Fed. Ins. Co. v. Int'l Bus. Machines Corp.

• Decision Date: 21 February 2012
• Citation: 942 N.Y.S.2d 432,18 N.Y.3d 642,2012 N.Y. Slip Op. 01320,965 N.E.2d 934
• Parties: FEDERAL INSURANCE COMPANY, Respondent, v. INTERNATIONAL BUSINESS MACHINES CORPORATION et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

18 N.Y.3d 642

2012 N.Y. Slip Op. 01320

942 N.Y.S.2d 432

965 N.E.2d 934

FEDERAL INSURANCE COMPANY, Respondent,

v.INTERNATIONAL BUSINESS MACHINES CORPORATION et al., Appellants.

Court of Appeals of New York.

Feb. 21, 2012.

Jones Day, New York City (Thomas H. Sear, Howard F. Sidman, Victoria Dorfman and Caryn L. Wolfe of counsel), for appellants.

Stroock & Stroock & Lavan LLP, New York City (Michael F. Perlis, Richard R. Johnson, of the California bar, admitted pro hac vice, and Ernst H. Rosenberger of counsel), for respondent.

OPINION OF THE COURT

Chief Judge LIPPMAN.

The question before the Court is whether the disputed language in an insurance policy extends coverage to alleged violations of the Employee Retirement Income Security Act of 1974 (ERISA) by defendant insureds, International Business Machines Corporation and the IBM Personal Pension Plan (collectively, IBM), acting in their capacity as the settlor of their employee benefit plans. We reaffirm fundamental principles of insurance contract interpretation and hold that the plain language of the policy does not cover such acts and, therefore, that the Appellate Division correctly held that plaintiff insurer Federal Insurance Company (Federal) is entitled to summary judgment and a declaration that it is not required to indemnify IBM in the manner requested.

Federal issued an excess insurance policy to IBM for the policy period from April 14, 1999 through April 14, 2000. The underlying policy (Zurich policy) was issued by Zurich American Insurance Company (Zurich) and it is limited to $25,000,000. A class action was filed against IBM, alleging that certain amendments to the benefit plans in 1995 and 1999 violated provisions of ERISA pertaining to age discrimination ( see Cooper v. IBM Personal Pension Plan, 2005 WL 1981501, 2005 U.S. Dist. LEXIS 17071 [S.D.Ill.2005], revd. in part 457 F.3d 636 [7th Cir.2006], cert. denied 549 U.S. 1175, 127 S.Ct. 1143, 166 L.Ed.2d 907 [2007] ). The parties to the Cooper action reached a settlement, which included amounts designated to cover those plaintiffs' attorneys' fees. IBM made those payments and then sought reimbursement from Federal, maintaining that the limits of the underlying Zurich policy had been exhausted and coverage of the excess Federal policy was thereby triggered. Federal commenced the instant suit against IBM, alleging eight causes of action and requesting a declaration that the Federal policy “provides no coverage for, or duty to indemnify, any amount paid by IBM and the Plan in settlement of the Cooper Action which represents attorneys' fees.” The parties filed cross motions for summary judgment. The Supreme Court denied plaintiff Federal's motion and granted IBM's motion. The Appellate Division reversed, holding that plaintiff was entitled to summary judgment (78 A.D.3d 763, 911 N.Y.S.2d 148 [2d Dept.2010] ). This Court granted IBM leave to appeal (16 N.Y.3d 706, 920 N.Y.S.2d 780, 945 N.E.2d 1031 [2011] ). We now affirm.

As is relevant to this appeal, the Federal policy is a “follow form” policy, meaning that it conforms to the terms and endorsements of the underlying Zurich policy ( see e.g. Jefferson Ins. Co. of N.Y. v. Travelers Indent. Co., 92 N.Y.2d 363, 369, 681 N.Y.S.2d 208, 703 N.E.2d 1221 [1998] ). A reviewing court must decide whether, “ ‘afford[ing] a fair meaning to all of the language employed by the parties in the contract and leav[ing] no provision without force and effect’ ” ( Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 222, 746 N.Y.S.2d 622, 774 N.E.2d 687 [2002], quoting Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487, 493, 549 N.Y.S.2d 365, 548 N.E.2d 903 [1989] ), there is a “reasonable basis for a difference of opinion” as to the meaning of the policy ( Greenfield v. Philles Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 780 N.E.2d 166 [2002] ). If this is the case, the language at issue would be deemed to be ambiguous and thus interpreted in favor of the insured ( see Breed v. Insurance Co. of N. Am., 46 N.Y.2d 351, 353, 413 N.Y.S.2d 352, 385 N.E.2d 1280 [1978] [recognizing “the general rule that ambiguities in an insurance policy are to be construed against the insurer”] ). If not, then the policy will be found to be unambiguous, meaning that “the language it uses has ‘a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion’ ” ( Greenfield, 98 N.Y.2d at 569, 750 N.Y.S.2d 565, 780 N.E.2d 166, quoting Breed, 46 N.Y.2d at 355, 413 N.Y.S.2d 352, 385 N.E.2d 1280), and shall be applied as written, either in favor of or against coverage, depending entirely on the language used. In analyzing the meaning of an insurance policy provision, it is necessary to determine the “reasonable expectations of the average insured” ( Cragg v. Allstate Indent. Corp., 17 N.Y.3d 118, 122, 926 N.Y.S.2d 867, 950 N.E.2d 500 [2011] ).

