Fiduciary Liability Policies May Not Cover All Your Liability under ERISA

ERISA Roles & Responsibilities

The uncertainty that seems to have developed regarding the scope of coverage under a fiduciary liability policy may stem from an incomplete understanding of the roles and responsibilities of various parties whose conduct is governed by ERISA.

Plan Sponsors
Under ERISA, an employer who establishes or maintains an employee benefit plan is called the “plan sponsor.”[4] The plan sponsor’s responsibilities under ERISA are commonly called “settlor” functions. These settlor functions, which are not subject to fiduciary liability under ERISA, may include the following:

As demonstrated by the case studies in the final section of this article, a plan sponsor may have liability exposure under ERISA for its failure to comply with various statutory mandates. A plan sponsor may also have settlor liability for violation of other laws in the execution of its sponsor / settlor responsibilities.

Plan Fiduciaries
Under ERISA, “fiduciary” status is a function-based classification,[10] not tied to formal titles or positions:

Although ERISA plan sponsors may also be named fiduciaries in the plan, ERISA fiduciary duties attach only to conduct that is fiduciary in nature.[12] The inquiry focuses on the extent to which the would-be fiduciary exercises control or authority over the administration and management of plan assets, renders or has the authority to render advice regarding the investment of plan assets, or has discretionary authority or responsibility in the administration of the plan.[13] Notably, “[f]iduciary status under § 1002(21)(A) is not an all-or-nothing concept.”[14] Rather, the inquiry focuses on “whether a person is a fiduciary with respect to the particular activity in question.”[15] When a plan sponsor adopts or amends an employee benefit plan, it is not performing a fiduciary function because “amending . . . a plan cannot be an act of plan management or administration.”[16]

In that situation, it is often said that the plan sponsor wore the “hat” of a non-fiduciary. Only when one wears the “hat” of a fiduciary do ERISA’s fiduciary requirements attach.[17]

Fiduciary functions under ERISA may include such activities as the following:

Plan Administrators
In addition to settlor conduct and decision making by those vested with discretionary authority, the administration of an ERISA plan necessarily entails the performance of nondiscretionary, ministerial functions.[22] Although these low-level, clerical activities are distinct from discretionary fiduciary functions under ERISA, the negligent administration of an ERISA plan can also result in liability if the error causes damages to a plan participant or beneficiary.

ERISA-Related Exposures and Coverages

Since the enactment of ERISA, the insurance industry has responded with policies designed to protect insureds against specified risks arising from their involvement with ERISA plans: fiduciary liability insurance, ERISA fidelity insurance (also called ERISA fidelity bonds), and employee benefit liability insurance.

Fiduciary Liability Coverage
In section 410(a), ERISA imposes personal liability on plan fiduciaries. Corporate indemnification provisions do not apply to ERISA fiduciary liability. A fiduciary is permitted, pursuant to section 410(b), to purchase insurance to cover the risk of liability.

ERISA Fidelity Coverage
Fidelity coverage or bonds, which are mandated by ERISA,[23] protect the plan from losses due to dishonesty or theft. ERISA fidelity coverage is first-party coverage issued solely for the benefit of the plan and its beneficiaries. The coverage does not apply to a fiduciary’s personal liability and does not overlap with fiduciary liability coverage.

Employee Benefit Liability Coverage
Employee benefit liability (EBL) insurance protects non-fiduciary administrators of an employee benefit plan from liability for acts, errors, or omissions in the administration of the plan. “Administration” is typically defined in the policy and interpreted by the courts to refer to ministerial, nondiscretionary tasks.[24] Examples of negligent administration may include failing to send COBRA notices to employees who have experienced a qualifying event, failing to enroll a new employee in the plan, or failing to process a cancellation request.

EBL coverage may be obtained in a stand-alone policy or as an endorsement on another liability policy. Often, fiduciary liability policies include EBL coverage, subject to the same policy limit as the fiduciary coverage.

