Coverage for Suit Arising from Settlement of Previous Litigation Not Barred by Prior and Pending Proceeding Exclusion

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Applying California law, the United States Court of Appeals for the Ninth Circuit has held that a fiduciary liability policy’s Prior and Pending Proceeding Exclusion did not bar coverage for litigation concerning implementation of a settlement agreement resolving a prior lawsuit because the two actions did not “arise out of the same facts or circumstances.” San Joaquin County Employees’ Ret. Ass’n v. Travelers’ Cas. & Sur. Co., 2021 WL 1310665 (9th Cir. Apr. 8, 2021). Further, an Inadequate Funding Exclusion did not apply because the loss did not arise out of insufficient funding of the benefit plan as a whole.

In 1998, employee benefit plan members brought suit against the insured plan asserting that the California Supreme Court’s holding in Ventura County Deputy Sheriffs’ Association v. Board of Retirement, 16 Cal. 4th 483 (1997), applied retroactively to require that certain compensation be deemed “compensation earnable” for purposes of calculating retirement benefits (the 1998 Action). The 1998 Action resulted in a settlement agreement in 2001 (the 2001 Agreement) that established a supplemental reserve fund to provide plan members with new retirement benefits based on agreed-upon formulas. In 2017, members of the plan brought suit (2017 Action), alleging that the plan made improper reserve allocation decisions between 2001 and 2018 and adopted policies that led to the suspension of benefit payments created by the 2001 Agreement.

The plan sought coverage for the 2017 Action from its fiduciary liability carrier. In light of the earlier 1998 Action, the insurer denied coverage based on the application of a Prior and Pending Proceeding Exclusion, which provided that the insurer “will not be liable for Loss for any Claim based upon or arising out of any fact, circumstance, situation, event or Wrongful Act underlying or alleged in any prior or pending civil, criminal, administrative or regulatory proceeding against [the plan].” The carrier also denied coverage based on the application of an Inadequate Funding Exclusion, which barred coverage for “Loss for any Claim based upon or arising out of . . . the inadequate funding of the Benefit Plan.”

In the ensuing coverage litigation, the district court granted summary judgment to the insurer, holding that the 2017 Action arose out of and “has at least a slight connection with the allegations” in the 1998 Action, thus triggering the Prior and Pending Proceeding Exclusion.

On appeal, the Ninth Circuit reversed. The court explained that, regardless of how broadly “arising out of,” is read, a claim is not precluded by the Prior and Pending Proceeding Exclusion unless it arises out of some “fact, circumstance, situation, event or Wrongful Act underlying or alleged in a prior proceeding.” Applying this construction, the court concluded that the 1998 Action did not concern the terms of the 2001 Agreement or its implementation. The court reasoned that the facts and circumstances that gave rise to the 2017 Action could not underlie or have been alleged in the 1998 Action because the supplemental benefits did not exist in 1998.

The court also rejected the application of the Inadequate Funding Exclusion, concluding that the exclusion did not apply because the policy defined “Benefit Plan” to mean the plan as a whole, and not any individual reserves or accounts within the plan.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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