United Association Local 38 Pension Trust Fund v. Aetna Casualty & Surety Co. , 790 F.2d 1428 ( 1987 )

GILLIAM, District Judge:

This action arises from defendants’ refusal to defend and indemnify plaintiffs under an ERISA liability insurance policy in connection with an action by the Department of Labor charging plaintiffs with violations of ERISA.

I. FACTS

Plaintiffs are trustees of the employees’ benefit trust funds of the United Association Local 38 (hereinafter Local 38), a union of plumbers and pipefitters in San Francisco. The funds themselves are also plaintiffs. Defendants are the Aetna Casualty & Surety Company (Aetna) arid a wholly owned subsidiary of Aetna, the Standard Fire Insurance Company (Standard), and Huntington T. Block (Block), an insurance brokerage firm which represented Aetna and Standard in their dealings with plaintiffs in this case.

Plaintiffs had an ERISA insurance policy with Aetna, purchased through Block for the years 1975, 1976 and 1977. The claims against which the policy provided protection were claims for breach of fiduciary duty made against the trustees of the Local 38 funds. The policy involved was a “claims-made” policy. A claims-made policy is one which provides coverage only for claims which are made against the insured during the policy period, and not for actions that occur during the effective period of the policy but give rise to a claim only after the policy expires.

Important to this dispute is Clause VII of the ERISA policy for it provided for an exception to coverage only for claims made against the insured during the policy period. Clause VII was a claims-made extension clause and provided as follows:

If, during the policy period hereof, the insured shall first become aware of any wrongful act which may subsequently give rise to a claim against any insured and shall during the policy period hereof give written notice to the company of such wrongful acts, then any such claim which is subsequently made against the insured arising out of such wrongful act shall for purposes of this policy be deemed to have been first made against the insured during the policy period. (Emphasis added.)

Under Clause VII plaintiffs were required to send written notice to Aetna informing it of any wrongful acts. In 1977, during the effective period of the policy plaintiffs sought a renewal of their policy with defendants. They filed a renewal application with defendants in 1977 and included a 5500 form. The 5500 form is a detailed return that the Department of Labor requires for benefit plans which shows the placement of the benefit plan’s assets. Attached to this 5500 form was an audit for the Local 38 pension trust for the year ending June 30, 1976. Both the audit and the 5500 form provided the information that became the issues in the Department of Labor suit, namely lack of diversification and an improper loan. The audit also stated that the Department of Labor had been auditing the trust fund since 1971 to determine the fund’s compliance with applicable federal law. The renewal application, the 5500 form and the audit were all in writing and were sent to the insurance company during the effective period of the policy.

Also important to this dispute is Clause X of the ERISA policy. Clause X was an extension which permitted plaintiffs to obtain an additional twelve months of coverage for certain wrongful acts. Clause X provided:

... at any time prior to termination or cancellation of this policy as an entirety, whether by the Insured or by the Company, the Insured may give to the Company notice that it desires to be insured for an additional period of twelve (12) months after the effective date of termination or cancellation, at an additional premium of 25% of the premium hereunder, for claims made against the Insured during the said twelve (12) month period by reason of a Wrongful Act committed or alleged to have been committed prior to the effective date of termination or cancellation and which would be otherwise insured by this policy, subject to the following provision:

(a) such additional period shall be deemed part of the policy period and not an addition thereto;

(b) such additional period of time shall terminate forthwith on the effective date of any other insurance obtained by the Insured or its successors in business, replacing in whole or in part the insurance afforded by this policy, whether or not such other insurance provides coverage for loss sustained prior to its effective date.

Prior to the policy’s termination at the end of 1977 plaintiffs did not give notice to defendants that they wished to invoke Clause X so as to extend their coverage through the year 1978. Aetna through Block advised plaintiffs in a letter that coverage would cease on January 1, 1978. Apparently no defendant ever directed plaintiffs’ attention to the fact that Clause X was available to them and the policy expired at the close of 1977.

The Department of Labor made no formal claim against plaintiffs until January of 1979 when it filed suit in federal district court. (The Department of Labor had first informed plaintiffs of the possibility of an action against them in May of 1978.) The district court subsequently entered judgment against the plaintiffs for violations of ERISA.

