Fifth Circuit: No Fiduciary Liability Coverage for Claim Against Third-Party ESOP Trustee

Wiley Rein LLP

The United States Court of Appeals for the Fifth Circuit recently upheld an insurer’s denial of fiduciary liability coverage for claims brought against a third party appointed by the insured to manage its employee stock ownership plan (ESOP).  Martin Res. Mgmt. Corp. v. Federal Ins. Co., 2021 WL 4269565 (5th Cir Sept. 20, 2021).  The court also held that the insured was not entitled to damages under the Texas Insurance Code or common law because it did not establish coverage under the policy.

The insured company appointed a professional trustee to manage its ESOP’s investments and transactions.   After the insured’s employees filed class action litigation against the trustee for acts allegedly undertaken by the trustee involving the ESOP, the trustee demanded that the insured provide defense and indemnification pursuant to the terms of the trust agreement.  The insured tendered the trustee’s demands to its insurer under the fiduciary liability coverage section of the relevant policy, and the insurer denied coverage.

In the ensuing coverage litigation, the district court dismissed the claims against the insurer with prejudice.  The Fifth Circuit affirmed, holding that the insurer’s denial of coverage was proper because the litigation against the trustee was not a Fiduciary Claim made against an Insured for a Wrongful Act committed by the Insured, so the insuring agreement was not triggered.  The insured argued that an exception contained in the policy’s contract exclusion, which excepted from that exclusion liability assumed under the trust agreement, effectively brought the matter within the ambit of coverage.  The Court rejected that assertion, reasoning that “exceptions to exclusions do not, in themselves, yield insurance coverage.”  According to the court, “by attempting to invoke an exception to an exclusion, when [the insured] has not established coverage under the Policy, [the insured] seeks to bypass the step of meeting its burden to establish coverage.”

Because the policy did not provide coverage, the court refused to entertain the insured’s claims for violation of the Texas Insurance Code or breach of the covenant of good faith and fair dealing.  Under Texas law, a policyholder cannot recover extra-contractual damages if the policy bars recovery.  Additionally, where an insured has no right to coverage, there can be no breach of the implied covenant of good faith.

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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