Arizona Court Considers Coverage Under An Employment Benefit Endorsement

In its recent decision in Enterprising Solutions, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA (D. Ariz. Sept. 11, 2012), the United States District Court for the District of Arizona had occasion to consider whether an insured was entitled to coverage under a professional liability policy’s employee benefits liability coverage for its alleged failure to have properly calculated necessary contributions to fund a group medical and dental plan.

The insured, Enterprising Solutions, Inc. (“ESI”) was a professional employer organization, providing outsourced services such as payroll administration to employer-clients.   ESI and its clients would enter into “co-employer agreements” whereby it would assume various employer-related responsibilities.  Through these agreements, ESI became a co-employer of its clients’ employees.  At issue in the Enterprising Solutions litigation was ESI’s administration of an employee health benefit program and an employee dental plan.  Among other things, ESI assumed responsibility for determining the amount of contributions necessary to fund the plans.  The contribution levels established for the 2008 and 2009 plans turned out to be insufficient to cover claims and expenses, causing ESI it to terminate the plans.  As a result, ESI was the subject of numerous claims brought by plan participants.

National Union insured ESI under a Staffing Services Liability Policy, providing professional liability coverage ESI’s employment-related administrative services.  Of relevance, the policy excluded from coverage the “Insured’s failure to fulfill any duty or obligation imposed by Employment Retirement Income Security Act of 1974, including amendments to that law, or similar federal, state, or local statutory or common law.”  Also relevant to the coverage dispute was an Employee Benefit Liability (“EBL”) endorsement, which insured:

… all sums which you shall become legally obligated to pay as damages because of any claim made against you for “wrongful acts” arising out of “administration” of your “employee benefits program,” …

The EBL endorsement defined “administration” as:

(a) giving counsel to employees with respect to your “employee benefits program”;

(b) interpreting your “employee benefits” program”;

(c)  handling of records in connection with your “employee benefits program”; or

(d) effective enrollment, termination or cancellation of “employee” under your “employee benefits programs”

provided any action which gives rise to a “Wrongful Act” was authorized by you.

The EBL endorsement also contained an exclusion barring coverage for “all sums which you shall become legally obligated to pay as a loss because of any ‘breach of fiduciary duty’ or because of any ‘breach of fiduciary duty’ by any person for whom you are legally responsible and arising out of your activities as a fiduciary of any plan covered by this endorsement.”

National Union argued, among other things, that the underlying claims were not covered, as the claims did not result from a “wrongful act” and that in any event, the claims were excluded from coverage as a result of the ERISA exclusion and the breach of fiduciary duty exclusion.   The court agreed, albeit skeptically, that ESI’s alleged conduct constituted “wrongful acts” as that term was defined.  It nevertheless concluded that exclusions barred coverage for the conduct alleged.  Specifically, the court held that ESI’s responsibilities in determining the level of necessary contributions did not fall within the policy’s definition of “administration,” reasoning that it could find no authority for the proposition that “discretionary decision-making activities,” such as determining contributions, qualify as “administration” of an employee benefit plan.  The court further noted that:

Plaintiff's calculation of contribution levels involved the exercise of discretion and was not, therefore, merely administrative. In that respect, plaintiff's exercise of discretion in failing to properly calculate contributions is not included within the definition of "administration" and is beyond the scope of the policy.

The court also concluded that even if ESI’s miscalculation of contributions could be considered “administration” of an employee benefits program, the miscalculation was still undertaken in ESI’s fiduciary capacity to the plan participants.  “Fiduciary,” the court observed, is defined by ERISA as:

[A] person is a fiduciary with respect to a plan to the extent (I) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets; (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of the plan.

The court concluded that ESI qualified as a fiduciary as it had “control and authority” over the health and dental plans.  Specifically, the court found that ESI’s miscalculation of necessary contributions “was, indeed, the exercise of discretion relating to plan management and administration and was, consequently, subject to ERISA fiduciary standards.”  As such, the court concluded that the policy’s ERISA and breach of fiduciary duties exclusions served as additional grounds for noncoverage.