Pacific Insurance v. Eaton Vance ( 2004 )

United States Court of Appeals
For the First Circuit
Nos. 03-1691 and 03-1798
PACIFIC INSURANCE COMPANY, LIMITED,
Plaintiff, Appellant/Cross-Appellee,
v.
EATON VANCE MANAGEMENT,
Defendant, Appellee/Cross-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Howard, Circuit Judge,
Coffin and Campbell, Senior Circuit Judges.
Harvey Weiner with whom Barry D. Ramsdell and Peabody & Arnold
LLP were on brief, for appellant.
Jeffrey B. Maletta with whom Aimée E. Bierman and Kirkpatrick
& Lockhart LLP were on brief, for appellee.
May 27, 2004
HOWARD, Circuit Judge. These cross-appeals arise out of
an indemnification dispute between an employer and its insurer.
The principal issue is whether the employer must be indemnified for
certain belated contributions it made to the profit-sharing
accounts of various subsidiary employees. Upon determining that
these payments (and certain other amounts) were covered by the
relevant policy, the district court granted the employer's motion
for summary judgment in the amount of $1,015,138.94 and denied the
insurer's cross-motion for summary judgment seeking a declaration
of no coverage under the policy. See Pacific Ins. Co. v. Eaton
Vance Mgmt., 260 F. Supp. 2d 236 (D. Mass. Aug. 14, 2002); Pacific
Ins. Co. v. Eaton Vance Mgmt., 260 F. Supp. 2d 334 (D. Mass. April
30, 2003). We reverse in part, vacate in part, and remand.
I.
The relevant facts having been twice reported, see id.,we confine ourselves to the essentials.
A. The Plan
Since the 1950s, Eaton Vance Management ("Eaton Vance")1
and its predecessors have operated a qualified profit-sharing plan
("Plan")2 for their employees. Annual contributions to the Plan
1
Eaton Vance is a Massachusetts business trust, with its
principal place of business in Boston.
2
The Internal Revenue Service ("IRS") reviewed the Plan and
deemed it "qualified," with the result that Eaton Vance may deduct
any contributions made to it.
-2-
are discretionary and, if made, are derived from Eaton Vance's
profits in a given fiscal year. Of particular importance are the
Plan's employee-eligibility criteria.
Prior to November 1984, employees of Eaton Vance's
subsidiaries were not included in the Plan unless the respective
subsidiary expressly adopted the Plan by written resolution.3 In
July 1986, Eaton Vance adopted new Plan documents –- effective
November 1, 1984 ("1984 documents") –- that allegedly broadened the
Plan's eligibility criteria to include automatically subsidiary
employees unless specifically excluded. Supplying our own emphasis
to language that significantly differs from, or adds to, language
in the prior governing documents, see supra n.3, the 1984 documents
provide in pertinent part:
The term employee includes: (a) any common-law
employee of the employer . . . .
"Employer" means the employer named in the
last section of the adoption agreement, any
commonly controlled organization, and any
predecessor organization . . . .
An employee ordinarily becomes an active
participant on his entry date. However, there
are three exceptions: . . . (c) An employee is
not an active participant during any period in
which he is not an employee in an eligible
class.
3
Specifically, the governing documents defined "employee" as
"any employee of the employer" and defined "employer" as "the
employer named in the Adoption Agreement" (i.e., Eaton Vance) and
"any predecessor organization." The documents also provided that
"a commonly controlled organization may join the employer in
adopting this plan . . . by [adopting] a written resolution."
-3-
An employee is in an eligible class unless:
[he falls within one of four exceptions not
germane to this appeal].
Subject to the rules of this article, a
commonly controlled organization may join the
principal employer [Eaton Vance] in adopting
this plan. A commonly controlled organization
with any employees eligible must join the
principal employer in adopting this plan. No
other organization may do so.
An organization joins by a written
resolution . . . .
It is uncontested that, despite its adoption of the 1984 documents,
Eaton Vance management was unaware of the change in language.
