Supreme Court Upholds Individuals’ Right to File ERISA Claims

On Feb. 20, 2008, the United States Supreme Court issued a unanimous holding in LaRue v. DeWolff, Boberg & Associates that the Employment Retirement Income Security Act (ERISA) authorizes individual defined contribution plan participants to sue for fiduciary breaches that impair the value of plan assets in the individual’s plan account. That holding could have important implications for future ERISA litigation activity, and the individuals’ claims potentially could present significant insurance coverage issues.

James LaRue is a former employee of DeWolff, Boberg & Associates. He participated in DeWolff’s 401(k) plan. He claims that in 2001 and 2002, he directed DeWolff to “make certain changes to the investments in his individual account” but that DeWolff never made the changes and that the omission “depleted” his interest in the plan by $150,000.

LaRue sued the DeWolff firm and the DeWolff 401(k) plan seeking “make whole” or other equitable relief under ERISA.

The district court dismissed LaRue’s complaint on the grounds that LaRue sought money damages, which are not permitted under the specific ERISA provision on which LaRue relied. The Fourth Circuit found that LaRue’s claim was barred by the Supreme Court’s 1985 opinion in Massachusetts Life Ins. Co. v. Russell that permitted claims under the ERISA provision on which LaRue relied only on behalf of the entire plan, rather than on behalf of any one participant’s individual interest. LaRue sought and obtained a writ of certiorari to the United States Supreme Court.

The U.S. Supreme Court held that an individual plan participant has the right to pursue an individual action, notwithstanding the court’s prior holding in the Russell case. The majority opinion’s analysis turns on the view that, by contrast to the era when ERISA was first enacted and defined benefit plans predominated, “defined contribution plans dominate the retirement scene today.”

The circumstances for an individual participant in a defined benefit plan, Supreme Court Justice John Paul Stevens wrote, are quite different than under a defined contribution plan because misconduct relating to a defined benefit plan would not affect any one individual’s plan interest unless the misconduct caused a default of the defined benefit plan itself. Justice Stevens wrote that “for defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”

Accordingly, the court held that ERISA “does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” The court vacated the Fourth Circuit’s judgment and remanded the case for further proceedings.

Press coverage of the LaRue case has suggested that the decision may trigger “a raft of lawsuits by employees. However, employees considering a lawsuit like LaRue’s should consider several things about the Supreme Court’s opinion.

The first is that the only thing LaRue has won is the right to continue his fight. He must now go back to the trial court to substantiate his claim. Justice Stevens specifically noted that “we do not decide whether petitioner made the alleged declarations in accordance with the requirements specified in the plan.”

In addition, LaRue must overcome potentially significant defenses. For example, Justice Stevens also noted that the court did not decide whether LaRue is “required to exhaust remedies set forth in the plan before seeking relief in federal court.”

Justice Stevens also said that the court did not resolve the question whether LaRue “asserted his rights in a timely fashion.”

In other words, although LaRue has survived to fight another day, on remand he will face both potentially formidable defenses and daunting evidentiary challenges. Just because an individual may now have the right to pursue an individual claim for 401(k) losses does not mean that the individual has a great claim.

Nevertheless the possibility of an influx of new claims raises questions about the availability of insurance protection for the claims. One question that is whether these individual 401(k) claims would trigger the “benefits due” exclusion found in the typical fiduciary liability policy.

While the various carriers’ policies vary, a fairly typical “benefits due” exclusion provides that the carrier “shall not be liable for that part of loss, other than defense costs” that constitutes benefits due or to become due under the terms of a benefit program unless, and to the extent that, (i) the insured is a natural person and the benefits are payable by such insured as a personal obligation, and (ii) recovery of the benefits is based on a covered wrongful act.

Policyholders would argue that this type of lawsuit does not trigger the exclusion, because it seeks recovery for breach of fiduciary duty, rather than restoration of benefits due. But even assuming that the exclusion would be triggered, the exclusion does not in any event apply to defense expenses. This defense cost carve out from the exclusion could be very significant for companies confronted with a wave of individual employee 401(k) lawsuits. A host of small cases could become very expensive to defend.

The exclusion’s coverage carve-back also preserves coverage for natural person insureds with a “personal obligation” to pay benefits due. (ERISA’s liability provision specifies that plan fiduciaries are “personally liable”). Natural person fiduciaries are sometimes named as defendants in ERISA lawsuits, but it is noteworthy that LaRue at least named no natural person defendants in his lawsuit. If there were both natural person and entity defendants, and if this exclusion is otherwise triggered, there could potentially be difficult allocation issues for indemnity amounts.

An even more important consideration is that some insurers now offer an “investment loss coverage” endorsement that carves out investment loss claims from the benefits due exclusion. In light of the LaRue decision, that type of endorsement arguably could become an indispensible part of a complete fiduciary liability policy.

The LaRue decision is still very fresh and reactions are still emerging. One issue that will be particularly interesting to watch, if the influx of individual claims does indeed arise, is whether insurers will respond either through altered terms and conditions (such as requiring increased per claim self-insured retentions as a barrier to low level defense expense) or through changed pricing structures. Dramatic changes seem unlikely in the current environment, but if there really is a flood of claim, insurers may well react.