RTFP – Trial Court Failed by Deciding in Error Without Considering Exclusions

What is a Fiduciary’s Liability?

Erickson-Hall Construction Co. appealed the district court’s grant of the motions to dismiss filed by Scottsdale Insurance Company and Hartford Fire Insurance Company. Erickson-Hall provided its employees with life and disability insurance benefits by purchasing and administering policies issued by third-party insurers to its employees (“Employee Benefits Plans”). To cover risks of loss arising from potential mistakes in administering the Employee Benefits Plans, Erickson-Hall obtained “fiduciary liability” insurance coverage from Scottsdale and Hartford.

In Erickson-Hall Construction Company, a California Corporation v. Hartford Fire Insurance Company, a Connecticut Corporation; Scottsdale Insurance Company, a Ohio Corporation, No. 19-55319, United States Court Of Appeals For The Ninth Circuit (April 8, 2020) the district court held that because Erickson-Hall incurred its claimed losses as a result of its contractual obligation to employees to provide the Employee Benefits Plans, any claim for indemnification and coverage would fall outside the scope of the insurance policies issued by Hartford or Scottsdale.

FACTUAL BACKGROUND

Erickson-Hall’s claimed losses were amounts it owed under a preexisting contractual obligation. Erickson-Hall contracted with its employees to administer the Employee Benefits Plans (which were issued by third-party insurers), not to make benefit payments under the Employee Benefits Plans when coverage is owed.

Erickson-Hall’s claimed losses were not “amounts [Erickson-Hall was] obligated to pay [its employees] by contract, independent of any Wrongful Act. To the contrary, but for the allegedly negligent acts of Erickson-Hall’s Controller, the premiums would have been paid, the Employee Benefits Plans would have been in effect, and the employees’ benefits would have been paid by third-party insurers. In the absence of such alleged negligence, Erickson-Hall would never have been liable for the claimed loss amounts.

Second, under California law, an insured’s losses for breach of contract are not uninsurable as a matter of law. Rather, the nature of the damage and the risk involved, in light of particular policy provisions, control coverage. Here, both insurance policies provide coverage for an error or omission in Erickson-Hall’s administration of its employee benefits, including giving counsel to or counseling employees as to their participation in such benefits and handling records in connection with such benefits.

THE ALLEGATIONS

The complaint alleges facts sufficient to show that the Controller utterly failed to counsel employees that their Employee Benefits Plans had lapsed on account of nonpayment of premiums. This constitutes an “omission” in the Employee Benefits Plans’ “administration” that resulted in an “employee benefits injury” or a “Loss,” as defined by each policy. The complaint also alleges that the Controller mishandled documentation—by failing to receive and process premium invoices, deduct premium amounts from employees’ paychecks, and paying premiums on behalf of Erickson-Hall and its employees—with respect to the plans. This constitutes another “error” or “omission” in the Employee Benefits Plans’ “administration.”

ANALYSIS

The “nature of the damage and the risk” that Erickson-Hall sought to cover was exactly that which did in fact transpire: The Employee Benefit Plans were negligently administered, resulting in a loss to Erickson-Hall.

Accepting these factual allegations as true for the purposes of deciding the insurers’ motions, Erickson-Hall has carried its burden that the loss falls within the basic scope of coverage.

However, the district court did not consider Hartford’s or Scottsdale’s arguments that certain policy exclusions bar coverage.

The Ninth Circuit, therefore, reversed the district court’s dismissal and remand for reconsideration of the insurers’ arguments as to exclusions that were raised in support of their respective motions to dismiss.

ZALMA OPINION

Fiduciary liability insurance provides coverage to an insured for breaching its contract with employees, or others, who are protected by the fiduciary relationship between the employees (in this case) and their employer. Since the facts showed that the employer, by not paying the premium on the employees health insurance, it breached the fiduciary relationship. However, since the trial court failed to consider the insurer’s claim that exclusions applied when it made its erroneous decision, the Ninth Circuit sent the case back to the trial court to decide whether the exclusions applied.


© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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