August 31, 2013 Articles

Insurance Coverage for Equitable Relief under ERISA

Must fiduciaries pay for remedies recently expanded by a U.S. Supreme Court decision, or can they pass the cost to their insurers?

by Patrick Frye [1]

Fiduciaries of employee benefit plans governed by the federal Employee Retirement Income Security Act of 1974 (ERISA) often purchase liability policies to insure them against losses incurred in the execution of their fiduciary duties. In CIGNA Corp. v. Amara,[2] the Supreme Court expanded the equitable relief available under ERISA against fiduciaries by allowing reformation and surcharge to be awarded against them.

Unanswered is whether the fiduciaries must pay for these remedies themselves or pass the cost to their insurers. This article addresses whether fiduciaries have insurance coverage for this relief. Although the issue has not yet been decided by any court, case law to date suggests that liability insurance usually should not cover the costs of reformation or certain surcharge ordered in an ERISA case.

ERISA Makes Fiduciaries Subject to Specific Liabilities

ERISA provides a national standard for employee benefits offered anywhere in the country. It governs plan information, fiduciary standards for persons responsible for plan management, and reporting and disclosure requirements. Under ERISA, an employer can sponsor benefit plans by establishing the plans and creating the written instrument that defines their terms and conditions. ERISA requires a written plan and details the mandatory and optional provisions that the plan must or may include.[3] The plan has an administrator, who is a fiduciary to the plan and who must fulfill certain statutory duties.[4] The plan’s administrator—who may or may not be the employer—manages the plan, following the terms of the written plan so long as they do not conflict with ERISA itself.[5]

ERISA enumerates the only causes of action that can be brought for violations of ERISA.[6] Three particular ones concern us at the moment. First, a participant or beneficiary may sue to recover benefits or to enforce or clarify his or her rights under the plan. Second, a participant or beneficiary may sue for breach of fiduciary duty, accusing the fiduciary of unjust enrichment at the expense of the plan or the plan’s beneficiaries. Third, a participant or beneficiary may sue for equitable relief redressing a violation of one of his or her rights under ERISA.[7] For example, participants and beneficiaries are entitled to reasonably comprehensive disclosure of their rights and obligations under their plan,[8] and if the benefits sought are not due under the plan’s written terms, a participant or beneficiary may argue that inadequate disclosure entitles him or her to equitable relief so that he or she may have those benefits.

The equitable relief available under ERISA has drawn the attention of the Supreme Court, which has ruled that various forms of equitable relief might be available to address errors in summary plan descriptions. Until 2011, it was widely believed that equitable relief did not allow any monetary recovery.[9] In CIGNA Corp. v. Amara, that belief proved to be incorrect, as the Supreme Court expanded the remedies permitted against an ERISA fiduciary.[10] This possible relief included the equitable remedies of reformation and of surcharge, which the district court considered upon remand.

Amara: Equitable relief as explained by the Supreme Court. In 1998, CIGNA converted its defined benefit pension plan to a cash balance plan. Overall, the conversion saved CIGNA $10 million a year, reduced the annual payments to employees opting for an early retirement, and shifted the risk of interest rate changes from CIGNA to its employees.[11] The participants kept the benefits already accrued, but many employees would not realize additional benefits under the new plan until they worked long enough to “wear away” the difference between the old plan’s accrued benefits and the lesser amount with which they began in the new plan. For example, imagine that under CIGNA’s old plan, employee John had accrued benefits equal to $250,000. Upon converting to the new plan, John’s account was credited with benefits equal to $200,000, giving him a “wear away” of $50,000. No matter what, when John retired, he would receive at least a quarter million dollars’ worth of benefits. But even though he would accrue benefits as he worked under the new plan, the $50,000 wear-away would delay his accrual of benefits in addition to the quarter million already due. If he retired after accruing $50,000 during the new plan, he would receive benefits equal to $250,000, not $300,000. Only once he exceeded the “wear away” would he truly add to his benefits. If he accrued $75,000 during the new plan, then his take-away benefits would grow from $250,000 to $275,000, but not to $325,000.

