A recent ruling from the Sixth Circuit Court of Appeals serves as a warning to policyholders: read your entire policy, understand each provision, and confirm that the wording of the policy accurately reflects your understanding of the coverage you have. bought.
Navigating an insurance policy is not easy. The declarations, terms and conditions, insurance agreements, definitions, exclusions, conditions and endorsements of a policy collectively define the scope of coverage of the policy. With very few exceptions, the insurer and the policyholder will be bound by the wording of the policy. This is true even if the wording of the policy is unfavorable to the insured and does not cover the risks that the insured was trying to mitigate through insurance.
A recent decision by the Sixth Circuit Court of Appeals demonstrates some rather ruthless rules for interpreting insurance policies. See Secretary of Labor, et al. v. Potts, et al., #20-3856, 20-3895 (Sixth Circuit, Nov. 24, 2021). The case involved an errors and omissions insurance policy (also known as a professional liability policy) that provided coverage to an independent ESOP trustee. The policy insured against claims for acts, errors or omissions in the performance of “professional services”. But the policy’s standard insurance form contained an exclusion for “[v]non-compliance or non-compliance with [ERISA] . . .”
The policyholder sought coverage for losses and expenses related to a Department of Labor (DOL) lawsuit, brought under ERISA, accusing the trustee of overpaying an ESOP for the shares of the company. The claims were clearly related to the professional services of the ESOP trustee, but the insurer relied on the ERISA exclusion to deny coverage. The insurer intervened in the DOL’s lawsuit against the policyholder and asked the court to declare that the insurance policy did not cover the DOL’s ERISA claims against the trustee. The district court enforced the ERISA exclusion in the policy and entered judgment in favor of the insurer, finding that the ERISA exclusion was unambiguous and applied to the ERISA claims that the DOL had filed.
In the Sixth Circuit, the trustee argued that the exclusion should not apply because the intention of the parties was that the insurance policy protect the trustee against business risks; therefore, it would make little sense for an ERISA exclusion to apply in a policy that insured an ESOP trustee against the primary risks the trustee faced in his or her business as an ESOP trustee. But the Sixth Circuit ruled that under Ohio state law, which was to be applied to the parties’ disputes, the court was required to interpret the coverage according to the plain and unambiguous language of the police. . The ERISA exclusion was clear and unambiguous. The court declined to consider documents the trustee submitted to the broker or insurer when applying for coverage or other documents purporting to reflect the trustee’s intention to obtain the policy.
Notably, a judge wrote a concurring opinion and observed that the case approached “illusory” coverage – a policy that provides essentially no coverage for the risks of the insured – in which case the court may not apply. an exclusion as written. But under Ohio law, the doctrine of illusory coverage is extremely narrow and difficult to prove. The trustee’s policy provided some coverage for the trustee, however narrow, and so the policy was not illusory.
The lesson to be learned from this decision is that policyholders should review their policies in their entirety and work with experienced insurance brokers and advisors when purchasing policies. Unfortunately, it is common to find gaps in coverage that policyholders did not expect. The author regularly advises clients on the purchase of fiduciary liability policies, including policies issued to fiduciaries.