No Coverage under Commercial Liability Policy for Penalties and Costs Incurred Administering Employee Benefit Plan

The United States District Court for the Northern District of Georgia, applying Georgia law, has held that a commercial liability policy covering “sums that the ‘insured’ becomes legally obligated to pay as damages” provides coverage only for third-party claims, and not for a company’s payment of penalties to the U.S. Department of Labor (DOL) or other costs incurred administering its employee benefit plan. North Am. On-Site, LLC v. Zurich Am. Ins. Co., 2022 WL 3136006 (N.D. Ga. June 24, 2022).

A company discovered that it had erred in the administration of its employee benefits plan from 2015-2018, including by failing to enter required pre-tax deferrals and failing to provide the plan’s service provider with required information. In 2018, the DOL notified the company of its intent to assess a penalty of $50,000 for the company’s failure to submit an adequate annual report. In 2019, the DOL notified the company that payment of $14,800.00 by the plan administrator would settle all penalties asserted against the company. The company subsequently made payments to correct the errors and sought coverage under its commercial liability policy. The insurer denied coverage. 

In the ensuing coverage litigation, the company sought coverage for over $500,000 in losses, including approximately $300,000 in “corrective contributions” to the plan, $123,000 in legal fees, $54,000 in accounting fees, and $14,800 in late payments to the DOL. The insurer moved for summary judgment on numerous grounds, including that the insured had no obligation to pay liability damages to a third party and thus the “insuring agreement” was not triggered. 

The court granted summary judgment to the insurer, agreeing that the insuring agreement – which obligated the insurer to pay only “those sums that the ‘insured’ becomes legally obligated to pay as damages” – was not triggered. The court reasoned that the payments made by the insured were not for “damages” because no one sued or threatened to sue it for damages arising from its mismanagement of the plan.  Although the DOL had brought suit against the insured, it was only to recover penalties, not amounts due to plan participants. The court noted that the policies do not cover the “ordinary contractual duties” owed by the insured under the plan, “but only those breaches which cause an injury to a participant leading to a claim” against the company.  

Finally, the court held that the insurer did not waive its argument by failing to raise the insuring agreement defense in its denial letter. The court noted in this regard that it is well settled under Georgia law that “neither waiver nor estoppel can be used to create liability not created by an insurance contract and not assumed by the insurer under the terms of the policy.”      

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