Young Men's Christian Ass'n of Plattsburgh v. Phila. Indem. Ins. Co.

• Decision Date: 30 November 2018
• Docket Number: 8:18-CV-0565 (LEK/DJS)
• Parties: YOUNG MEN'S CHRISTIAN ASSOCIATION OF PLATTSBURGH, Plaintiff, v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of New York

YOUNG MEN'S CHRISTIAN ASSOCIATION OF PLATTSBURGH, Plaintiff, v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, Defendant.

8:18-CV-0565 (LEK/DJS)

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

November 30, 2018

MEMORANDUM-DECISION AND ORDER

I. INTRODUCTION

This insurance coverage dispute is before the Court following its removal from New York State court on diversity of citizenship pursuant to 28 U.S.C. §§ 1441(a), 1446, and 1331. Dkt. No. 1 ("Notice of Removal"). The former executive director of Plaintiff, the Young Men's Christian Association ("YMCA") of Plattsburgh, failed to properly implement its employee benefits program for approximately fifteen employees, resulting in underpayment to the YMCA Retirement Fund. Dkt. No. 2 ("Complaint") ¶¶ 7, 14. During the relevant period, Plaintiff had an employee benefits insurance policy with defendant Philadelphia Indemnity Insurance Company, which has largely denied coverage for the funds Plaintiff owes to the Retirement Fund. Id. ¶¶ 4-6, 9-16. Seeking declaratory relief and damages, Plaintiff alleges that Defendant has violated its contract as well as certain state statutory duties. Id. ¶¶ 19-35.

Defendant now moves to dismiss the suit for failure to state a claim. Dkt. Nos. 6 ("Motion to Dismiss"), 6-2 ("Memorandum"), 17 ("Reply"). Plaintiff opposes the motion. Dkt. No. 14 ("Opposition"). For the following reasons, the Motion to Dismiss is granted in part and denied in part.

II. BACKGROUND

The following facts are taken from the allegations in the Complaint, which are assumed to be true when deciding a motion to dismiss. Bryant v. N.Y. State Educ. Dep't, 692 F.3d 202, 210 (2d Cir. 2012).

Plaintiff is a non-profit organization existing under the laws of New York State, with its principal place of business in Plattsburgh, New York. Compl. ¶ 1. Defendant is a corporation incorporated, and with its principal place of business in Pennsylvania. Id. ¶ 2.

In April 2015, Defendant issued to Plaintiff a "comprehensive Commercial Lines (insurance) Policy" ("CL Policy"), with a policy period of May 1, 2016 through May 1, 2017. Compl. ¶ 4. Among the endorsements included in the policy was one providing "Employee Benefits Administration Errors and Omissions Insurance" ("Benefits Insurance Policy"). Id. ¶ 5. Plaintiff paid an additional premium for this coverage. Id.

Among its provisions, the Benefits Insurance Policy provided that Defendant "will pay those sums that you become legally obligated to pay as damages because of a negligent act, error or omissions in the administration of your employee benefits program." Id. ¶ 6. The Benefits Insurance Policy defines "administration" as follows:

Administration means performance of the ministerial functions of your employee benefits program and could include:

a. applying the program rules to determine who is eligible to participate in benefits;

b. calculating service and compensation credits of employees; c. preparing messages to tell employees about their benefits;

d. maintaining service and employment records of those employees participating in your employee benefits program;

e. preparing reports required by government agencies;

f. calculating benefits;

g. informing new employees about your employee benefits program;

h. implementing enrollment instructions from your employees in your employee benefits program;

i. advising, other than legal advice, employees who are participating in your employee benefits program of their rights and options;

j. collecting contributions and applying them as called for under the rules of your employee benefits program;

k. preparing benefits reports for your employees participating in your employee benefits program;

l. processing claims.

Id.

In "early 2017," Plaintiff "discovered" that its previous executive director had "committed errors and made omissions that caused [Plaintiff] to fail to implement its employee benefits program with the YMCA Retirement Fund" for approximately fifteen employees. Id. ¶ 7. Specifically, the previous executive director had failed to (1) determine who was eligible for benefits; (2) calculate the "service and compensation credits" for those employees; (3) prepare messages to employees about their benefits; (4) calculate the benefits of employees; (5) inform new employees about the benefits program; and (6) collect contributions and apply them as called for under the program rules. Id. ¶¶ 7, 11. Most importantly, the executive director failed to pay the employer portion of pension contributions, and likewise failed to withdraw contributions from employees' paychecks to pay the employee contribution to the pension fund. Id.