The conversion was entirely lawful, but the employees received a summary plan description that, although intended to give an adequate description of the new plan to the employees, did not disclose the ways in which the participants might be disadvantaged. (Other material supplied to the employees suggested that the participants would not be disadvantaged at all: A newsletter represented that the new plan offered “comparable benefits” to the old, and a retirement kit claimed that the new plan did not afford the company any “cost savings.”) The summary plan description also did not explain the conversion with reasonable accuracy and comprehensiveness. The federal courts ruled that, in addition to failing to provide an adequate summary plan description, CIGNA failed to apprise participants and beneficiaries of all modifications, changes, and significant reductions in the rate of accrual of future benefits, which, as the plan administrator, it was required to do.[12]

The Supreme Court ordered the district court to consider “appropriate equitable relief” under section 502(a)(3) of ERISA.[13] That section of the statute does not explain what relief is available as “appropriate equitable relief,” and the Supreme Court has defined it as the relief traditionally available in a court of equity.[14] Usually, equitable relief is thought to exclude money damages. But in Amara, the Supreme Court specifically suggested that the district court consider an affirmative or negative injunction, reformation, estoppel, and surcharge.[15] Although these remedies could result in a monetary recovery, they were the relief available in the courts of equity against fiduciaries. Hence, they may be won against an ERISA plan fiduciary.[16]

Amara, continued: Reformation and surcharge as considered in the district court. Upon remand, the district court considered awarding the plaintiffs reformation or surcharge. Through reformation, a court can impose terms absent in—or perhaps contradicting—the writing.[17] Surcharge is monetary relief awarded against a fiduciary.[18]

The district court awarded reformation of the new plan, finding justification for this relief in the combination of CIGNA’s deficient summary plan description, its failure to correct its deficiencies, and the misinformation spread by other documents circulated to its employees.[19] To redress CIGNA’s failure to explain the wear-away, the court ordered the plan reformed to permit class members all amounts that accrued under the old plan plus all additional amounts that accrued under the new plan.[20] Thus, the reformation eliminated the wear-away so that all accruals during the new plan added to the class members’ take-away benefits. Remember John from a few paragraphs ago? Under CIGNA’s plan, he would have accrued $50,000 during the new plan without adding to the $250,000 he accrued during the old plan. Under the reformed plan, he would receive benefits equal to the $250,000 accrued during the old plan and $50,000 during the new plan, for a total of $300,000.

The district court noted that CIGNA might be surcharged to make it disgorge any money its deficient notice saved, money that may have unjustly enriched CIGNA. However, the court did not rule on whether any of CIGNA’s savings was due to those deficiencies and so did not rule on whether this type of surcharge was available against CIGNA.[21]

Liability Insurance Generally Does Not Cover Restitution

The equitable remedies the district court considered in Amara have not been adjudicated under the liability insurance policies typically bought by ERISA fiduciaries. That kind of policy usually indemnifies the fiduciary for loss, subject to other terms and conditions. Whether explicitly written into the policy or implied by operation of law,[22] “loss” usually does not include restitution of unjust enrichment or damages for breach of contract. This has been true as a general principle of insurance law as well as in cases specifically considering whether insurance covers an ERISA action brought against the policyholder.

Restitution of unjust enrichment. Generally, restitution correcting unjust enrichment is paid when the payer has received a benefit that would be unjust for the payer to retain.[23] A payment is restitution if measured by the amount of the payer’s gain.[24] It should be noted that the gain to be returned need not have been gotten through any fraud or other knowing or willful conduct;[25] the gain merely needs to be undeserved.[26]

A restitutionary payment is not insured. As the Seventh Circuit recently stated in Ryerson Inc. v. Federal Insurance Co., “You can’t, at least for insurance purposes, sustain a ‘loss’ of something you don’t (or shouldn’t) have.”[27] Generally, an insurable interest requires a loss of something that truly belonged to the policyholder. If a policyholder pays to satisfy a judgment or settle a claim seeking the return of the policyholder’s ill-gotten gains, then the policyholder has no insurable loss. If it did, then insurance effectively would encourage policyholders to get these ill-gotten gains.[28]

Restitution is thus uninsurable as a matter of law.[29] In one ERISA case, a fiduciary liability policy did not cover the return of funds improperly transferred from a pension fund to a health and welfare fund. With no right to the funds in the first place, the health and welfare plan had no claim to any insurable loss.[30]

Damages for breach of contract. Generally, damages are paid in order to enforce a contract after the payer breached it.[31] In a vein similar to the policy against insuring restitution, liability policies do not insure damages from the policyholder’s breach of a contract with someone else.[32] If such policies did so, they “would have the effect of making the insurer a sort of silent business partner subject to great risk in the economic venture without any prospects of sharing in the economic benefit.”[33] A policyholder could “enter into a contract safe in the assumption that if he later decides to engage in an act which might be considered a breach, the insurance company will step forward to cover the consequences of his act if he was wrong; and if he was right, he still walks away with no consequence to himself.”[34] Therefore when a policyholder must pay damages because he or she did not perform his or her part of a contract, the damages are simply an obligation voluntarily assumed, not a loss.[35]

