The United States District Court for the Southern District of Ohio, applying Ohio law, has held that an ERISA exclusion in two E&O policies barred coverage for a lawsuit filed by the United States Department of Labor alleging ERISA violations in connection with an employee stock ownership program (ESOP) stock purchase.  Gemini Ins. Co. v. Potts, 2020 WL 4000977 (S.D. Ohio July 15, 2020).

The president and CEO of a company that provides trustee services to ESOPs executed a stock purchase agreement on behalf of an ESOP.  Because the company relied on a flawed valuation opinion to purchase the stock, the stock was overvalued, and the transaction resulted in a significant financial loss to the ESOP.  The Department of Labor filed an action against the company, the president, and the ESOP alleging ERISA violations.  The company’s professional liability insurer intervened and sought a determination that it had no duty to defend or indemnify because the policies it issued excluded claims for “violation of or failure to comply with the Employee Retirement Income Security Act of 1974 (ERISA) or similar provisions of any Federal, State or local statutory law or common law.”

The defendants argued that the exclusion was ambiguous and limited to employee benefits claims, and that applying the exclusion beyond employee benefit claims rendered coverage illusory.  In response, the insurer argued that: (i) the ERISA exclusion was unambiguous; (ii) the exclusion was not limited to any subset of ERISA claims; and (iii) the policies’ “professional services” definition and the ERISA exclusion did not conflict because there were other non-ERISA claims to which the policies would apply.

The court agreed with all three of the insurer’s arguments and held that the insurer had no duty to defend or indemnify.  First, the court concluded that the ERISA exclusion was unambiguous, and its plain language should be given effect.  Second, the ERISA exclusion was not limited to employee benefit claims.  The court determined that the “unequivocal” language of the exclusion “clearly demonstrate[d]” the intent to exclude any claim arising from an actual or alleged ERISA violation without limiting the exclusion’s applicability to a subset of ERISA claims.  Third, no conflict existed between the exclusion and the definition of “professional services” in the policies.  The court concluded that the policies were not illusory because they provided coverage for non-ERISA professional services claims, including negligent misrepresentation claims and advice regarding employee compensation.  The court held that coverage was not illusory as long there was “at least one example to which coverage would apply.”  Accordingly, the ERISA exclusion barred coverage.