An employer sponsor and administrator of a group health benefits plan was sued for alleged violations of its fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) and the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). The employer in turn sought coverage from the insurance carrier from which it had purchased a fiduciary insurance policy. The carrier refused to defend the employer, basing its denial of coverage on the ground (among other grounds) that the claims against the employer did not constitute “wrongful acts” under the terms of the fiduciary policy. The employer brought suit against the carrier claiming that it was entitled to be defended.
The Fifth Circuit Court of Appeals affirmed the decision of the District Court in denying coverage under the fiduciary insurance policy. The reason is that the liability which was claimed was based upon the employer’s duty as a plan sponsor, not as a fiduciary of the benefit plan.
In asserting its entitlement to coverage, the employer pointed to the language from the suit which had been brought against it, alleging that it had “failed to provide continuation coverage to the terminated… employees and to otherwise satisfy any of the other obligations imposed upon [it] by COBRA.” The relevant COBRA obligations, at least as alleged, concerned the provision of access to the benefits under the medical plans.
The relevant provisions of the fiduciary insurance policy, which was expressly described as providing “fiduciary liability coverage,” insured only against claims of “wrongful acts.” The policy defined “wrongful acts” as “any breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by [ERISA]… or any negligent act, error or omission in the Administration of any Sponsored Plan.”
One is a “fiduciary” under ERISA only “to the extent… he exercises any discretionary authority or discretionary control respecting management… or disposition of [plan] assets….” (29 U.S.C. Section 1002(21)(A)).
The Court of Appeals found, as did the lower court, that any alleged failure to offer continuing benefits under its benefit plans rests upon the employer as a plan sponsor, and sponsorship acts or omissions are not fiduciary in nature. The Court of Appeals noted that some circuits (such as the Third Circuit Court of Appeals) have allowed fiduciary-based relief for failure to advise participants of COBRA rights. However, the Fifth Circuit has taken care to distinguish between fiduciary and statutory ERISA duties. The court reasoned that the offer of health benefits—the core of the relevant claim in the suit—would require inclusion of new participants in the employer’s benefit plan. This, it concluded, would be a settlor, not a fiduciary, function. (Mary Kay Holding Corp. v. Federal Insurance Co., 2009 U.S. App. LEXIS 2381 (5th Cir. 2009))