Many lawsuits filed under ERISA seek recovery of benefits supposedly owed under the terms of ERISA plans. Liability policies typically do not insure these suits. The insurable “loss” often must arise from a “wrongful act.” Generally, policies define “wrongful act” as including negligence or errors and omissions.[36] In policies written to policyholders to protect them against fiduciary liability under ERISA, “wrongful act” is commonly defined as including any actual or alleged error or omission, negligent act, or breach of duty committed in the discharge of fiduciary duties. These policies often, but not always, reference the fiduciary duties as those ERISA enumerates.[37]

Court-ordered payments of benefits do not arise from any negligence, error or omission, or breach of fiduciary duty. Rather, they arise from a contractual obligation that preexisted the fiduciary’s failure to pay the benefits.[38] The promise to pay benefits is a contractual obligation. Liability insurance does not insure the policyholder’s performance of his or her contractual obligations:[39]

It would be passing strange for an insurance company to insure a pension plan (and its sponsor) against an underpayment of benefits, not only because of the enormous and unpredictable liability to which a claim for benefits on behalf of participants in or beneficiaries of a pension plan of a major employer could give rise, but also because of the acute moral hazard problem that such coverage would create. . . . Such insurance would give the plan and its sponsor an incentive to adopt aggressive (just short of willful) interpretations of ERISA designed to minimize the benefits due, safe in the belief that if, as would be likely, the interpretations were rejected by the courts, the insurance company would pick up the tab. Heads I win, tails you lose.[40]

These are examples of benefit payments that liability policies will not cover:

· Money to pay the difference between underpayments made to medical providers and the cost of their services.[41]
· Money the policyholder’s third-party administrator failed to pay in benefits due and subject to collection actions by medical providers.[42]
· Money the employer refused to pay upon retirees’ requests for lump-sum distributions.[43]
· Money paid to correct the adjustment percentage used to credit participants’ cash balance accounts each quarter.[44]
· Money to make up a shortfall from a failure to meet ERISA’s minimum accrual rates.[45]
· Money due to participants but not deposited in their accounts.[46]

Reformation and Certain Surcharge Are Unlikely to Be Covered

Following the Supreme Court’s expansion of ERISA equitable relief to include reformation and surcharge, courts surely will consider the extent to which insurance may cover this new relief. It often should not. Among other things, the surcharge can require the fiduciary to pay the amounts by which he or she was unjustly enriched.[47] Plainly, when a fiduciary is surcharged to  disgorge money he or she unjustly gained, that surcharge is no more insurable than any other form of restitution.

Nor is there any insurable loss when the policyholder pays the costs of benefits added by the reformation of a plan. The contract is the parties’ mutual understanding, and a writing merely evidences the contract.[48] The reformation defines the true contract:[49] the parties’ mutual understanding stripped away of the fraud or mistake that made the written contract not enforceable as written.[50]

After reformation modifies the contractual writing to make it conform to the contract, the parties pay their obligations pursuant to the revised writing. Additional money may be needed if the plan must pay beneficiaries more money than was anticipated under the unreformed writing. Paying this extra money was an obligation undertaken voluntarily, and it is no more insurable than any other failure to perform a promise. The breach of an unwritten term differs from the breach of a written term only in the writing, an evidentiary point of no significance after the court has reformed the instrument. The cost of benefits is simply an operating expense, a form of a workforce’s compensation. Hence, there is no insurable loss in the policyholder’s failure to perform the unwritten, but actual, terms of a plan.

Keywords: litigation, insurance coverage, breach of fiduciary duty, reformation, surcharge, unjust enrichment

Patrick Frye is with Edwards Wildman Palmer LLP, Chicago.