Because Eaton Vance did not intend to broaden the
eligibility criteria (i.e., it continued to believe that a
subsidiary's affirmative adoption of the Plan was a condition
precedent to the subsidiary's employees' eligibility), it continued
to operate the Plan as it had prior to the adoption of the 1984
documents and treated as participants only those employees of those
subsidiaries that had expressly adopted the Plan. Accordingly, it
did not automatically establish accounts in the names of all
subsidiary employees. Nor did it specifically exclude them from
the Plan or provide them with information regarding the Plan.
B. The Claim Against Eaton Vance
On February 2, 1999, Wilfredo Hernandez, then an employee
of an Eaton Vance subsidiary (Compass Management, Inc.), sent to
Eaton Vance a letter indicating that money due him under the Plan
had not been deposited into his account. Upon receiving this
-4-
letter, Eaton Vance contacted its outside ERISA counsel for an
evaluation of Hernandez's claim. Although Compass had not adopted
the Plan by written resolution, outside counsel advised Eaton Vance
that, due to the plain language of the 1984 documents, Hernandez
likely would be successful if he chose to litigate. Further,
counsel warned Eaton Vance that there would be serious tax
consequences if the IRS discovered that the Plan had not been
administered according to its terms. Eaton Vance thereafter
adopted counsel's advice and has since steadfastly maintained –-
both before the district court and on appeal –- that the 1984
documents were worded so as to cover Hernandez and other similarly
situated employees.
On April 28, 1999, outside ERISA counsel sent to
Hernandez's attorney a letter acknowledging that Eaton Vance should
have recognized Hernandez and other "similarly affected
participants" as Plan participants. The letter also stated that
Eaton Vance would fund those accounts at the level they would have
been funded had the employees been recognized as participants all
along.4
4
In October 1999, Eaton Vance revised the plan language
(effective November 1, 1998) to reaffirm its intention that
employees of subsidiaries are not included in the Plan unless the
Plan has been adopted by written resolution of the subsidiary.
-5-
C. The Insurance Policy
Back in 1998, Pacific Insurance Company ("Pacific") had
issued to Eaton Vance a Mutual Fund Errors and Omission Policy
("Policy") effective from August 1, 1997, to August 1, 1999. The
Policy provided coverage for
[l]oss or liability incurred by [Eaton Vance],
from any claim made against [Eaton Vance]
during the Endorsement Period, by reason of
any actual or alleged failure to discharge his
or its duties or to act prudently within the
meaning of the Employee Retirement Income
Security Act of 1974 ["ERISA"] . . ., or by
reason of any actual or alleged breach of
fiduciary responsibility within the meaning of
said Act . . . in [Eaton Vance's] capacity as
a fiduciary with respect to any pension or
employee plan or trust.
D. The Notification & The Funding of Overdue Accounts
By letter dated June 18, 1999, Eaton Vance notified
Pacific of the Hernandez claim. Pacific thereafter responded with
a letter acknowledging receipt of Eaton Vance's letter.
Subsequently, Eaton Vance asked Pacific to agree to a filing with
the IRS under the Voluntary Compliance Review ("VCR") program.
(This filing had been proposed by outside ERISA counsel as a means
to end Eaton Vance's exposure to governmental penalties for
noncompliance with the 1984 documents.) Pacific acknowledged this
request but "before consenting to this action" urged Eaton Vance to
consider withholding any additional contributions to the Plan.
Pacific further stated that it was "reserv[ing] its rights" and
-6-
advised Eaton Vance "to take whatever action [it] deems appropriate
to protect Eaton Vance including the filing of a VCR application."
The VCR application ultimately was filed with, and
approved by, the IRS. Although Hernandez had been the only party
to make a claim under the Plan, Eaton Vance thereafter established
accounts for a total of forty-nine employees and contributed
$880,869.86 to those accounts (representing the amount -– principal
and interest –- needed to fund the accounts to the level they would
have attained had Eaton Vance timely contributed).
E. The Litigation
On June 8, 2000, Pacific filed a diversity action in the
District of Massachusetts seeking a declaratory judgment of no
coverage under the Policy. See 28 U.S.C. §§ 1332 and 2201.
Specifically, Pacific alleged, inter alia, that (1) Eaton Vance did
not breach its fiduciary duties or fail to discharge its duties or
act prudently within the meaning of ERISA; (2) the obligation to
make payments is not due "by reason of" a breach of fiduciary
responsibility or "by reason of" a failure of Eaton Vance to
discharge its duties; and, (3) even if there is coverage under the
Policy, a $1,000 per claim deductible exists for each excluded
employee. Eaton Vance counterclaimed, alleging that the Policy
covered its liabilities. Eventually, both parties moved for
summary judgment.
