Sokolowski v. Aetna Life & Cas. Co.

• Decision Date: 09 October 1987
• Docket Number: No. 84 Civ. 4801 (RWS).,84 Civ. 4801 (RWS).
• Citation: 670 F. Supp. 1199
• Parties: John F. SOKOLOWSKI, as Administrator and on Behalf of the M.M. & P. PENSION PLAN, Plaintiff, v. AETNA LIFE & CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

670 F. Supp. 1199

John F. SOKOLOWSKI, as Administrator and on Behalf of the M.M. & P. PENSION PLAN, Plaintiff, v. AETNA LIFE & CASUALTY COMPANY, Defendant.

No. 84 Civ. 4801 (RWS).

United States District Court, S.D. New York.

October 9, 1987.

Proskauer Rose Goetz & Mendelsohn, New York City, for plaintiff; Bettina B. Plevan, Katherine Raymond, of counsel.

Hendler, Murray & Mait, P.C., New York City, for defendant; William R. Mait, of counsel.

SWEET, District Judge.

OPINION

Plaintiff John Sokolowski, as administrator and on behalf of the MM & P Pension Plan (the "Plan"), brought this action to enforce and recover damages for breach of its Fiduciary Responsibility Insurance Policy (the "Policy") issued by defendant Aetna Life & Casualty Company ("Aetna"). In 1979 and 1980, Aetna denied coverage and refused to defend two suits (Deak and Chambless) against the Plan and its trustees. Based upon the following facts and conclusions, judgment will be entered (1) granting the Plan the attorneys fees and litigation expenses it has incurred or will incur in defending the Deak and Chambless actions and (2) declaring that Aetna is obligated to indemnify the Plan for any attorneys fees ultimately awarded in those actions.

The resolution of the difficult and significant procedural and substantive issues presented has been greatly facilitated by the skill of counsel for both the Plan and Aetna. At issue is the interpretation to be given to a standard fiduciary responsibility policy issued by Aetna.

Prior Proceedings

This action was filed July 6, 1984 and proceeded through discovery until the summer of 1986 when Aetna by motion for summary judgment sought dismissal of the complaint. By the opinion of August 8, 1986, that motion was denied, and certain of the issues there presented were resolved. Familiarity with that opinion is assumed. After the completion of discovery with respect to Aetna's files dealing with the acceptance or declination of coverage on other similar policies, a one-day bench trial was held on July 1, 1987 in the course of which exhibits and depositions were entered into evidence, and argument was held. There is little factual dispute between the parties though the conclusions to be drawn from those facts are sharply at issue.

The Facts

The Policy is a standard form Fiduciary Responsibility Insurance Policy, sometimes referred to as a "FRIP," drafted and marketed by Aetna to provide fiduciary liability insurance coverage to the trustees of employee benefit plans. Section I of the Policy provides:

I. INSURING AGREEMENT

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages on account of any claim made against the Insured for any Wrongful Act and the Company shall have the right and duty to defend such claim against the Insured seeking such damages, even if any of the allegations of the claim are groundless, false or fraudulent, and may make such investigation and settlement of any claim as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements. (emphasis added)

The word "damages" is defined in Section IV.(3) as follows:

"Damages" shall mean sums of money payable as compensation for loss or in discharge of an obligation of an Insured to make good a shortage in the Insured Trust or Employee Benefit Plan. The word "damages" shall not include:

(a) Fines, penalties, taxes or punitive or exemplary damage.

(b) Benefits due or to become due under the terms of the Trust or Plan, unless and to the extent that recovery for such benefits is based upon a Wrongful Act and is payable as a personal obligation of an Insured.

The Policy defines "Wrongful Act" as "any breach of fiduciary duty by the Insureds." The parties have stipulated, and the court has already held, that the Deak and Chambless complaints alleged "Wrongful Acts" under the Policy.

The claim for coverage by the Plan arose out of two actions filed in 1979 and 1980. The Deak case is a class action filed in 1979 by a class of Plan participants who contended that adoption of Amendment 46 of the Plan Regulations by the trustees was a breach of fiduciary duty and a violation of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461. The basis for the contention was that the Amendment caused a suspension and forfeiture of their pension benefits until age 65 because of work in certain prohibited employment. They also unsuccessfully challenged Amendment 42, which defined Normal Retirement Age under the Plan as age 65.

