In a significant ruling for businesses managing employee benefits, the Eleventh Circuit Court of Appeals clarified that Employee Benefits Liability (EBL) coverage can be triggered even in the absence of third-party claims. The decision provides important guidance for businesses that administer employee benefit plans, such as 401(k) retirement programs, by expanding the scope of coverage under these policies.
The case arose from a dispute involving North American On-Site LLC (“North American”), a 401(k) plan administrator that made clerical errors while administering a retirement plan. These errors included failing to include certain employees in the plan and mishandling employees’ contributions. To rectify the mistakes and preserve the plan’s qualified status, North American incurred approximately $500,000 in legal and accounting fees, corrective contributions, and late payments to the Department of Labor.
Initially, North American sought guidance from its insurance broker, who advised that its Employee Benefits Liability policy would not cover the losses. After switching brokers, North American filed a claim with Zurich American Insurance Company, its insurer, only for Zurich to deny the claim. Zurich contended that EBL coverage was not triggered because no third-party claim had been made against North American.
The district court sided with Zurich, ruling that the policy’s insuring agreement, which covers damages from errors in the administration of employee benefit programs, required a third-party claim to be triggered. However, the Eleventh Circuit disagreed, finding that the policy’s wording did not require such a claim. Instead, the court emphasized that North American had become “legally obligated” to make corrective payments under federal regulations, which were critical to maintaining the 401(k) plan’s tax-deferred status.
The court rejected Zurich’s interpretation that a third-party claim was a prerequisite for coverage, arguing that such a requirement would unduly limit the purpose of the policy. Specifically, the court pointed out that the duty to defend provision within the policy was not intended to be a condition for the insurer’s obligation to cover damages. Under Georgia law, the policy should be read as a whole, and ambiguities should be interpreted in favor of the policyholder. The court ultimately vacated the district court’s summary judgment and remanded the case for further proceedings, allowing North American to pursue its claim for coverage.
This ruling underscores the importance of businesses carefully reviewing their insurance policies and understanding the scope of their coverage. In this case, the Eleventh Circuit applied established principles of policy interpretation, confirming that EBL coverage can apply in situations where a company is legally required to take corrective action, even without a third-party claim.
The case also highlights a key lesson for policyholders: relying on an insurance broker’s opinion alone may not always lead to the right outcome. North American’s experience shows that seeking legal counsel when coverage issues arise can help ensure businesses fully understand their policy rights and avoid costly mistakes.
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