ERISA Exclusion Bars Coverage for Claims Arising From Denial of Employee’s Insurance Benefits

The United States District Court for the Southern District of California has held that a liability insurer had no duty to defend a claim made against an insured arising out of the denial of an employee’s life insurance benefits because coverage was barred by an ERISA exclusion.  By Referral Only, Inc. v. Travelers Prop. Cas. Co. of Am., 2019 WL 1559145 (S.D. Cal. Apr. 10, 2019).

The insured, a professional services company, offered disability and life insurance plans to its employees.  One employee who contributed to a plan was diagnosed with cancer and collected long-term disability until her death.  After her death, her beneficiary submitted a life insurance claim.  The life insurer denied coverage, asserting that the employee’s coverage had terminated prior to her death, despite her continued payments.  The employee’s beneficiary filed suit against the employer, asserting that the employer failed to advise the employee that her eligibility for coverage had expired and the employer had a duty to explain the plan such that the employee could elect to continue coverage.  The company’s liability insurer denied coverage for the lawsuit.

In the resulting coverage litigation, the insurer argued that the policy was not triggered because coverage applied only to negligent acts committed during the “administration” of an employee benefit program, meaning ministerial tasks and not “substantive failures to discharge fiduciary obligations.”  The district court rejected the insurer’s “construction of the policy,” finding that the term “administration” encompassed providing information to employees.  The court explained, “[w]hether ministerial or not, providing information regarding eligibility is expressly within the scope of coverage."

The insurer argued in the alternative that an ERISA exclusion barred coverage for the suit.  The exclusion barred coverage for loss for which “any insured is liable because of liability imposed on a fiduciary by [ERISA].”  The district court agreed with the insurer, finding the exclusion clear and unambiguous.  The court rejected the insured’s argument that the term “fiduciary” could be read so broadly as to make coverage for the administration of pension plans illusory, holding that the “plain and clear meaning of [the] exclusion is that it excludes only those ERISA claims that allege a breach of fiduciary duty under ERISA.”  The court also found that both causes of action against the insured fell within the exclusion because both alleged the breach of fiduciary duties for failing to advise the employee of the termination of her coverage.


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