The disputed language (“any breach of the responsibilities, obligations or duties by an Insured which are imposed upon a fiduciary of a Benefit Program by [ERISA]”) appears in the first prong of the Zurich policy's definition of “Wrongful Act.” The term “Wrongful Act” is defined, in its entirety, in endorsement No. 17 to the Zurich policy as

“1. any breach of the responsibilities, obligations or duties by an Insured which are imposed upon a fiduciary of a Benefit Program by the Employee Retirement Income Security Act of 1974, as amended, or by the common or statutory law of the United States, or ERISA equivalent laws in any jurisdiction anywhere in the world;

“2. any other matter claimed against an Insured solely because of such Insured's service as a fiduciary of any Benefit Program; or

“3. any negligent act, error or omission in the Administration of any Benefit Program.”

Contrary to the Supreme Court's holding in this case in which it granted IBM's motion for summary judgment, IBM was not alleged to have breached fiduciary duties in the underlying Cooper action. There is no dispute in this case that under Lockheed Corp. v. Spink, 517 U.S. 882, 890, 116 S.Ct. 1783, 135 L.Ed.2d 153 [1996] [holding that “(p)lan sponsors ⁽¹⁾ who alter the terms of a plan do not fall into the category of fiduciaries”], IBM was not acting as an ERISA fiduciary in taking the actions that gave rise to the allegations in the Cooper suit. A straightforward reading of the initial language of the first prong of the “Wrongful Act” definition is that it covers violations of ERISA by an insured acting in its capacity as an ERISA fiduciary. As such, the actions alleged in the Cooper suit are not covered by the Zurich policy.

The definition of “Wrongful Act” in the Zurich policy explicitly refers to ERISA and specifically to duties imposed on fiduciaries by ERISA. Therefore the only reasonable approach to determining whether the disputed language in the policy requires the coverage demanded by IBM in this action is to determine whether or not IBM was acting in its capacity as an ERISA fiduciary in amending the plans. Under Lockheed, IBM was acting as a plan settlor and not as a fiduciary when it made the changes to the benefit plans that allegedly violated ERISA. The policy language is clear that coverage requires that the insured be acting in its capacity as an ERISA fiduciary in committing the alleged ERISA violation. We conclude that the average insured would reasonably interpret the disputed language in the definition of “Wrongful Act” to mean that coverage is limited to acts of an insured undertaken in its capacity as an ERISA fiduciary.

We have considered and reject IBM's contentions to the contrary, certain of which we specifically address as follows. IBM maintains that the term “fiduciary” is undefined in the Zurich policy and therefore must be given its plain, ordinary meaning, which differs from the definition provided in ERISA. This argument appears to stem from the rule that “[t]he language employed in the contract of insurance must be given its ordinary meaning, such as the average policyholder of ordinary intelligence, as well as the insurer, would attach to it” ( Morgan v. Greater N.Y. Taxpayers Mut. Ins. Assn., 305 N.Y. 243, 248, 112 N.E.2d 273 [1953] [internal quotation marks and citation omitted] ). Under IBM's reading of the policy, there is no requirement that the insured must have been acting in its capacity as an ERISA fiduciary in order for an act to be considered a “Wrongful Act” because the ordinary, plain meaning of the term “fiduciary” is not equivalent to the “artificial” definition of the term that appears in ERISA ² ( see Mertens v. Hewitt Associates, 508 U.S. 248, 255 n. 5, 113 S.Ct. 2063, 124 L.Ed.2d 161 [1993] [describing ERISA's definition of fiduciary as “artificial”] ). IBM maintains that because it is alleged in the Cooper action to have violated certain ERISA provisions and because IBM is a fiduciary of the benefit plans (based on the plain meaning of the term),³ the actions alleged in the Cooper action are covered and therefore IBM is entitled to recover the attorneys' fees from Federal. In other words, IBM's actions would be covered by virtue of the fact that it was an insured and a plan fiduciary that allegedly violated certain ERISA provisions, regardless of the fact that, if the allegations are correct, it undoubtedly did so in its capacity as a plan settlor and not in its capacity as an ERISA fiduciary.

IBM misapplies a general principle of insurance policy construction—that terms take on their plain, ordinary meaning—and the result is a strained and implausible interpretation of the provision at issue. Contrary to IBM's argument, this does not amount to a prohibited implied exception to coverage ( see Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 311, 486 N.Y.S.2d 873, 476 N.E.2d 272 [1984] [holding that “whenever an insurer wishes to exclude certain coverage from its...