-7-
On August 14, 2002, the district court entered summary
judgment for Eaton Vance upon determining, inter alia, that
(1) Eaton Vance had breached its fiduciary duty under ERISA; and
(2) Eaton Vance's liability to the excluded employees was caused by
this breach. See Pacific Ins. Co., 260 F. Supp. 2d at 241-44. The
court did find, however, that there existed a $1,000 deductible for
each employee's claim; accordingly, it granted summary judgment to
Pacific on this issue. See id. at 247-48. Finally, on April 30,
2003, Pacific was ordered to pay Eaton Vance $1,015,138.94.5 See
Pacific Ins. Co., 260 F. Supp. 2d at 346-47.
These cross-appeals followed.
II.
A. Standards of Review
Summary judgment is proper when "the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to judgment as a matter of law." Fed. R. Civ. P. 56(c). In ruling
5
This amount was calculated as follows: $880,869.86 (the
amount –- principal and interest –- that Eaton Vance paid to fund
the employees' accounts) - $49,000 (the Policy's deductible) +
$148,876.28 (the prejudgment interest on the $880,869.86) +
$12,537.00 (the defense and investigation costs incurred prior to
the date on which Eaton Vance notified Pacific of Hernandez's
claim) + $5,787.16 (the prejudgment interest on the $12,537) +
$13,100.57 (the prejudgment interest on the post-notification costs
that belatedly were reimbursed by Pacific) + $2,968.07 (the costs
for deposition transcripts).
-8-
on the motion, the district court must view "the facts in the light
most favorable to the non-moving party, drawing all reasonable
inferences in that party's favor." Barbour v. Dynamics Research
Corp., 63 F.3d 32, 36 (1st Cir. 1995). And, of course, "[t]he
standards are the same where, as here, both parties have moved for
summary judgment." Bienkowski v. Northeastern Univ., 285 F.3d 138,
140 (1st Cir. 2002) (citing 10A Charles Alan Wright, Arthur R.
Miller & Mary Kay Kane, Federal Practice and Procedure § 2720, at
335-36 (3d ed. 1998) ("The court must rule on each party's motion
on an individual and separate basis, determining, for each side,
whether a judgment may be entered in accordance with the Rule 56
standard.")). The district court's rulings on the cross-motions
for summary judgment are reviewed de novo. See Calero-Cerezo v.
U.S. Dept. of Justice, 355 F.3d 6, 19 (1st Cir. 2004) (citations
omitted).
B. Analysis
In order for Pacific to be held liable under the Policy,
Eaton Vance must have incurred a (1) "loss or liability" (2) "by
reason of" (3) "any actual or alleged failure to discharge . . .
its duties or to act prudently within the meaning of . . .
ERISA . . . or by reason of any actual or alleged breach of
fiduciary responsibility within the meaning of [ERISA]." As
already stated, the district court determined that coverage existed
under the Policy because each element was satisfied. Without
-9-
necessarily opining on whether the facts of this case implicate
either the first or third prong, we turn directly to a discussion
of the second.
"[B]y reason of" is not defined in the Policy;
accordingly, if the language were ambiguous, we normally would
consider whether the phrase should be construed in favor of Eaton
Vance. See Cody v. Conn. Gen. Life Ins. Co., 439 N.E.2d 234, 237
(Mass. 1982) ("[I]f the contract is ambiguous, doubts as to the
meaning of the words must be resolved against the insurance company
that employed them and in favor of the insured." (citations and
internal quotation marks omitted)); F.D.I.C. v. Ins. Co. of North
Am., 105 F.3d 778, 786-87 (1st Cir. 1997) (applying Massachusetts
law and noting that the presumption against the insurer does not
apply "where the policy language results from the bargaining
between sophisticated commercial parties of similar bargaining
power" (citation omitted)).
