Case Updates Archives - Page 21 of 21

Can a plan participant sue for breach of fiduciary duty when his individual account is diminished by a failure of the administrator to follow his investment instructions? The U.S. Supreme Court answered this important question in the affirmative in James LaRue v. DeWolff, Boberg & Associates Inc., 128 S. Ct. 1020 (2008). LaRue filed an action under ERISA alleging that his employer (also the plan administrator) breached its fiduciary duty with regards to an ERISA-regulated 401(k) retirement savings plan by failing to follow his investment instructions. Relying on the Supreme Court’s ruling in Massachusetts Mutual Life Insurance Co. v. Russell that a participant could not bring a suit to recover consequential damages resulting from the processing of a claim under a plan that paid a fixed level of benefits, the Fourth Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of the plan on the grounds that section 502(a)(2) did not provide a remedy for LaRue’s “individual injury.” The Supreme Court disagreed.

In an opinion written by Justice Stevens, the Court held that “although § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of the plan assets in a participant’s individual account.” The Court reasoned that in the context of defined contribution plans, the misconduct did not need to threaten the solvency of the entire plan in order for section 409 (which provides remedies for breach of fiduciary duty) to apply. Rather, the legislative history and plain language of the statute authorizes a participant to enforce fiduciary obligations under ERISA, and the administrator’s failure to follow the LaRue’sinvestment instructions could qualify as a breach of those duties.

The Ninth Circuit recently addressed, for the first time, whether the standard of review analysis for “top hat”ERISA plans is the same as for other ERISA plans. InSznewajs v. U.S. Bancorp Amended and Restated Supplemental Benefits Plan, 572 F.3d 727 (9th Cir. 2009), Franciene Sznewajs, the ex-wife of co-defendant Robert Sznewajs, challenged the Plan’s decision to treat Robert Sznewajs’ second wife, Virginia Sznewajs, as his surviving beneficiary. The Plan Administrator denied Franciene’s claim for benefits because it interpreted Robert’s “retirement” to have occurred when Robert started collecting benefits. Franciene argued that “retirement” meant the date of Robert’s termination of employment. The issues on appeal were the appropriate standard of review and the definition of retirement under the Plan.

The employee benefit plan in this case is known as a “top hat”plan. ERISA “defines a top hat plan as one which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.”Sznewajs at *4. Because of the specialized nature of “top hat” plans, Congress exempts such plans from certain ERISA regulations. Gilliam v. Nevada Power Co., 488 F.3d 1189, 1192-93 (9th Cir. 2007).

In most ERISA cases, the administrator’s claim decision is reviewed under the de novo standard of review unless the plan documents grant the administrator discretionary authority. Here, Franciene argued that, despite the discretion granted to the plan administrator, the district court should utilize the de novo standard of review because payments made to beneficiaries come directly from the company’s pockets and those payment decisions are made by the company’s executive committee. Franciene’s argument was consistent with holdings in the Third and Eighth Circuits, both of which have ruled that “top hat” plans are subject to a de novo standard of review despite the existence of a grant of discretionary authority for the very same reasons. However, the Ninth Circuit disagreed, explaining that applying a de novo standard of review to “top hat” plans “would create unnecessary confusion.” Therefore, in the Ninth Circuit, “top hat” plans are subject to the same standard of review analysis as other ERISA plans.

Finally, in making this ruling, the court found that the Plan did not abuse its discretion in its interpretation of the term “retirement.”

In Amer. States Ins. v. Progressive Casualty Ins., 180 Cal. App. 4th 18 (2009), the California Court of Appeal addressed the “peculiar risk” doctrine in the context of an insurer’s duty to defend.

Victor Meza was a self-employed truck driver who was hired by Western Trucking LLC (“Western”) as an independent contractor. While driving a tractor trailer owned by Western and insured by Wilshire Insurance Company (“Wilshire”), Meza collided with a pedestrian, Yevdokia Bristman, seriously injuring him. Bristman later sued the grading contractor who hired Western, Vinci Pacific Corporation and the general contractor, Garden Communities (collectively “Vinci Pacific”).

Meza’s liability insurance carrier was Progressive Casualty Insurance Company (“Progressive”) and American States Insurance Co (“American”) provided the commercial auto liability policy covering Western and Vinci Pacific. American tendered its defense of the Bristman suit to Progressive who disclaimed coverage. American then sued Progressive, seeking a declaration that Progressive had a duty to defend. The trial court held that the “peculiar risk” doctrine did not apply and that Progressive did not have a duty to defend.

American appealed and the appellate court reversed the trial court’s decision, holding that the Progressive had a duty to defend American against Bristman’s lawsuit based on the “peculiar risk” doctrine. The “peculiar risk” doctrine is a form of vicariously liability where an owner or contractor can be held directly liable for damages that an independent contractor causes by negligently performing his work. Progressive argued that this was a simple automobile accident that did not implicate any special or inherent danger in connection with the subcontractor’s operation of the truck. The Court of Appeal disagreed. Instead, the court noted that the Vinci Pacific allowed its subcontractors to use an entrance that required drivers to execute a U-turn, jump a curb, cross two pedestrian crosswalks and drive on the sidewalk, all without the assistance of flagmen. This, the court reasoned, represented a level of control by the general contractor over the contractor’s work that involved a special, recognizable and inherent danger. As a result, Vinci Pacific was potentially liable for Bristman’s injuries under the vicarious liability theory of the “peculiar risk” doctrine.

Having established that potential liability existed, the court then held that Progressive had a duty to defend stating, “It is enough that a single claim is potentially covered by the policy; the insurer owes a duty to defend even if all other claims against the insured are clearly not covered […] [T]he insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot; the insurer, in other words, must present undisputed facts that eliminate any possibility of coverage.”

In holding that Progressive owed a duty to defend Vinci pursuant to the “peculiar risk” doctrine, the court noted two caveats. First, that “where more than one insurer owes a duty to defend, a defense by one constitutes no excuse of the failure of any other insurer to perform.” Second, that Progressive “may have a right to be reimbursed for defense costs allocable solely to claims for which there was no potential vicarious coverage under their policies.”

Having concluded that a duty to defend existed based on potential liability under the peculiar risk doctrine, the Court of Appeal reversed and remanded the case for further proceedings.

ERISA Authorizes Breach of Fiduciary Duty Action for Misconduct When it Impairs Plan Assets in Participant’s Individual Account

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