Plaintiff "promptly" advised Defendant of these errors, inquiring as to coverage and assistance. Id. ¶ 8. On May 30, 2017, Defendant issued its first partial coverage disclaimer ("First Disclaimer"). Id. ¶ 9. In its First Disclaimer, Defendant explained that "[t]o the degree that there is coverage available for this type of claim, it would be limited to lost profits only." Id. ¶¶ 10-12. In effect, Defendant disclaimed coverage for any principal amounts that Plaintiff may be found liable to pay into its employee benefit program, including contributions that the impacted employees would have made but for the error. Id. The First Disclaimer did not explain whether "lost profits" encompassed interest that the Retirement Fund would have earned on the contributions, had they been properly collected and paid. Id. ¶ 12

In June 2017, Defendant issued a second partial coverage disclaimer ("Second Disclaimer") to Plaintiff. Id. ¶ 13. Defendant advised that it had received a letter from the Retirement Fund demanding full payment of all amounts due from Plaintiff. Id. ¶ 14. Defendant reiterated its position that only "lost profits coverage" would be available for such a claim, but advised Plaintiff that Defendant's counsel would be available to represent Plaintiff in defending against the Retirement Fund's claim. Id.

On June 30, 2017, Plaintiff wrote to Defendant inquiring as to the basis for its position that the Benefits Insurance Policy did not cover the principal amounts due to the Retirement Fund. Id. ¶ 15. Defendant responded that its position was based on Baylor Heating & Air v. Federated Mut., 987 F.2d 415 (7th Cir. 1993). Id. ¶ 16.

As a result of Defendant's denial of coverage, Plaintiff has had to borrow "substantial funds" to pay the employer and employee contributions owed to the Retirement Fund. Id. In addition, Plaintiff is "likely to experience negative publicity that will diminish its ability to raise funds within the community." Id. ¶ 17.

Plaintiff alleges that Defendant's decision to deny coverage was made in "bad faith," and that Defendant was aware of the financial harm that denial would cause Plaintiff. Id. ¶¶ 25-30. Plaintiff further alleges that Defendant has engaged in "Unfair Trade Practices" under General Business Law ("G.B.L.") § 349 and Insurance Law § 2601, by "knowingly misrepresenting" to Plaintiff and other New York insured the provisions relating to the coverage at issue and by "not attempting in good faith to resolve" Plaintiff's claim. Id. ¶¶ 31-35. Plaintiff further alleges that Defendant's "unreasonable and arbitrary interpretation of its policy provisions could result in many small businesses and not-for-profits being held individually liable for amounts that they cannot afford, and that they reasonably believed were covered." Id. ¶ 32.

Plaintiff seeks a declaration that the Benefits Insurance Policy provides coverage for all amounts that Plaintiff owes to the Retirement Fund as a result of the errors, including the "principal amounts owed, employee contributions, and the interest that would have accrued had those payments been made." Id. ¶ 24, and at 10.¹ Plaintiff also seeks an order requiring Defendant to settle the claim made by the Retirement Fund in full. Id. at 10. In addition, Plaintiff seeks reimbursement for expenses and loss of good will, three times actual damages up to $1,000, punitive damages against Defendant based on a pattern of tortious conduct aimed at its New York insureds, and attorneys' fees. Id. at 11.

III. LEGAL STANDARD

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), "a complaint must contain sufficient matter . . . 'to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In assessing whether this standard has been met, courts take "all factual allegations contained in the complaint" as true, Twombly, 550 U.S. at 572, and "draw all inferences in the light most favorable to the non-moving party," In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007) (internal citation omitted).

IV. DISCUSSION

A. Applicable Law in Diversity

A federal court siting in diversity jurisdiction, as here, must apply the substantive law of the state in which it is sitting, including the state's choice of law rules. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). The dispute here must be resolved under New York Law, as the policy was issued to a New York entity insuring activities and property in New York. See Ethicon, Inc. v. Aetna Cas. & Surety Co., 688 F. Supp. 119, 123 (S.D.N.Y. 1988) ("New York courts have traditionally resolved choice of law issues involving insurance policies by applying the law of the state which the parties understood would be the principal location of the risk and the state most intimately concerned with the outcome of the litigation.").

B. Employer and Employee Pension Contributions

The parties dispute whether the Benefits Insurance Policy covers two types of funds Plaintiff now owes the Retirement Fund for the relevant period: (1) the employer portion of the pension...