Here, however, we need not reach the contra proferentem
issue because we consider the language unambiguous: "by reason of"
means "because of," Black's Law Dictionary 201 (6th ed. 1990), and
thus necessitates an analysis at least approximating a "but-for"
causation test. Cf. United States v. Rosa-Ortiz, 348 F.3d 33, 38
(1st Cir. 2003) ("The statutory phrase 'by virtue of,' by its plain
meaning, suggests a but-for causation test." (citing Webster's
Third New Int'l Dictionary 307 (defining "by virtue of" to mean "by
-10-
reason of"))); Three Sons, Inc. v. Phoenix Ins. Co., 257 N.E.2d
774, 776 (Mass. 1970) ("The words 'liability imposed . . . by
reason of any statute,' clearly imports a direct causal relation
between the fact of liability and the violation of a statute. To
qualify for this exclusion, liability must directly result from the
violation of the statute . . . ." (emphases added)). We therefore
reject Eaton Vance's assertion that "'by reason of' . . . is a more
generous standard that extends coverage beyond the strict 'but-for'
test Pacific seems to be applying."6 See Cody, 439 N.E.2d at 237
("A policy of insurance whose provisions are plainly and definitely
expressed in appropriate language must be enforced in accordance
with its terms." (citations and quotation marks omitted)).
Having defined the relevant language, we next consider
whether Eaton Vance's liability to the employees falls within the
Policy's scope. Eaton Vance argues that, even under a restrictive
reading of the Policy's causation element, coverage exists because
(1) the cause of Eaton Vance's liability was "its failure to
administer the Plan in accordance with the 1984 Plan Documents by
identifying the proper participants [i.e., Hernandez and other
similarly situated employees] and establishing and funding accounts
for them when contributions were made"; (2) "this failure was a
6
The authorities that Eaton Vance cites for support (a
Tennessee Supreme Court case and a piece in an insurance journal)
are not directly on point because they deal with construction of
the phrase "arising out of" rather than the "by-reason-of" language
at issue here.
-11-
breach of Eaton Vance's fiduciary obligations"; and that (3)
"[o]nce [this breach] occurred, no intervention from any other
force was required to bring about the liability." Presented with
a similar argument,7 the district court agreed with Eaton Vance:
"[The] failure to read the 1984 Plan Documents closely enough to
see that the scope of the Plan had changed was . . . a breach of
fiduciary duty which resulted in Hernandez's account not being
funded." Pacific Ins. Co., 260 F. Supp. 2d at 244 (emphasis
added).
Having had the benefit of additional briefing and oral
argument on this tricky issue, we arrive at a different conclusion.
As we see it, the relevant liability for which Eaton Vance seeks
recovery from its insurer is not one for breach of fiduciary duty
relative to the belatedly funded employee accounts; rather, Eaton
Vance seeks reimbursement for amounts it paid -– principal and
interest –- in satisfaction of its Plan-created obligation to
establish and fund those accounts to the level they would have
attained had Eaton Vance initially complied with the Plan. So
7
Specifically, Eaton Vance argued that
simply signing the 1984 Plan documents did not
proximately cause Hernandez's account to be unfunded[;]
[r]ather, the cause of Hernandez's unfunded account was
that Eaton Vance did not administer the Plan in
accordance with its terms, which is a breach of fiduciary
duty under ERISA that is covered by the Policy.
Pacific Ins. Co., 260 F. Supp. 2d at 243-44 (emphasis added).
-12-
understood, the cause of this obligation cannot be the breach of
the obligation; instead, in our view, this obligation derived from
the broadened eligibility criteria in the 1984 documents themselves
(as now interpreted by Eaton Vance), management's discretionary
decision to fund, and the employees' concomitant entitlement to
interest that would have accrued in their profit-sharing accounts
had Eaton Vance acted in accordance with the Plan by establishing
and funding the accounts.8 See, e.g., American Cas. Co. of
8
The interest at issue here is, essentially, the prejudgment
interest that a court might have awarded Hernandez and others had
they elected to litigate their claims for payment of benefits due
under the Plan. Cf. Cottrill v. Sparrow, Johnson & Ursillo, Inc.,
100 F.3d 220, 223-24 (1st Cir. 1996) ("In ERISA cases the district
court may grant prejudgment interest in its discretion to
prevailing fiduciaries, beneficiaries, or plan participants. . . .
