Claims Arising out of Insured’s Contractual Obligation to Provide Employee Benefits Plans Are Not Because of a Wrongful Act

The U.S. District Court for the Southern District of California, applying California law, has held that neither fiduciary nor employment benefits liability coverage applied to claims seeking benefits under an insured company’s employee benefits plan because the company’s liability arose, not from negligent acts or breaches of fiduciary duty, but from its contractual obligation to provide employees with benefit plans.  Erickson-Hall Constr. Co. v. Scottsdale Ins. Co., 2019 WL 719204 (S.D. Cal. Feb. 20, 2019).

The insured company offered employee benefit plans, which were administered by a Controller.  Unbeknownst to the company, the Controller failed to make the premium payments required to maintain and renew the employee benefit plans, and coverage lapsed.  Afterwards, three of the company’s employees suffered injuries or death that would have been covered under the employee benefit plans had the coverage not lapsed.  Upon learning that the coverage had lapsed, the claimants submitted demand letters to the company seeking payment of the benefits they would have been entitled to under the plans had they remained in effect.  The company ultimately settled these claims without litigation.

The company sought coverage for the underlying claims under two insurance policies: one that provided fiduciary coverage for loss that the company becomes legally obligated to pay by reason of a claim for a wrongful act and one that provided employee benefits liability coverage for amounts the company becomes legally obligated to pay because of an employee benefits injury, meaning an injury arising out of a negligent act, error or omission in the administration of the employee benefits program.  Both insurers denied coverage, and the company brought this coverage action.

In granting the insurers’ motions to dismiss, the court concluded that neither policy provided coverage because the company’s liability for the claims was not because of either a wrongful act or an employee benefits injury.  Specifically, the company’s responsibility to pay benefits under the employee benefits plans arose not because of any negligent acts or breaches of fiduciary duty by the Controller but because of its independent, contractual obligation to provide its employees with employee benefits plans and its corresponding obligation to pay premiums into those plans.