Case Studies: A Federal Trilogy

Northwest Airlines v. Federal
In Northwest Airlines v. Federal Insurance Co.,[25] the insured sought coverage under its fiduciary liability policy in connection with a lawsuit filed by employees arising from an employee stock ownership plan (ESOP).[26] Because the insured’s selection of a certain eligibility date excluded them from the ESOP, the employees alleged that the decision to apply that eligibility date violated ERISA.[27]

In the coverage litigation, the insured alleged the underlying litigation alleged a “wrongful act” with respect to the decision to adopt the specified eligibility date.[28] Based on the policy definition of “wrongful act,” the court rejected the insured’s contention.[29] The policy issued to Northwest defined “wrongful act” as follows:

Analyzing clauses (A) and (B), the Eighth Circuit Court of Appeals observed that selection of the eligibility date was an action taken by Northwest as an employer.[31] Because no fiduciary duty attaches to such corporate or “settlor” decisions, the court concluded that no coverage existed under clauses (A) and (B).[32]

With respect to clause (C), the Northwest court found no negligent act, error, or omission in the administration of the program.[33] The policy defined “administration” as “giving advice to employees or effecting enrollment, termination or cancellation of employees under Benefit Programs.”[34] Finding that the selection of the eligibility date was a corporate decision that did not affect the administration of the ESOP, the Northwest court concluded that the allegations in the underlying lawsuit did not fit within the third prong of the definition of wrongful act.[35] Courts have interpreted similar policy language in employee benefit liability policies or endorsements as referring to ministerial actions, as distinguished from both discretionary, fiduciary conduct and corporate policy decision making.[36]

Mary Kay v. Federal
The Fifth Circuit Court of Appeals addressed a similar issue in Mary Kay Holding v. Federal Ins. Co.[37] The underlying lawsuit alleged that Mary Kay, as plan sponsor, had an obligation to make COBRA continuation coverage available to former employees of an entity in which Mary Kay had an ownership interest. The corporate decision by Mary Kay not to restructure its benefit plans to provide coverage for the other company’s employees involved a high-level corporate policy decision. Mary Kay sued, claiming that Federal breached its duties to defend and indemnify.

The coverage lawsuit involved two issues: whether the benefit plans of the other company were Mary Kay “Sponsored Plans” under the Federal policy; and whether the COBRA allegations constituted a “Wrongful Act.” Applying the eight-corners rule (which governs an insurer’s duty to defend in Texas), the district court answered both questions in the negative and denied Mary Kay’s motion for summary judgment. The Fifth Circuit affirmed.[38]

Because the underlying lawsuit did not allege that the other company was a subsidiary of Mary Kay, the court concluded that its plans were not “sponsored plans” and that fiduciary breach allegations with respect to non-sponsored plans were not covered.[39] The COBRA allegations pertained to Mary Kay’s own plans but did not involve fiduciary conduct. For that reason, the COBRA claims did not allege any “wrongful acts.” The court explained:

Although not discussed by the Fifth Circuit in affirming summary judgment for Federal, the district court further explained that the COBRA allegations did not meet the third prong of the definition of “wrongful act”—negligent administration.[41] The policy defined “administration” as “giving advice to employees, handling records, or effecting enrollment, termination or cancellation of employees under a benefit plan.”[42] The court concluded that the provision of continuation coverage was distinct from administration—giving advice, handling records, or effecting enrollment.[43]

Federal v. IBM
A New York Court of Appeals case decided earlier this year likewise evidences the common—but often unanticipated—limitations on the scope of coverage under fiduciary liability policies.[44]

Analyzing coverage under an excess fiduciary liability policy issued by Federal Insurance Company, the New York high court held that neither the primary policy nor Federal’s follow-form excess policy provided coverage for a class action lawsuit against International Business Machines (IBM) Corporation in its capacity as a plan sponsor or “settlor” under ERISA.

In the underlying class action lawsuit, the plaintiffs alleged that amendments made by IBM to an ERISA benefit plan discriminated against them on the basis of age in violation of ERISA.[45] The Cooper plaintiffs did not, however, allege that IBM breached any fiduciary duties. After protracted litigation, IBM settled the case for more than $300 million, including an estimated $88 million in attorney fees and costs. Following exhaustion of the $25 million limits of the primary policy issued by Zurich American Insurance Company, IBM sought reimbursement from Federal pursuant to its first-layer excess policy. Federal filed suit against IBM, seeking a declaration that it had no duty to indemnify under the follow-form excess policy.