Ordinarily a cause of action under ERISA and prejudgment interest
on a plan participant's claim both accrue when a fiduciary denies
a participant's benefits. . . . Setting the accrual date in this
manner not only advances the general purposes of prejudgment
interest . . . but also serves ERISA's remedial objectives by
making a participant whole for the period during which the
fiduciary withholds money legally due. . . . Figuring the accrual
date in this way also prevents unjust enrichment." (citations
omitted)). Accordingly, as we see it, the interest portion of the
$880,869.86 is part and parcel of what is due the employees under
the Plan and, as such, is not a liability incurred by reason of a
breach of fiduciary duty.
The result we reach makes sense from a policy perspective as
well. Because Eaton Vance wrongfully withheld the principal, it
presumably was able to earn interest on these monies –- interest
that otherwise would have been earned by the employees on their
accounts. As such, the interest represents benefits to Eaton Vance
on monies wrongfully withheld. If we were to hold that the Policy
covers these amounts, Eaton Vance would reap a substantial
windfall. This result would create a perverse incentive for
employers negligently to delay contributions while retaining the
monies in an interest-earning account safe in the belief that any
interest earned would be theirs to keep.
In any event, Eaton Vance made no significant effort –- either
-13-
Reading, Pa. v. Hotel & Rest. Employees & Bartenders Int'l Union
Welfare Fund, 942 P.2d 172, 176-77 (Nev. 1997) ("The refusal to pay
an obligation simply is not the cause of the obligation, and the
[insured's] wrongful act in this case did not result in their
obligation to pay; [its] contract imposed on [it] the obligation to
pay.").
Whether or not Eaton Vance breached its fiduciary duties
under ERISA by initially failing to administer the Plan in timely
accordance with its terms is thus of no import to the relevant
causation inquiry because the underlying obligation for which
reimbursement is sought existed regardless of whether Eaton Vance
first complied with its fiduciary duties or breached them.
Accordingly, we must also reject Eaton Vance's alternative argument
that the asserted breach of fiduciary duty was a concurrent cause
of the obligation. See 7 G. Couch, Couch on Insurance § 101:57 (3d
ed. 1997) ("The concurrent cause rule . . . takes the approach that
coverage should be allowed whenever two or more causes do
appreciably contribute to the loss, and at least one of the causes
is an included risk under the policy.").
before us or before the district court –- to argue that, even if
the principal payments are not covered under the Policy, the
interest should be covered. Cf. United States v. Zannino, 895
F.2d 1, 17 (1st Cir. 1990) ("[W]e see no reason to abandon the
settled appellate rule that issues adverted to in a perfunctory
manner, unaccompanied by some effort at developed argumentation,
are deemed waived.").
-14-
As we understand the situation, the difference between
what did happen (the belated funding of the accounts) and what
should have happened (the timely funding of the accounts) is only
one of timing: because Eaton Vance's management failed to read the
1984 documents prior to receiving the Hernandez letter, management
became aware of the company's liability to the accounts later than
it otherwise would have. Eaton Vance essentially argues this same
point in its brief: "Had Eaton Vance administered the Plan
according to its terms during each affected year, the omitted
participants would have had funded accounts at the time they came
to seek benefits."
But the fact that the alleged breach of fiduciary duty
resulted in the late payment of funds does not alter the essential
fact that the liability was "incurred . . . by reason of" the
adoption of the 1984 documents, management's discretionary decision
to fund the accounts of eligible employees, and the employees'
entitlement to the interest that would have accrued in their
profit-sharing accounts had Eaton Vance established and funded the
accounts as required by the Plan. The insurance policy at issue
covers debts "incurred . . . by reason of," inter alia, a breach of
fiduciary duty; it does not cover debts that are "incurred" through
a contractual obligation although belatedly paid because of a
breach of fiduciary duty.
-15-
As indicated above, Eaton Vance admits that Hernandez and
other similarly situated employees were, pursuant to the 1984
documents, automatically covered unless specifically excluded.
Indeed, the company acknowledges as much in its brief to this
court. There, in arguing that it breached its fiduciary duty under
ERISA, Eaton Vance concedes that "[t]he governing Plan documents by
their terms made all employees of the 'employer' -- Eaton Vance and
its commonly controlled organizations –- Plan participants."
