Key Requirements For Coverage Under Employee Benefits Liability Endorsement

October 4, 2005

Corporate America, facing an explosion of employee benefit-related costs and expenses, has been struggling in an effort to gain control of them.  Whether by reducing benefits or by increasing employee contributions, businesses continue to take every possible step to maintain benefits and, at the same time, enhance their profit margins, competitiveness, and shareholder value.

By the same token, it seems as if more and more current and former employees have been turning to the courts to assert claims that employers have wrongfully denied them employee benefits.  Typically, when a company is named as a defendant in such a lawsuit, it is likely to examine its insurance contracts - and, in particular, any that contain an "Employee Benefits Liability Insurance Endorsement" - to see if it is entitled to a defense and indemnification under the relevant insurance contract.  As with other insurance coverage questions, one must analyze the particular terms of the applicable insurance contract and endorsement, interpret the scope of the coverage afforded by them, and then compare the coverage afforded to the allegations of the claims made by the employee.

The Employee Benefits Liability Endorsement

A common employee benefits liability endorsement states, in relevant part:

"We will pay those sums that the insured becomes legally obligated to pay as damages because of loss sustained by any of your employees or former employees, or by the estate, heirs, legal representatives, beneficiaries or assigns of such person, arising out of any act, error or omission that occurs in the 'Administration' of your 'Employee Benefits Program.'  We will have the right and duty to defend any 'suit' against you seeking those damages, even if any of the allegations of the 'suit' are groundless, false or fraudulent."

There are two key terms in this endorsement:  "Administration" and "Employee Benefits Program."  The term "Administration" usually is defined as:

"(1)  Providing interpretations and giving counsel to your employees regarding your 'Employee Benefits Program';

"(2)  Handling records in connection with your 'Employee Benefits Program';

"(3)  Effecting the enrollment, termination or cancellation of employees under your "Employee Benefits Program';

"But does not include any act, error or omission of any person acting in the capacity of a fiduciary[1] under the Employee Retirement Income Security Act of 1974, including any amendments to and regulations relating to that act."

In addition, the term "Employee Benefits Program" is defined, in part, as:

"any of the following employee benefit plans and programs maintained for the benefit of your employees or former employees:

"(1)  Group life insurance, group accident and health insurance, employee pension plans, employee stock subscription plans, profit sharing plans, workers compensation, unemployment compensation, social security and disability benefits insurance ... ."

Therefore, generally speaking, an employee benefits liability endorsement may provide coverage to policyholders only if there was an act, error, or omission in the administration of an employee benefits program.

What Is An "Employee Benefits Program"?

Federal law[2] defines "employee benefit plan" to mean "an employee welfare benefit plan,"[3] an "employee pension benefit plan,"[4] or a plan that is both an employee welfare benefit plan and an employee pension benefit plan.

Under federal law, there is a significant difference between an "employee benefit program" and "wages."  For example, wages are excluded from the definition of an employee benefit plan in regulations issued under the federal statute governing employee benefits, the Employment Retirement Income Security Act, or ERISA.[5] Moreover, a plan to pay wages in the form of profits is not an employee benefit plan.

Courts will look to the underlying purpose of the agreement between the employer and employee to decide whether the payment to the employee is for benefits and thus is subject to ERISA, or is for wages and thus is not subject to ERISA.  As the U.S. Court of Appeals for the Fifth Circuit has made clear, where an agreement is intended to compensate employees for their services, the agreement is not an ERISA plan.[6]


The duty on the part of an insurer to defend the employer will arise, if at all, only if the allegations in a complaint occurred in the administration of the employee benefit plan.  "Administration" involves only routine, ministerial acts performed in relation to an employee benefit plan - and does not include discretionary, decision-making types of activities.

In one case,[7] an insurer sought a declaratory judgment that it did not have a duty to defend or indemnify its insureds for acts giving rise to an underlying suit alleging that the insureds had violated their fiduciary and statutory duties to the employee pension plan.  In part, the underlying action alleged that the trustees had violated their fiduciary duties and ERISA by investing too large a percentage of pension plan funds in the company's own securities.  The court determined that the employee benefit liability endorsement limited coverage to liability incurred in relatively routine, ministerial acts, and excluded from coverage actions taken in "the decision-making and monitoring involved in managing the Plan's investments."

In reviewing each claim to determine whether the alleged acts fell within the administration of the pension plan, the court noted that miscalculation of the percentage of funds invested in the company's own securities may have fallen under the policy's definition of "Administration."  However, the court determined that the underlying plaintiffs were complaining of "the investment itself," which did not fall within the policy's definition of "Administration."

Another case[8] involved an employee stock ownership plan ("ESOP") created by Darby Lumber, Inc.  To implement the ESOP, an Employee Stock Ownership Trust (the "Trust") purchased 565,217 of the one million outstanding shares of Darby Lumber stock for $6.5 million.  At the time the ESOP and the Trust were created, Robert and Peggy Russell were executive officers, directors, stockholders, and employees of Darby Lumber.

Several years later, employee participants in the ESOP filed suit against Darby Lumber, the Russells, and others alleging that the defendants had violated ERISA by overvaluing the stock sold to the Trust, causing the Trust to pay too much for its 565,217 shares.