Resolution of the coverage dispute turned on the definition of “wrongful act” as set forth in the Zurich policy:

Notably, it was undisputed in the coverage litigation that IBM was not acting as a fiduciary in taking the actions at issue in the Cooper lawsuit.[46]

Although its conduct as a fiduciary was not at issue, IBM relied on the language in the first prong of the definition of “wrongful act” in maintaining its entitlement to coverage as an insured and plan fiduciary. The dispute focused on the phrase “any breach of the responsibilities, obligations or duties by an Insured which are imposed upon a fiduciary of a Benefit Program by [ERISA].” IBM argued that “fiduciary” as used in the definition of “wrongful act” should be given its plain and ordinary meaning, not its more limited, “artificial” meaning under ERISA. Because IBM was alleged in Cooper to have violated certain ERISA provisions and because it was also a fiduciary of the benefit plans (based on the plain meaning of the terms), the insured argued that it should have been covered—even if the conduct alleged in Cooper was not undertaken in its capacity as a fiduciary. Under IBM’s theory, its actions “would be covered by virtue of the fact that it was an insured and a plan fiduciary that allegedly violated certain ERISA provisions, regardless of the fact that, if the allegations are correct, it undoubtedly did so in its capacity as a plan settlor and not in its capacity as an ERISA fiduciary.”[47]

The New York Court of Appeals disagreed, characterizing IBM’s interpretation of the policy as “strained and implausible.”[48] A straightforward reading of the initial language of the first prong of the “wrongful act” definition is that it covers violations of ERISA by an insured acting in its capacity as an ERISA fiduciary, not all violations of ERISA.[49]

Although not the first case to conclude that fiduciary liability coverage does not extend to plan sponsor conduct, IBM clearly illustrates the importance of reading and understanding the terms of the policy to avoid an unexpected gap in coverage. While the ruling in IBM may open the door to new insurance products designed to cover unlawfully discriminatory conduct in the design of an ERISA plan or defense costs in certain situations (such as when breach of fiduciary duty is alleged but not established), insureds are advised to scrutinize closely the proposed policy terms to clarify which risks are covered and which remain an uninsured obligation of the corporation.

Keywords: breach of fiduciary duty, employee benefit liability, plan fiduciary, plan administrator, plan sponsor, settlor function

Amy Elizabeth Stewart is the founding partner of Amy Stewart PC, Dallas.

