Fiduciary Negligence: Meaning, Types, Penalties

What Is Fiduciary Negligence?

Fiduciary negligence is a type of professional malpractice in which a person fails to honor their fiduciary obligations and responsibilities. Fiduciaries are entrusted with certain responsibilities in regard to their clients. Fiduciary negligence occurs when the fiduciary, through negligence, causes damages to the party they are entrusted to.

Understanding Fiduciary Negligence

Fiduciary negligence occurs when a fiduciary fails to act on breaches of duty, specifically when their actions could have prevented the infractions or minimized the negative repercussions. A fiduciary is a person or entity that is charged with the responsibility of overseeing the financial accounts or assets of another party.

Board members can act as fiduciaries on behalf of shareholders. Attorneys and trustees are examples of other professionals that often act in a fiduciary role. The fiduciary is required to abide by a variety of ethical and legal rules and guidelines.

Fiduciary negligence generally comes in the form of passive behavior, in that it is a failure to take action or take any steps to stop or address the actions of others. This is why this type of failure is called negligence, as opposed to acts of fraud or deception, where the fiduciary initiates or actively engages in behavior that breaches their ethical duty or code of conduct.

A party in a fiduciary role can be guilty of negligence even if they did not benefit from the result of their inaction. Suppose that a company's shareholders entrust their funds with the firm's management.

If the company's employees are embezzling money or expensing funds on lavish dinners and gifts and the chief financial officer fails to check the financial accounts, allowing such infractions to go unnoticed, that officer would be considered negligent and held accountable even if they did not personally benefit from these actions.

Types of Fiduciary Negligence

A variety of actions can constitute fiduciary negligence. These include the following:

Negligence: This occurs when a fiduciary breached their duty and that breach caused an individual injury. This is usually looked upon as a duty of care.

Gross negligence: Gross negligence is a step above negligence. It does include when a duty of care has been violated, but this violation is done in a reckless manner without the consideration for the safety of others.

Negligent misrepresentation: This type of fiduciary negligence occurs when a party makes decisions based on information that was prepared without reasonable care.

How to Prove Fiduciary Negligence

To prove fiduciary negligence, a party will have to prove that an individual was entrusted with fiduciary duty and that the duty was violated which resulted in damages. The plaintiff will have to show the defendant had responsibilities, such as acting in good faith, transparency, and loyalty, and that these were not respected.

To show that these duties were not respected, the plaintiff will have to demonstrate a multitude of possible situations, such as the withholding of information, misappropriation of funds, abuse of position, or misrepresenting facts. The plaintiff will have to directly prove these actions resulted in damages.

Penalties for Fiduciary Negligence

Parties that commit actions that could be considered negligence may be subject to a variety of penalties or other consequences. These penalties may be imposed by a relevant entity or governing body that has jurisdiction over that party.

In some cases, the offending party may even be potentially subject to criminal penalties. More commonly, the behavior would be considered a civil matter. A party that feels they have been negatively impacted by fiduciary negligence can file a legal complaint naming the fiduciary as the defendant.

As with any type of civil lawsuit, the plaintiff would have to establish a case proving the alleged act(s) of negligence and providing evidence to back up their claim. The potential damages that could be awarded if the plaintiff is successful would depend on a variety of factors, including the amount of losses the plaintiff may have suffered as a result of the negligence on the part of the fiduciary.