A federal appellate court has held that ERISA claims related to the improper characterization of an employee as an independent contractor constituted an “employee benefits injury” under a comprehensive general liability policy. Euchner-USA, Inc. v. Hartford Cas. Ins. Co., 2014 WL 2576348 (2d Cir. June 10, 2014). The U.S. Court of Appeals for the Second Circuit also determined that making such a characterization fell within the policy’s definition of “administration” of an employee benefits plan.
A former employee sued the insured, alleging that the insured “improperly classified” the employee as an independent contractor, and asserted causes of action under ERISA. The insured sought coverage under a comprehensive general liability policy that provided coverage for “employee benefits injury,” which was defined as an “injury that arises out of any negligent act, error or omission in the ‘administration’ of [the insured’s] ‘employee benefits program.’” The policy defined “administration” to include “handling records in connection with ‘employee benefits program.’”
The insurer denied coverage because the policy excluded coverage for fraudulent conduct and for liability resulting from the insured’s failure to comply with regulatory reporting requirements associated with an employee benefits program. The insured filed a declaratory judgment action, and the lower court determined that the insurer did not have a duty to defend the insured.
In reversing the lower court’s decision regarding the insurer’s duty to defend, the appellate court determined that the former employee’s ERISA claims raised a reasonable possibility of negligent conduct by the insured. The appellate court explained that the ERISA claims did not allege that the insured improperly classified the former employee as a contractor with the purpose of interfering with her benefits, and the claims did not require that intent be established. Although the complaint stated that the insured “improperly and unlawfully” characterized the former employee as a contractor, the appellate court determined that the allegation did not fall within the exclusion for intentional wrongdoing because it was a legal conclusion and not a factual allegation.
The appellate court also found that determining the former employee’s eligibility for the 401-K plan may reasonably be considered part of the program’s recordkeeping function. The appellate court disagreed with the insurer’s argument that “administration” entailed only ministerial actions, noting that classification of an individual as either an independent contractor or employee for purposes of eligibility is not a matter of discretion.