Darby Lumber tendered the complaint to Indiana Lumbermens Mutual Insurance Company, which had provided Darby Lumber with a general commercial liability insurance policy that included an employee benefit liability endorsement in the aggregate amount of $1 million.  The endorsement covered "any negligent act, error or omission of the 'Insured' or of any other person for whose acts, errors or omissions the 'Insured' is legally liable, in the administration of the 'Insured's Employee Benefit Programs."  The coverage extended to Darby Lumber, its executive officers, directors, stockholders, and employees.  The coverage also extended to "profit sharing plans, pension plans [and] employee stock subscription plans."

Indiana Lumbermens disclaimed coverage, asserting that the allegations in the underlying complaint did not fall within the coverage of the policies.  Darby Lumber then filed suit seeking a declaratory judgment that the policy covered the acts alleged.

Darby Lumber relied on the endorsement's definition of "Administration" as:

"(1)  Giving counsel to 'Employees' with respect to the 'Employee Benefit Program';

"(2)  Interpreting the 'Employee Benefit Programs' for employees;

"(3)  The handling of records in connection with the 'Employee Benefit Programs';

"(4)  Effecting enrollment, termination or cancellation of 'Employees' under the 'Employee Benefit Programs' provided all such acts are authorized by the Insurance."

Darby Lumber contended that coverage existed because the ESOP could not exist, and no employees could be enrolled, without a purchase of Darby Lumber stock.  Darby Lumber argued that the purchase of stock effected enrollment, and that the allegations of wrongdoing related to the valuing and purchase of stock therefore fell within the administration of the ESOP and the Trust.

Indiana Lumbermens countered that the acts alleged in the employee complaint did not fall within the definition of "Administration."  It argued that it was the investment itself, and the valuation of Darby Lumber's stock, that was being complained of, not the administration of the ESOP.  Further, it argued that "effecting enrollment, termination or cancellation" did not extend to creation and funding of the ESOP and the Trust.

The court pointed out that Darby Lumber and the Russells were accused, in part, of overvaluing Darby Lumber stock that they sold to the Trust to be invested in the ESOP.  It concluded that the miscalculation of the value of the stock might involve, under certain circumstances, relatively routine ministerial acts within the definition of "Administration."  The court, however, contrasted the type of "ministerial acts" that might fall within coverage to the "decision-making and monitoring" involved in "managing" a benefits plan that did not.  The latter were clearly "excluded from coverage" by the definition of "Administration."

The Travelers Ruling

Recently, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court's decision that underlying suits did not involve "Administration" as defined in insurance contracts issued by Wausau Underwriters Insurance Company and Employers Insurance of Wausau that contained an employee benefits liability insurance endorsement.  In this case, Travelers Cas. & Surety Co. v. Wausau Underwriters Ins. Co.,[9] the court noted the definition of "Administration" contemplates "Administrative and ministerial" acts, not acts of a discretionary, decision-making nature.  The Ninth Court concluded that the wrongful acts alleged in the underlying complaints involved the discretionary acts of the employer in failing to pay into the program under which the employees were claiming.  Such acts were not "merely administrative."  Thus, they did not fall within the definition of "Administration" as "giving counsel to employees with respect to those benefits."  Indeed, the court stated that it agreed with the district court that "[t]here is simply no principled way to shoehorn a claim alleging failure to fund a profit-sharing program into an insurance provision covering 'providing interpretations,' 'giving counsel,' 'handling records,' or 'effecting the enrollment, termination or cancellation of employees' in an employee benefits program."

The court found that it was "plain on the facts of the [employees'] Complaints that [Wausau] did not insure the types of claims alleged in the Underlying Actions."


When faced with claims by current or former employees that seek wrongfully withheld benefits, companies will turn to insurers that have issued liability policies, and employee benefit liability insurance endorsements, for the defense and indemnification of such claims.  As those endorsements and case law make clear, coverage only will be available where the allegations allege that an act, error, or omission occurred in the "Administration" of an employee benefits program.


[1] A fiduciary is anyone who exercises discretionary authority or control respecting the management or administration of an employee benefit plan.  See, e.g., Kyle Rys v. Pacific Admin. Servs., 990 F.2d 513 (9th Cir. 1993).

[2] 29 U.S.C. §1002(3).

[3] The statute defines "employee welfare benefit plan" as "any plan, fund, or program ... maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services or (B) any benefit described in section 186(c) of this title (other than pensions on retirement or death, and insurance to provide such persons)."  29 U.S.C. §1002(1).

[4] ERISA defines "employee pension benefit plan" as "any plan, fund or program ... that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan."  29 U.S.C.§1002(2)(A).

[5] See 29 C.F.R. §2510.3-1(a)(1) and (b)(1) ("[e]mployee welfare benefit plan" and "employee pension benefit" shall not include ... [p]ayment by an employer of compensation on account of work performed by an employee").

[6] See Murphy v. Inexco Oil Co., 611 F.2d 570 (5th Cir. 1980).

[7] Maryland Cas. Co. v. Economy Bookbinding Corp. Pension Plan Trust, 621 F.Supp. 410 (D.N.J. 1985).

[8] Darby Lumber, Inc. v. Indiana Lumbermens Mutual Ins. Co., 30 Mont. F.Rpts. 219 (D. Mont. Aug. 28, 2002).

[9] 2005 U.S. App. Lexis 7500 (9th Cir. Apr. 28, 2005).

Reprinted with permission from the November 8, 2005 issue of the New York Law Journal. All rights reserved.



William M. Savino, Partner

Stephen J. Smirti, Jr., Partner


Insurance Coverage & Litigation