In 1982, pursuant to the ERISA insurance policy, the plaintiffs sought reimbursement from the defendants for costs expended in defense of the Department of Labor’s suit, and indemnification for the judgment rendered against them. Standard refused to reimburse for the defense costs or to indemnify on the ground that the insurance policy had expired on January 1, 1978, six months before the Department of Labor’s claim was made.

Plaintiffs filed this action and the district court granted summary judgment for defendants holding that there was no genuine issue as to any material fact.

II. DISCUSSION

In order to grant a motion for summary judgment there must be no genuine dispute as to any material fact and the moving party must be entitled to judgment as a matter of law. The evidence and inferences that may be drawn from it must be construed in the light most favorable to the party opposing summary judgment. Beckham v. Safeco Insurance Co. of America, 691 F.2d 898, 902 (9th Cir.1982). An issue of fact is not material unless it has legal probative force as to a controlling issue. Western Transportation Co. v. Wilson & Co., 682 F.2d 1227, 1232 (7th Cir.1982).

A. CLAUSE VII

Defendant argues that the renewal application, the 5500 form and the audit were everyday financial data and cannot therefore constitute notice as required under Clause VII. Defendant also asserts that the language of the policy was clear and unambiguous and since the determination of ambiguity was a question of law summary judgment was properly granted.

If the interpretation of the language of the contract were the sole issue, the court might be able to resolve the matter on summary judgment for only questions of law would be in controversy. Beck Park Apartments v. United States Department of Housing, 695 F.2d 366, 369 (9th Cir.1982). However, this case cannot be so easily resolved, for where the controversy centers not on interpretation of the contract but on whether the terms of the contract were met the case must be submitted to the trier of fact. A determination that the contract was clear and unambiguous can only help the trier of fact to determine whether the terms of the contract were met or not. Whether the renewal application together with the 5500 form and the audit complied with the terms of Clause VII so as to constitute notice is a material issue of fact for it has legal probative force as to a controlling issue of fact. The specific issue here is the meaning or interpretation to be given the material furnished to defendants by plaintiffs. To put it slightly differently, what should the insurance company have understood from the information it was given. Viewed in the light most favorable to plaintiffs, the statements contained in the furnished material at the very least raise a genuine issue of material fact as to whether they constitute the notice that the contract requires. Therefore, a material issue of fact is in controversy and summary judgment as pertains to Clause VII must be denied.

B. CLAUSE X

Having held that the dispute under Clause VII requires reversal of the summary judgment order we are not required to reach plaintiffs’ claim under Clause X; if upon remand, plaintiffs prevail under Clause VII, the trier of fact need not consider the claim under Clause X. However, if plaintiffs do not prevail under Clause VII, the availability of a claim under Clause X will become important to their case. Therefore, in order to provide guidance to the parties and the district court we will examine the grant of summary judgment in light of that clause.

Plaintiffs argue that Clause X should be found to have been in effect so as to extend coverage to them for the year 1978. If Clause X had so extended coverage, the claim made by the Department of Labor against plaintiffs, of which they were first notified in May of 1978, would most likely have been covered by the policy. Although plaintiffs did not give notice to defendants that they wished to extend coverage under Clause X for the year 1978 they claim entitlement to such an extension by asserting that defendants had a fiduciary duty to notify them of their rights under Clause X.

As regards Aetna and Standard plaintiffs offer no support for their contention that a fiduciary duty existed. Block, however, was plaintiffs’ agent, Lien Ho Hsing Steel Enterprise Co. v. Weihtag, 738 F.2d 1455, 1460 (9th Cir.1984); Eagle Star & British Dominions v. Tadlock, 22 F.Supp. 545, 548 (S.D.Cal.1938), and therefore did owe them a fiduciary duty. Restatement (Second) of Agency § 387 (1958). Deposition testimony indicates that the scope of Block’s duty may have included the giving of notice of the availability of Clause X. The trust administrator testified that he relied exclusively on Block to inform him of his rights and liabilities and various options under the policy. Thus, plaintiffs have offered sufficient evidence to raise a material issue of fact, that is, whether Block violated a fiduciary duty by not informing plaintiffs of their right to an extension of coverage under Clause X. Summary judgment as pertains to Clause X is reversed for defendant Block; however, summary judgment for defendants Aetna and Standard is affirmed.

AFFIRMED in part and REVERSED and REMANDED in part.