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A federal district court in California, applying Illinois law, has ruled that an exclusion in a commercial general liability insurance policy precluded coverage of a lawsuit alleging that the insured company had violated its fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) in connection with its employee welfare benefit plan.

The Case

Keith McBean sued United of Omaha Life Insurance Company and By Referral Only, Inc., asserting causes of action for recovery of benefits and breach of fiduciary duties under ERISA.

Mr. McBean alleged in his lawsuit that Teresa McGee was an employee of By Referral and was a participant in the By Referral Only, Inc. Employee Welfare Benefit Plan, which included disability and life insurance benefits and which was underwritten by United. According to Mr. McBean, Ms. McGee was diagnosed with cancer and subsequently took a leave of absence in June 2015. She returned to work on a part-time basis in October 2015, stopped working on August 10, 2016, and collected long term disability benefits through the plan and United until her death on August 5, 2017.

Mr. McBean said that he submitted a life insurance claim to United that United denied, asserting that Ms. McGee's coverage had terminated under the terms of the plan prior to her death. According to Mr. McBean, Ms. McGee continued to make premium payments to United while working part-time, and had never been notified that her coverage had ceased.

Mr. McBean alleged that By Referral had “fail[ed] to advise [Ms. McGee] that her eligibility for coverage had expired” and had “affirmatively advised” Ms. McGee “that she continued to be covered.”

By Referral sought a defense of the McBean lawsuit from its insurer, Travelers Property Casualty Company of America, under a commercial general liability insurance policy that included employee benefits liability coverage.

Travelers moved for summary judgment, arguing among other things that the policy's ERISA exclusion precluded coverage because Mr. McBean alleged that By Referral acted as an ERISA fiduciary and breached its fiduciary duties.

For its part, By Referral contended that the ERISA exclusion was ambiguous because “[d]etermining what constitute[d] a fiduciary duty under ERISA [was] not within the 'working vocabulary' of the average insured.”

The District Court's Decision

The court granted the insurer's motion.

In its decision, the court explained that the policy's ERISA exclusion provided that “[t]his insurance does not apply to . . . [l]oss for which any insured is liable because of liability imposed on a fiduciary by [ERISA].”

The court found that the “plain and clear meaning” of the exclusion was that it excluded “only those ERISA claims that allege[d] a breach of fiduciary duty under ERISA.”

The court was not persuaded by By Referral's contention that Travelers had a duty to defend because By Referral's conduct as alleged in the McBean lawsuit was not solely based on breach of fiduciary duties.

With respect to the first cause of action for recovery of benefits, the court pointed out, Mr. McBean alleged that By Referral “violated [its] fiduciary duties by failing to advise [Ms. McBean] that her eligibility for coverage had expired, while at the same time accepting her premiums and in effect advising her that she continued to be covered . . . while [By Referral] affirmatively advised her and her family that she continued to be covered[.]”

The court then found that, with respect to his second cause of action for equitable relief, Mr. McBean alleged that By Referral “had a duty to promote the interest of employees and their beneficiaries,” which obligated By Referral to “explain to plan participants and beneficiaries the material terms and conditions of the relevant plan documents[,] to provide them with adequate notice of circumstances which may result in disqualification, ineligibility, or denial or loss of benefits and what was needed to continue their elected life insurance coverage.”

The court ruled that, based on Mr. McBean's allegations, all of By Referral's alleged conduct arose out of its alleged breach of fiduciary duties imposed upon it by ERISA. In other words, the court added, Mr. McBean sought to hold By Referral liable for loss incurred “because of liability imposed on a fiduciary by [ERISA].” The Travelers policy “clearly and unambiguously” precluded coverage for such losses and, therefore, Travelers did not have a duty to defend By Referral, the court concluded.

The case is By Referral Only, Inc. v. Travelers Property Casualty Co. of America, No.: 18cv1695-MMA (JLB) (S.D. Cal. April 10, 2019). Attorneys involved include: For By Referral Only, Inc., a California corporation, Plaintiff: Gastone Bebi, LEAD ATTORNEY, The Law Offices of Gastone Bebi, San Diego, CA. For Travelers Property Casualty Company of America, Defendant: Leo Lavoy Ashley, III, LEAD ATTORNEY, Weston & McElvain, Los Angeles, CA; Richard C Weston, LEAD ATTORNEY, Weston and McElvain LLP, Los Angeles, CA.