[1] 29 U.S.C. §§ 1001–1461.
[2] See 29 U.S.C. §§ 1161–1169; Mary Kay Holding Corp. v. Fed. Holding Co., No. 3:06-CV-896, 2007 U.S. Dist. LEXIS 88583, at *17–25 (N.D. Tex. Aug. 14, 2007), aff’d sub nom. Mary Kay Holding Corp. v. Fed. Ins. Co., 309 F. App’x 843 (5th Cir. 2009) (analyzing coverage under fiduciary liability policy for underlying lawsuit alleging that the named insured and plan sponsor failed to provide for continuation of certain employment benefits).
[3] Fed. Ins. Co. v. IBM Corp., 965 N.E.2d 934 (N.Y. 2012) (analyzing coverage under fiduciary liability policy for allegations that plan eligibility date violated age discrimination laws).
[4] See 29 U.S.C. § 1002 (16)(b) (under ERISA, a plan sponsor is “(i) the employer in the case of an employee benefit plan established or maintained by a single employer, (ii) the employee organization in the case of a plan established or maintained by an employee organization, or (iii) in the case of a plan established or maintained by two or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan”).
[5] Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995) (“Employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans.”); Trenton v. Scott Paper Co., 832 F.2d 806, 809 (3d Cir. 1987), cert. denied, 485 U.S. 1022 (1988) (design of plan was “purely a corporate management decision,” not a breach of fiduciary decision).
[6] See Trenton, 832 F.2d at 809 (eligibility requirements for early retirement program were “purely a corporate management decision,” not subject to ERISA’s fiduciary obligations).
[7] See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444 (1999) (“ERISA’s fiduciary duty requirement simply is not implicated . . . [in] a decision regarding the form or structure of the Plan such as who is entitled to receive Plan benefits[.]”)
[8] See Curtiss-Wright Corp., 514 U.S. at 78 (“Employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans.”); Sys. Council EM-3 v. AT&T Corp., 159 F.3d 1376, 1377 (D.C. Cir. 1998) (AT&T was not acting in fiduciary capacity when it amended its pension and welfare plans and allocated the assets and liabilities of those plans between itself and its spun-off corporation); Malia v. Gen. Elec. Co., 23 F.3d 828, 833 (3d Cir. 1994), cert. denied, 513 U.S. 956 (1994) (employer acts as employer, not fiduciary, in making business decisions about modifying plan design).
[9] See Curtiss-Wright Corp., 514 U.S.at 78 (employer is not engaged in plan administration and is therefore not acting in a fiduciary capacity in deciding to create, amend, or terminate a plan); Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996) (“sponsors who alter the terms of a plan [are not] fiduciaries”). See also Mary Kay Holding Corp. v. Fed. Ins. Co., 309 F. App’x 843 (5th Cir. 2009).
[10] Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993).
[11] 29 U.S.C. § 1002 (21)(A); see Varity Corp. v. Howe, 516 U.S. 489, 498 (1996); Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993); Employee Benefits Sec. Admin., Dep’t of Labor, Meeting Your Fiduciary Responsibilities (Feb. 2012) (fiduciary status is based on the functions performed for the plan, not just a person’s title).
[12] Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1158 (3d Cir. 1990).
[13] Pegram v. Herdrich, 530 U.S. 211, 226 (2000) (regarding fiduciary status, the threshold question is whether the person was acting as a fiduciary, i.e., performing a fiduciary function, when engaging in the conduct at issue in the lawsuit); Mertens v. Hewitt Assocs., 508 U.S. 248, 251-52 (1993); Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 24 (1st Cir. 1998) (trustee bank is not a fiduciary to the extent it had no discretionary authority or control over investment of plan assets and no duty to monitor the investment manager retained by plan sponsor).
[14] Kerns v. Benefit Trust Life Ins. Co., 992 F.2d 214, 217 (8th Cir. 1993) (citation omitted).
[15] Kerns, 992 F.2d at 217.
[16] Lockheed Corp. v. Spink, 517 U.S. 882, 890–91 (1996).
[17] Tussey v. ABB, Inc., 2012 U.S. Dist. LEXIS 45240, *15 (W.D. Mo. Mar. 31, 2012).
[18] Coyne & Delaney Co. v. Selman, 98 F.3d 1457, 1465 (4th Cir. 1996) (appointment, retention, and removal of plan fiduciaries is a fiduciary function); Liss v. Smith, 991 F. Supp. 278, 310 (S.D.N.Y. 1998) (power to appoint plan trustees confers fiduciary status).