The Deak plaintiffs sued the Plan, its trustees and its then administrator in their individual as well as representative capacities. Counts I, III and V of the Deak complaint ask that the challenged amendments be declared null and void, and seek a reinstatement of plaintiffs' pensions. Thereafter, in Counts II, IV and VI, the plaintiffs specifically allege that they are suing the trustees "both in their individual and representative capacities for the relief sought in Counts I III, V and additionally for punitive or exemplary damages." The Deak plaintiffs sought, inter alia, "to obtain relief for and to redress violations of the provisions of ERISA and the terms of the plan and to obtain such further relief as is appropriate." They also sought an award of attorneys' fees.

Following a bench trial, the District Court for the Middle District of Florida, Tampa Division, in a decision dated June 4, 1984, found that the trustees had breached their fiduciary duty under ERISA in adopting the disputed Plan Amendment. Deak v. Masters, Mates and Pilots Pension Plan, No. 79 Civ. 190, slip op. (M.D.Fla. June 4, 1984). The Court enjoined the trustees from enforcing the challenged Amendment and held that plaintiffs and some class members were entitled to monies denied them as a result of the application of that Amendment. The Court, however, declined to hold the individual trustees personally liable for the economic consequences flowing from their breach of fiduciary duty. That decision was appealed by both parties and the appeal, as well as plaintiffs' application for an award of attorneys' fees, remain pending.

The Chambless case was filed on July 24, 1980 by plaintiffs Arthur Chambless and his wife Mildred, attacking a similar Plan Amendment (No. 47) providing for suspension of benefits and also attacking Amendment 42. Chambless challenged the suspension of benefits until he reached age 65 and the effect of the suspension whereby the monthly payment that he could receive if he retired at age 65 was reduced from $920 to $470. He also contended that (i) the Plan and its trustees, along with the union and shipping companies that had employed him, violated the antitrust laws; (ii) defendants failed to supply information requested by plaintiff; (iii) defendants failed to give him due notice of the new rules; (iv) defendants failed to provide a full and fair review procedure; and (v) defendants were estopped from denying Chambless "full benefits." In their prayer for relief, the Chambless plaintiffs demanded judgment against the defendants, including the trustees, "jointly and severally" and requested the following five elements of relief:

(1) a declaration that the amendments be declared null and void, and that Chambless be paid "$920 per month beginning as of May 1, 1977, with interest thereon until the date of judgment, plus damages for and restoration of all other benefits plaintiffs have been deprived of by defendants' actions;"

(2) $100 per day for the failure to supply information under ERISA;

(3) treble damages for the alleged violation of the Sherman Antitrust Act by "defendants";

(4) punitive damages in the sum of $500,000; and

(5) "attorneys' fees together with interest and costs, and ... such other and further relief as the Court may deem just and proper."

In the Chambless case, the Honorable Robert L. Carter granted summary judgment dismissing the antitrust, estoppel and certain ERISA claims. Chambless v. Masters, Mates & Pilots Pension Plan, 571 F.Supp. 1430 (S.D.N.Y.1983). Following a trial on the remaining claims, Judge Carter ruled that Amendment 47 was arbitrary as applied to Chambless, but rejected Chambless' request for damages in the nature of retroactive benefits. The Court then ordered the trustees to approve Chambless' new application for a pension (which was to be made under specified circumstances) and to treat that application as if it had been made in 1977, when he originally applied for a pension, which would have the effect of granting him a larger pension than he would receive under the Plan Amendments. The Court declined to assess punitive damages or award emotional distress damages. Chambless v. Masters, Mates & Pilots Pension Plan, 602 F.Supp. 904 (S.D.N.Y.1984). Both decisions were affirmed by the Second Circuit, 772 F.2d 1032 (1985), and the Supreme Court denied Chambless' petition for a writ of certiorari. 475 U.S. 1012, 106 S.Ct. 1189, 89 L.Ed.2d 804. Chambless' application for an award of attorneys' fees of $1.5 million was denied by the District Court but was reversed in part by the Second Circuit, which held that Chambless could recover the attorneys' fees expended solely in litigating the claim on which he had prevailed. 815 F.2d 869 (2d Cir.1987).

On March 7, 1979, shortly after the Deak action was filed, the Plan's insurance broker forwarded the complaint in that lawsuit to Aetna and requested that it assume defense of the action under the Policy. The claim was assigned to Alfred T. Dana ("Dana") (now deceased), an attorney and Superintendent of Aetna's Bond Claim Division in New York, and in accordance with Aetna's practice with respect to FRIP coverage, the Deak complaint was forwarded to Aetna's home office. Coverage was denied by letter of ...