[1] Patrick Frye is an Illinois-licensed attorney in the Insurance and Reinsurance Department of Edwards Wildman Palmer LLP. He represents insurance and reinsurance companies in commercial litigation of all varieties, including antitrust and coverage. He thanks Stacey Austin of Wang Kobayashi Austin LLP for many helpful comments. Any errors in this paper are in spite—and not because—of her help.
[2] 131 S. Ct. 1866 (2011).
[3] 29 U.S.C. § 1102.
[4] 29 U.S.C. §§ 1002 (14), 1002(21), 1021, 1022, 1024(b).
[5] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1877 (2011); 29 U.S.C. § 1104 (a).
[6] See Aetna Health Inc. v. Davila, 542 U.S. 200, 208–9 (2004).
[7] These three causes of action are found at 29 U.S.C. § 1132 (a)(1), (2), and (3), respectively.
[8] 29 U.S.C. § 1022 (a).
[9] John H. Langbein, “What ERISA Means by ‘Equitable’: The Supreme Court’s Trail of Error in Russell, Mertens, and Great-West,” 103 Colum. L. Rev. 1317, 1319, 1319 n.6 Shepardize  (2003); see CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1878 (2011).
[10] Gearlds v. Entergy Servs., 709 F.3d 448, 450–451 (5th Cir. 2013).
[11] A fuller recitation of the facts of this case may be found in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011); Amara v. CIGNA Corp., 534 F. Supp. 2d 288 (D. Conn. 2008); and Amara v. CIGNA Corp., 559 F. Supp. 2d 192 (D. Conn. 2008).
[12] See 28 U.S.C. §§ 1024 (b)(1), 1054(h)(1).
[13] 29 U.S.C. § 1132 (a)(3).
[14] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1878 (2011).
[15] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1879–80 (2011).
[16] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880–81 (2011).
[17] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1881 (2011).
[18] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011).
[19] Amara v. CIGNA Corp., No. 3:01-cv-2361 (JBA), 2012 U.S. Dist. LEXIS 180355, at *23–24 (D. Conn. Dec. 20, 2012).
[20] Amara v. CIGNA Corp., No. 3:01-cv-2361 (JBA), 2012 U.S. Dist. LEXIS 180355, at *28 (D. Conn. Dec. 20, 2012); see Amara v. CIGNA Corp., 559 F. Supp. 2d 192, 212 (D. Conn. 2008).
[21] Amara v. CIGNA Corp., No. 3:01-cv-2361 (JBA), 2012 U.S. Dist. LEXIS 180355, at *47–49 (D. Conn. Dec. 20, 2012).
[22] For an example of the written exception, see Federal Insurance Co. v. Arthur Andersen LLP, 36 Empl. Benefits Cas. (BNA) 1995, 2005 WL 1838440, at *2 (N.D. Ill. Aug. 2, 2005). For an example of the legal implication, see Level 3 Communications v. Federal Insurance Co., 272 F.3d 908, 910 (7th Cir. 2001).
[23] Restatement (Third) of Restitution & Unjust Enrichment § 1  cmts. a, d.
[24] See, e.g., Helfrich v. PNC Bank, Ky., Inc., 267 F.3d 477, 481 (6th Cir. 2001).
[25] “Persons who are without fault are frequently liable in restitution, but their unjust enrichment is measured in ways that tend to protect them from prejudice.” Restatement (Third) of Restitution & Unjust Enrichment § 51 cmt. c.
[26] Nortex Oil & Gas Corp. v. Harbor Ins. Co., 456 S.W.2d 489, 494 (Tex. Civ. App. 1970); see St. Paul Fire & Marine Ins. Co. v. Vill. of Franklin Park, 523 F.3d 754, 756 Shepardize  (7th Cir. 2008) (short-changing pension fund); Town of Brookhaven v. CNA Ins. Cos., No. CV-86-3569, 1988 U.S. Dist. LEXIS 19391, 1988 WL 23555 (E.D.N.Y. Feb. 24, 1988) (misallocating disbursements); Reliance Grp. Holdings, Inc. v. Nat’l Union Fire Ins. Co., 594 N.Y.S.2d 20, 24–25 (App. Div. 1993) (breaching fiduciary duty in the prosecution of a derivative lawsuit); Cent. Dauphin Sch. Dist. v. Am. Cas. Co., 426 A.2d 94, 97 (Pa. 1981) (over-collecting taxes); Am. Med. Sec., Inc. v. Exec. Risk Specialty Ins. Co., 393 F. Supp. 2d 693, 710 (E.D. Wis. 2005) (claim payments avoided in alleged violation of an insurance statute); cf. Granite State Ins. Co. v. Aamco Transmissions, Inc., 57 F.3d 316, 320 (3d Cir. 1995) (ruling that deceptive advertising was not “unfair competition” covered under the policy and noting that in “this case a finding of coverage would mean that Granite would be obliged to reimburse Aamco for the costs to defend and settle the Tracy case but that Aamco could retain whatever funds it received by reason of the Tracy plaintiffs having obtained transmission services from Aamco franchisees”).
