ensure familiarity of developing trends Unique coverage products to address client exposures and emerging legal trends Proprietary & Confidential January

44 Aon s Brokerage Services Process Aon s 4 Step Process Delivers Distinctive Client Value, Providing Comprehensive Terms & Conditions at Most Competitive Premiums Diagnose Differentiate Define Deliver Pricing Insurer Security Program Primary Retention Aon s D&O Terms Diagnostic Diagnostic Limits Following Form Structure + Business Levers of OCERS Commitment to Plan Members Plan Performance / Funding Status Fiduciary Duties Manage Total Cost of Risk + = Business Continuity Key Goals Understand what is important to OCERS: coverage breadth, program structure, total cost of risk Differentiate OCERS from other public pension risks Understand and discuss new coverages / products available in the marketplace Design a program that is specifically tailored to OCERS risks and ensures best-in-class personal asset protection Value to OCERS Deploy Aon s financial and legal leverage to drive best combination of pricing and coverage Tailored program that is in lockstep with OCERS financial and operational goals and risk philosophy Collaboration with Aon to ensure coverage for potential claims and optimal outcome for litigation Thought Leadership: Innovative coverages / products brought to management team Proprietary & Confidential January

45 Aon FSG s Legal Practice Our Philosophy The Policy Must Perform CLAIM EVENT Client advocate and advisory role PRE-INCEPTION Trend analysis A fully integrated approach to contract performance is critical. Our legal and claims experts are integrated into the broking team and are involved in both preinception discussions with clients and carriers and claim negotiation. We have resolved over $3.5 billion in claims and have active involvement in an additional $6 billion of pending litigation. Utilize claims leverage with insurers Negotiate claims and defense costs resolutions Manage claims process THE CONTRACT MUST PERFORM Monitor regulatory and case law developments Track insurer performance Policy language drafting, review, and negotiation Contractual Leverage Business Leverage Contract Performance Proprietary & Confidential January

46 Aon s Key Value Proposition for OCERS Industry and Product Expertise Specific to OCERS Risk Market Leverage to Ensure Best Available Terms and Conditions for OCERS Best-in-Front Philosophy Direct Marketing Approach for a Unified Message to the Markets Customized Risk Analysis and Marketing Submission to Distinguish OCERS from its Peers Innovative Program Solutions Specifically Tailored to OCERS Needs Best-in-Class, Customized Coverage Terms Proprietary Peer Benchmarking Data to Assist OCERS with Limit and Retention Decisions Dedicated Claims Advocacy and Leverage to Assist OCERS through the Claims Process Focus on Superior Client Service for OCERS Proprietary & Confidential January

47 FSG Service Team Michele Cowen Vice President 707 Wilshire Blvd., Suite 2600 Los Angeles, CA T: M: E: Proprietary & Confidential January