A recent Sixth Circuit Court of Appeals decision serves as a warning to policyholders: read your entire policy, understand each provision and confirm that the policy language accurately reflects your understanding of the coverage you purchased.
Navigating an insurance policy is not easy. A policy’s declarations, general terms, insuring agreements, definitions, exclusions, conditions and endorsements collectively set forth the scope of the policy’s coverage. With very rare exceptions, both the insurer and the policyholder will be bound by the language found in the policy. This is true even if the language in the policy is unfavorable to the policyholder and does not cover risks the policyholder was attempting to mitigate through insurance.
A recent decision from the Sixth Circuit Court of Appeals demonstrates some rather unforgiving rules of insurance-policy interpretation. See Secretary of Labor, et al. v. Potts, et al., No. 20-3856, 20-3895 (Sixth Circuit, Nov. 24, 2021). The case involved an errors and omissions policy (also called a professional liability policy) that provided coverage to an independent ESOP trustee. The policy insured against claims for acts, errors, or omissions in performing “professional services.” But the policy’s standard insurance form contained an exclusion for “[v]iolation of or failure to comply 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 causing an ESOP to overpay for company stock. The claims clearly related to the ESOP trustee’s professional services, but the insurer relied on the ERISA exclusion to deny coverage. The insurer intervened in the DOL’s lawsuit against the policyholder and sought a declaration from the court 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 granted judgment for the insurer, finding that the ERISA exclusion was unambiguous and applied to the ERISA claims that the DOL brought.
In the Sixth Circuit, the trustee argued that the exclusion should not be enforced because the parties’ intent was for the insurance policy to 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 business as an ESOP trustee. But the Sixth Circuit held that under Ohio state law, which had to be applied to the parties’ disputes, the court was required to construe the coverage according to the plain, unambiguous language of the policy. The ERISA exclusion was clear and unambiguous. The court refused to consider materials the trustee submitted to the broker or insurer when applying for the coverage or other documents that purportedly reflect the trustee’s intent in obtaining the policy.
Notably, one judge wrote a concurring opinion and observed that the case came close to one involving “illusory” coverage – a policy that essentially provides no coverage for the insured’s risks - in which case the court might not enforce an exclusion as written. But under Ohio law, the doctrine of illusory coverage is extremely narrow, and difficult to prove. The trustee’s policy did provide some coverage for the trustee, however narrow, and thus the policy was not illusory.
The lesson to be learned from this decision is that policyholders have to review their policies in full, and work with experienced brokers and insurance counsel when procuring policies. It is unfortunately common to see gaps in coverage that policyholders did not expect. The author regularly advises clients on procurement of fiduciary-liability policies, including policies issued to trustees.
