Indemnification Provisions in Benefit Plan Service

Contracts Should be Negotiated with Care

Thomas M. White
ARNSTEIN & LEHR LLP
120 SO U T H RI V E RSI D E P L A ZA | SU ITE 1200
CHI CA G O , I L 60606
P 312.876.71 84 | F 312.876.0 288
tmwhite@arnstein.com

Although ERISA was enacted 36 years ago, there are a number of important issues that
have not been settled by this law or by the courts. Among the unresolved issues is whether
there is a right under ERISA to indemnification between fiduciaries. ERISA does not address
this question and some courts recognize the right to indemnification while others don’t.
Therefore, until there is a definitive ruling by the Supreme Court, the ability to obtain
indemnification may depend upon the jurisdiction where a lawsuit is filed. As a result, both
ERISA service providers and those acting on behalf of a benefit plan need to negotiate the
terms of their indemnification provisions with care. In addition, because the courts are not
unanimous in their approach, choice of law and venue provisions should also be examined
and should reflect both parties’ understanding.
The issue of indemnification most frequently arises in the context of plan investments.
A plan fiduciary will often appoint an investment advisor or manager to direct plan
investments. The investments may decline in value and the appointing plan fiduciary may
believe that the investment manager has violated ERISA’s prudence standard for investments,
or has violated the parties’ contractual standards for managing plan investments. There has
been a plethora of investment related ERISA litigation resulting from recent market volatility
and poor investment performance. Frequently, everyone involved in the investment decision
making process gets sued. The co-fiduciaries are then left to sort out who is liable.
Although less common, indemnification actions may also be brought regarding non-
investment related plan administration questions. For example, indemnification claims may
arise where plan requirements (for example, top heavy or 401(k) discrimination tests) are not
satisfied.

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 Some courts have held that ERISA does not recognize indemnification claims between
plan fiduciaries; other courts have held that these claims are permitted and there is no
controlling precedent in other jurisdictions. For example, the district courts in the Seventh
Circuit - - covering Illinois, Indiana and Wisconsin - - have not come to a consensus on
whether there is an ERISA common law right to indemnification between fiduciaries.
Therefore, in the Seventh Circuit, the resolution of this issue may depend on the district court
judge who hears the case.
Both plan service providers and service recipients are in the best position to satisfy
their expectations regarding indemnification when negotiating their contract. The parties’
contracts should be negotiated with care. Neither party should gloss over these provisions.
The contracts should specify what matters are subject to indemnification and what each
party’s duties to the other are and what the standard of care should be. If there is a cap on
the indemnity amount subject to the provision, the parties should agree that the amount
specified is appropriate. Choice of law and choice of venue provisions should also be
considered in this context because the substantive law may vary from court to court. It is
better to negotiate the terms of the contract to satisfy each parties’ expectations, rather than
to have the end result left to the judgment of a court.