(emphasis added). Effectively, then, Eaton Vance asserts that the
1984 documents established eligibility so as to render Eaton
Vance's failure to fund (in years in which funding was authorized)
a breach of fiduciary duty while at the same time arguing that, for
purposes of the Policy, the resulting obligation was incurred by
reasons other than the 1984 documents (and management's decision to
fund in the relevant years). Eaton Vance cannot have it both ways.
Would we have reached the same result had the employees'
claims wound up in litigation? While not intuitively obvious, the
answer is yes. This hypothetical lawsuit might have alleged
several theories of liability: for example, (1) breach of Plan
documents; (2) breach of fiduciary duties under ERISA; and (3)
failure to discharge duties or to act prudently within the meaning
of ERISA. Perhaps Pacific would have associated with Eaton Vance
-16-
in defending this lawsuit,9 which -– if Eaton Vance's outside ERISA
counsel is to be believed -- Hernandez might well have won.
But, in this hypothetical situation, the possibility that
Hernandez could have prevailed on one or more of his theories does
not end our analysis. Given the underlying facts surrounding the
Hernandez claim, any judgment for Hernandez for back-payment of
benefits wrongfully withheld under the Plan (and the hypothesized
amount-of-return thereon) necessarily would be derivative of a
finding that the Plan documents themselves (together with
management's discretionary decision to fund) created the underlying
financial obligation on which Hernandez sought performance --
performance that was due Hernandez prior to, and irrespective of,
the lawsuit. Accordingly, the Policy's causation requirement –-
"liability incurred . . . by reason of any actual or alleged
9
The Policy provides, in relevant part, as follows:
Coverage hereunder is extended to pay on behalf of
[Eaton Vance] . . . all: . . .
DEFENSE EXPENSES
EE. Costs and expenses incurred in the investigation
or defense of any claim for which coverage is provided
hereunder.
CONDITIONS
C-1. SETTLEMENT:
It shall be the duty of [Eaton Vance], and not
[Pacific], to defend claims. [Pacific] may, at its own
expense, but is not obligated to, associate with any
Insured in the investigation, defense or settlement of
any claim . . . .
-17-
failure to discharge his or its duties or to act prudently within
the meaning of [ERISA] . . ., or by reason of any actual or alleged
breach of fiduciary responsibility within the meaning of said Act"
–- would remain unsatisfied because the at-issue liability10 would
have been incurred by reason of something other than the listed
contingencies.11
The Seventh Circuit faced a similar situation in Baylor
Heating & Air Conditioning, Inc. v. Federated Mut. Ins. Co., 987
F.2d 415 (7th Cir. 1993). There, mistakenly believing that it had
no liability under a collective bargaining agreement, the employer
intentionally decided not to make payments to an employee pension
fund. After the fund was successful in its suit against the
employer for payment of the withheld benefits, the employer sued
its insurer for the value of the unpaid benefits, which allegedly
were insured under a liability policy.12 The Baylor court denied
10
The liability at issue would have been Eaton Vance's
liability to Hernandez for his share of the $880,869.86, which
represents the amount –- principal and interest -- that Eaton Vance
belatedly contributed to the accounts of the excluded employees.
11
However, if, for example, a group of hypothetical Plan
participants had been successful in a class action against Eaton
Vance (as trustee of the Plan) for damages stemming from the
trustee's failure prudently to invest the assets that properly had
been deposited into participants' accounts pursuant to the Plan,
Eaton Vance presumably would have had a claim under the Policy.
12
Despite Pacific's assertion that Baylor was "conceptually
identical" to this case, Eaton Vance makes no attempt meaningfully
to distinguish Baylor. In its brief, Eaton Vance says only that
"[t]he discretionary nature of contributions [in this case]
distinguishes [Baylor], which involved mandatory contributions
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coverage, explaining that the judgment against the employer for
pension-fund amounts due under a collective bargaining agreement
was not an "injury or damage caused by any negligent act, error, or
omission in the administration" of the program:
[The employer's] liability to the pension fund
is contractual. Although at the time [the
employer] refused to make fund payments it did
not believe it had any contractual obligation
to do so, these beliefs do not change the
contractual nature of the obligation. The
Fund was awarded amounts owed pursuant to the
collective bargaining agreement, not damages
for negligence, and these payments are not
covered by [the employer's] policy.