[19] Martin v. Feilen, 965 F.2d 660, 660 (8th Cir. 1992).
[20] Varity Corp. v. Howe, 516 U.S. 489, 502 (1996).
[21] In re Enron Corp. Sec., Derivative & ERISA Litig., 284 F. Supp.2d 511, 547–49 (S.D. Tex. 2003).
[22] David P. Coldesina, D.D.S., P.C., Emp. Profit Sharing Plan & Trust v. Estate of Simper, 407 F.3d 1126, 1132 (10th Cir. 2005).
[23] See 29 U.S.C. § 1112.
[24] See Nat’l Union Fire Ins. Co. v. Travelers Prop. Cas. Co., No. 05 Civ. 4648, 2006 U.S. Dist LEXIS 35608, at *24 (S.D.N.Y. May 26, 2006) (“administration” as defined in the policies refers to ministerial actions rather than the kind of deliberate, discretionary activity alleged in the lawsuits against the insured); Travelers Cas. & Sur. Co. v. Wausau Underwriters Ins. Co., 129 F. App’x 396, 399–400 (9th Cir. 2005) (the company’s exercise of discretion in failing to pay into a plan was not “administration” because that “definition contemplates administrative and ministerial actions,” not discretionary, corporate decision making); Md. Cas. Co. v. Economy Bookbinding Corp. Pension Plan & Trust, 621 F. Supp. 410, 413 (D.N.J. 1985) (“administration” meant routine, ministerial acts, not decision making).
[25] Nw. Airlines, Inc. v. Fed. Ins. Co., 32 F.3d 349 (8th Cir. 1994).
[26] Northwest Airlines, 32 F.3d at 351.
[27] Northwest Airlines, 32 F.3d at 351.
[28] Northwest Airlines, 32 F.3d at 353.
[29] Northwest Airlines, 32 F.3d at 353.
[30] Northwest Airlines, 32 F.3d at 353.
[31] Northwest Airlines, 32 F.3d at 353.
[32] Northwest Airlines, 32 F.3d at 353.
[33] Northwest Airlines, 32 F.3d at 354.
[34] Northwest Airlines, 32 F.3d at 354.
[35] Northwest Airlines, 32 F.3d at 354; see also Benequity Props. v. Nat’l Union Fire Ins. Co., No. 90-55866, 1992 U.S. App. LEXIS 4013, at *4 (9th Cir. Feb 28, 1992) (insured was acting as corporate employer, not as plan administrator, so no implication of fiduciary duties and no coverage under the fiduciary liability policy).
[36] See Nat’l Union Fire Ins. Co. v. Travelers Prop. Cas. Co., No. 05 Civ. 4648, 2006 U.S. Dist LEXIS 35608, at *23 (S.D.N.Y. May 26, 2006) (“administration” as defined in the policies refers to ministerial actions rather than the kind of deliberate, discretionary activity alleged in the lawsuits against the insured); Travelers Cas. & Sur. Co. v. Wausau Underwriters Ins. Co., 129 F. App’x 396, 399-400 (9th Cir. 2005) (the company’s exercise of discretion in failing to pay into a plan was not “administration” because that “definition contemplates administrative and ministerial actions,” not discretionary, corporate decision-making); Md. Cas. Co. v. Economy Bookbinding Corp. Pension Plan & Trust, 621 F. Supp. 410, 414 (D.N.J. 1985) (“administration” refers to routine, ministerial acts, not discretionary decision making).
[37] Mary Kay Holding Corp. v. Fed. Ins. Co., 309 F. App’x 843 (5th Cir. 2009).
[38] Mary Kay Holding Corp., 309 F. App’x 843.
[39] The extrinsic evidence demonstrated conclusively that the entity was not a subsidiary of Mary Kay at the pertinent time. Mary Kay Holding, 309 F. App’x at 848 n.4.
[40] Mary Kay Holding, 309 F. App’x at 849, citing 29 U.S.C. § 1161 (a); Lockheed Corp. v. Spink, 517 U.S. 882, 890–91 (1996).
[41] Mary Kay Holding Corp. v. Fed. Holding Co., No. 3:06-CV-896, 2007 U.S. Dist. LEXIS 88583, at *22–25 (N.D. Tex. Aug. 14, 2007), aff’d sub nom. Mary Kay Holding Corp. v. Fed. Ins. Co., 309 F. App’x 843 (5th Cir. 2009).
[42] Mary Kay Holding Corp. v. Fed. Holding Co., No. 3:06-CV-896, 2007 U.S. Dist. LEXIS 88583, at *19.
[43] Mary Kay Holding Corp. v. Fed. Holding Co., No. 3:06-CV-896, 2007 U.S. Dist. LEXIS 88583, at *19.
[44] Fed. Ins. Co. v. IBM Corp., 965 N.E.2d 934 (N.Y. 2012).
[45] Cooper v. IBM Pers. Pension Plan, No. 99-cv-00829, 2005 U.S. Dist. LEXIS 17071  (S.D. Ill. Aug. 16, 2005), rev’d in part, 457 F.3d 636 (7th Cir. 2006), cert. denied, 549 U.S. 1175 (2007).
[46] See generally Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996) (plan sponsors who alter the terms of a plan do not fall into the category of fiduciaries).
[47] IBM Corp., 965 N.E.2d at 936–39.
[48] IBM Corp., 965 N.E.2d at 938.
[49] IBM Corp., 965 N.E.2d at 937.

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