[27] Ryerson Inc. v. Fed. Ins. Co., 676 F.3d 610, 613 (7th Cir. 2012).
[28] “Otherwise, the [policyholder] would retain the proceeds of his illegal acts, merely shifting his loss to an insurer.” Bank of the W. v. Superior Court, 833 P.2d 545, 555 (Cal. 1992); accord Level 3 Commc’ns v. Fed. Ins. Co., 272 F.3d 908, 911 (7th Cir. 2001); Exec. Risk Indem. v. Pac. Educ. Servs., 451 F. Supp. 2d 1147, 1160 (D. Haw. 2006).
[29] Pan Pac. Retail Props. v. Gulf Ins. Co., 471 F.3d 961, 966–67 (9th Cir. 2006); Level 3 Communications, 272 F.3d at 910; Bank of the West, 833 P.2d at 555; Central Dauphin School District, 426 A.2d at 96.
[30] Local 705 Int’l Bhd. of Teamsters Health & Welfare Fund v. Five Star Managers, L.L.C., 735 N.E.2d 679, 683 (Ill. App. Ct. 2000).
[31] Restatement (Second) of Contracts § 345 cmt. b.
[32] Entitle Ins. Co. v. Darwin Select Ins. Co., No. 1:11-CV-01193, 2013 U.S. Dist. LEXIS 14218, at *19–20, (N.D. Ohio, Feb. 1, 2013); Health Net, Inc. v. RLI Ins. Co., 206 Cal. App. 4th 232, 253, 141 Cal. Rptr. 3d 649, 665 (Cal. Ct. App. 2012).
[33] August Entm’t v. Phila. Indem. Ins. Co., 52 Cal. Rptr. 3d 908, 917 (Cal. Ct. App. 2007) (quoting Toombs NJ Inc. v. Aetna Cas. & Sur., 591 A.2d 304, 306 (Pa. Super. Ct. 2002)).
[34] Waste Corp. of Am. Inc. v. Genesis Ins. Co., 382 F. Supp. 2d 1349, 1355 (S.D. Fla. 2005).
[35] August Entertainment, 52 Cal. Rptr. 3d at 919.
[36] Health Net, Inc., 206 Cal. App. 4th at 252, 141 Cal. Rptr. 3d at 665.
[37] Cement & Concrete Workers Dist. Council Pension Fund v. Ulico Cas. Co., 387 F. Supp. 2d 175, 181 n.2 (E.D.N.Y. 2005); Fed. Ins. Co. v. Arthur Andersen LLP, 36 Empl. Benefits Cas. (BNA) 1995, 2005 WL 1838440, at *2 (N.D. Ill. Aug. 2, 2005).
[38] Pac. Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584, 592–93 (1st Cir. 2004); Health Net, Inc., 206 Cal. App. 4th at 252–53, 141 Cal. Rptr. 3d at 665–66; see also Fed. Ins. Co. v. Arthur Andersen LLP, 522 F.3d 740, 742 (7th Cir. 2008).
[39] Pacific Insurance Co., 369 F.3d at 592–93.
[40] May Dep’t Stores Co. v. Fed. Ins. Co., 305 F.3d 597, 601 (7th Cir. 2002).
[41] Health Net, Inc., 206 Cal. App. 4th at 242–43, 141 Cal. Rptr. 3d at 657–58 (Cal. Ct. App. 2012).
[42] Guyan Int’l, Inc. v. Travelers Cas. & Sur. Co., No. 10-1244, CCH Pens. Plan Guide (CCH) P 233, 470 (S.D. W. Va. Dec. 12, 2011).
[43] Fed. Ins. Co. v. Arthur Andersen LLP, 522 F.3d 740, 742 (7th Cir. 2008).
[44] See BOC Grp. v. Fed. Ins. Co., No. L-4271-03, 2007 WL 2162437, at *4 (N.J. Super. Ct. App. Div. July 30, 2007) (applying benefits exclusion).
[45] Cement & Concrete Workers Dist. Council Pension Fund v. Ulico Cas. Co., 387 F. Supp. 2d 175, 178 (E.D.N.Y. 2005).
[46] Pac. Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584, 586–87 (1st Cir. 2004).
[47] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011).
[48] See Restatement (Second) of Contracts §§ 155, 166.
[49] This passage overlooks the uncertainty as to whether the reformation of an ERISA plan is of a contract or of a trust. The Amara district court opted for contract reformation, and while the explanation of trust reformation differs from the one for contract reformation, breach of a reformed trust is no more insurable than breach of a reformed contract is.
[50] CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1881 (2011).

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