. . .
Under [the employer's] logic, any default
arising from a mistaken assumption regarding
one's contractual liability could be
transformed into an insured event. Indeed,
refusing to pay a debt in reliance upon
erroneous advice of counsel would convert a
contractual debt into damage arising from a
negligent omission. We dare not imagine the
creative legal theories treading just short of
malpractice and frivolity that could seek to
transform contractual obligations into insured
events.
987 F.2d at 419-20.13
under a collective bargaining agreement." We do not see why this
distinction should impact our analysis.
13
Similarly, in Oktibbeha County Sch. Dist. v. Corregis Ins.
Co., 173 F. Supp. 2d 541, 543 (N.D. Miss. 2001), the district court
reasoned as follows:
The school district had a duty to pay overtime
compensation because of the statutory requirements of the
[Fair Labor Standards Act], not because of any wrongful
act or omission of the school district. The school
-19-
We agree with the Seventh Circuit. It makes no sense to
permit a dereliction in duty to transform an uninsured liability
into an insured event. Cf. May Dept. Stores Co. v. Fed. Ins. Co.,
305 F.3d 597, 601 (7th Cir. 2002) (Posner, J.) ("It would be
passing strange for an insurance company to insure a pension plan
(and its sponsor) against an underpayment of benefits, not only
because of the enormous and unpredictable liability to which a
claim for benefits on behalf of participants in or beneficiaries of
a pension plan of a major employer could give rise, but also
because of the acute moral hazard problem that such coverage would
create. . . . Such insurance would give the plan and its sponsor an
incentive to adopt aggressive (just short of willful)
interpretations of ERISA designed to minimize the benefits due,
safe in the belief that if, as would be likely, the interpretations
were rejected by the courts, the insurance company would pick up
the tab. Heads I win, tails you lose.").14
district had a pre-existing obligation to pay these
employees for the overtime hours worked, an obligation
that was created by the FLSA. The policy states that
coverage will issue only if the school district suffered
a loss by reason of a wrongful act. The duty to pay
overtime is a matter of statutory law, and the obligation
to pay time and a half for every hour worked over a forty
hour week arose when the employees worked overtime hours.
14
We are aware that the policy at issue in May Department
Stores specifically excluded from coverage "benefits due or to
become due under the [Plan]." This fact, however, does not
undermine the persuasiveness of the analysis quoted in the text.
-20-
III.
For these reasons, we conclude that the district court
erred (1) when -- based upon an incorrect finding that the Policy
covered Eaton Vance's obligation to fund the relevant profit-
sharing accounts -- it held that Eaton Vance was entitled to
summary judgment for indemnification of amounts contributed to
these accounts (and prejudgment interest thereon),15 and (2) when
it denied Pacific's cross-motion for a summary-judgment declaration
of no coverage for these amounts.16 The court's judgment is
therefore reversed in part. Because we are unable to discern the
extent to which these errors influenced the district court's
determination that Pacific also was liable for certain amounts
peripheral to the funding of the accounts,17 the judgment is vacated
in part and remanded so that the court can determine, in the first
15
These amounts total $980,746.14: $880,869.86 + $148,876.28 -
$49,000. See supra n.5.
16
Because we conclude that no coverage exists under the Policy
for these amounts, we do not reach Eaton Vance's cross-appeal.
That appeal challenges the district court's grant of summary
judgment for Pacific on the separate issue of the Policy's
deductible, which became relevant as a result of the district
court's disposition of the coverage issue.
17
These amounts total $34,392.80: $12,537.00 (the defense and
investigation costs incurred prior to the date on which Eaton Vance
notified Pacific of Hernandez's claim) + $5,787.16 (the prejudgment
interest on the $12,537) + $13,100.57 (the prejudgment interest on
the post-notification costs that belatedly were reimbursed by
Pacific) + $2,968.07 (the costs for deposition transcripts). See
supra n.5.
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instance, whether Eaton Vance remains entitled to these amounts in
light of this opinion. Each party shall bear its own costs.
It is so ordered.
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