New York's Highest Court Holds IBM's Covered Acts Limited to Those Undertaken as ERISA Fiduciary
Cherilyn Rama | Bloomberg Law
The Court of Appeals of the State of New York, affirming a holding of the appellate division, held that an excess insurer, whose policy followed-form to a fiduciary liability policy, was not obligated to indemnify its insured where the insured was not acting as a fiduciary of a pension plan, but as the plan’s settlor.
Class Action Filed Against IBM
International Business Machines Corporation (IBM) provides a defined benefit pension plan for its employees. Plan participants brought a class action lawsuit against IBM, challenging as violative of the Employee Retirement Income Security Act of 1974’s (ERISA’s) laws against age discrimination (29 U.S.C. § 1054(b)(1)(G) & (H)) amendments IBM made to the pension plan that calculate the amount of retirement benefits based on a “benefit conversion factor” that correlates to the employee’s age. See Cooper v. IBM Personal Pension Plan, 274 F. Supp. 2d 1010 (S.D. Ill. 2003).
The Declaratory Judgment Action
The class action settled and IBM, maintaining that the primary policy had been exhausted, sought reimbursement from its excess insurer, Federal Insurance Company. Federal’s policy followed form to the underlying fiduciary liability policy issued by Zurich American Insurance Company. The policy provided coverage for “all Loss for which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured . . . for a Wrongful Act.” See Federal Ins. Co. v. International Bus. Machs. Corp., 78 A.D.3d 763, 764, 911 N.Y.S.2d 148, 150 (App. Div. 2010). “Wrongful Act” was defined, in part, as “any breach of the responsibilities, obligations or duties by an Insured which are imposed upon a fiduciary of a Benefit Program by [ERISA].” ERISA states that:
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
Federal filed suit against IBM, asserting that it had no duty to indemnify IBM for the underlying class action lawsuit. IBM argued that, because “fiduciary” was undefined by the policy, it should be given its plain and ordinary meaning, not the definition provided by ERISA. IBM further argued that because it was alleged to have violated ERISA and is a fiduciary of the benefit plans under the plain meaning of “fiduciary,” it is entitled to reimbursement for costs incurred in the underlying action.
IBM Not Acting as ERISA Fiduciary
Noting that the definition of “Wrongful Act” referred to a fiduciary in the context of ERISA, the court reasoned that IBM was not acting as an ERISA fiduciary based on the allegations of the underlying class action complaint. The court made the distinction between an employer acting in its capacity as a “fiduciary,” that is, faithfully administering the plan, or performing “settlor” activities, that is, setting up or changing benefit plans. The court concluded that IBM was not acting in its capacity as an ERISA fiduciary in amending the plan. Accordingly, the policy was clear on its face and the court affirmed the holding of the appellate division.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2012 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.