Since the spectacular collapse of Enron Corporation this past year, it is impossible to open the newspaper without reading about another corporate scandal or the latest "largest corporate bankruptcy in history." The television and print media have reported endlessly on how high-flying companies such as Enron, WorldCom, Global Crossing, and Qwest have misled the public about their record-breaking growth and earnings in an effort to inflate share price and maintain analysts' ratings. Meanwhile, their directors and officers are being investigated for manipulating company financial statements to keep massive losses and debts off the company's books. In the wake of these revelations, investor confidence-and stock prices-plummeted, resulting in billions of dollars in losses.
One group of investors–company employees–have been doubly hurt. More than willing to invest their retirement funds in company stock when the market–and company stock prices–were rising, these employees now face not only the loss of their jobs but the loss of their retirement savings as well. Both houses of Congress have responded by proposing legislation that would amend the Employee Retirement Income Security Act of 1974 ("ERISA") with respect to investments in company stock and Senator Daschle has announced his intention to pass a compromise bill that would allow plan participants to sue executives who provide false stock information.
Not content to wait for legislative reform, employees have begun filing a new breed of ERISA class action lawsuits. Based on the same factual allegations generally contained in securities fraud cases, these lawsuits assert that the company and its directors and officers breached their fiduciary duties under ERISA by knowingly issuing false and misleading public statements about the company's financial condition, which induced employees to invest and maintain their plan assets in company stock at artificially high prices.
These new lawsuits are troubling in two respects. First, they seek to expand the definition of an ERISA fiduciary to include corporate directors and officers not otherwise responsible for the management of plan assets. Second, these claims attempt to extend the reach of ERISA liability into areas currently regulated by the securities laws by expanding ERISA disclosure requirements to include not just information related to plan benefits, but also public information relating to the company's financial performance. In this article, we provide an overview of these new ERISA complaints, discuss earlier court cases that offer a glimpse into the possible outcome of these claims, and address the potential impact of these new lawsuits on D&O and fiduciary liability underwriters.
I. STATUTORY FRAMEWORK
Federal securities laws, enacted after the stock market crash of 1929, focus primarily on the disclosure of financial and other information so that securities holders and the public in general have information relevant to evaluate investment decisions. The Securities Act of 1933 is chiefly concerned with initial offerings, whereas the Securities Exchange Act of 1934 deals with securities trading and secondary markets and requires companies with publicly traded stocks to file periodic financial reports. Both acts prohibit deceptive and manipulative practices in the sale of securities.
On the other hand, ERISA was passed in 1974 in response to the rapid growth of employer benefit and pension plans. It establishes certain standards of conduct for persons responsible for plan administration and management and requires the reporting of certain information with respect to those plans. These disclosures are generally limited to providing plan participants with certain enumerated plan documents, benefit statements and other information relating to plan terms and eligibility. Thus, while disclosure is an element of ERISA, it is not its central theme.
The statute does not impose liability on all corporate directors and officers, only those who are considered fiduciaries. A person is a fiduciary with respect to a plan to the extent that:
- he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,
- he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or
- he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. § 1002(21)(A). ERISA, therefore, establishes three areas of fiduciary responsibility: (1) managing or administering a plan; (2) providing investment advice; and (3) investing plan assets. To the extent that a person exercises any discretionary authority or control in connection with these functions, that person is a fiduciary.
This statutory definition is a "functional" one; it includes not only those entities or persons who hold certain positions with respect to a plan–i.e., "named" fiduciaries–but also any person or entity that performs any of the functions enumerated in the statutory definition, regardless of any formal relationship to the plan-i.e., "functional" fiduciaries. The definition of fiduciary is to be applied broadly and courts are directed to look to substance rather than form. See Donovan v. Mercer, 747 F.2d 304 (5th Cir. 1984). Thus, certain positions, such as trustee or plan administrator, by their very nature confer fiduciary status, while the exercise of other functions, such as purely ministerial ones, do not. See 29 C.F.R. § 2509.75-8, D-2 & D-3. Similarly, directors and officers of corporations that sponsor a plan are not fiduciaries solely by reason of their status with the company, although they may become fiduciaries by exercising authority over plan management or administration. See 29 C.F.R. § 2509.75-8, D-5; Confer v. Custom Engineering Co., 952 F.2d 34 (3d Cir. 1991).
Courts have also held that merely making statements about plan benefits or having influence over plan management is not enough to impose fiduciary liability. See, e.g., American Federation of Unions, Local 102 Health & Welfare Fund v. Equitable Life Assur. Soc'y, 841 F.2d 658 (5th Cir. 1988)(urging the purchase of products does not make insurance company a fiduciary); Hansen v. North Trident Regional Hospital, Inc., 60 F. Supp. 2d 523 (D.S.C. 1999)(statements by company benefit supervisor regarding benefit eligibility); Bollenbacher v. Helena Chemical Co., 934 F. Supp. 1015 (N.D. Ind. 1996)(advice from human resources director on eligibility determinations and interpretations). To establish fiduciary liability, individuals must exercise such authority and control as to cause the fiduciaries responsible for such functions to relinquish their independent discretion. See, e.g., Schloegel v. Boswell, 994 F.2d 266 (5th Cir.), cert. denied, 510 U.S. 964 (1993); Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456 (5th Cir. 1986); cert. denied, 479 U.S. 1034 & 1089 (1987).
Generally speaking, a person is a fiduciary only to the extent of the plan function over which he exercises authority or control. In other words, a plan trustee is not automatically liable as a fiduciary for decisions involving plan administration, absent an express designation of such authority or his exercising discretion or control over those functions. See Coyne & Delany Co. v. Selman, 98 F.3d 1457 (4th Cir. 1996); Atwood v. Burlington Industries Equity, Inc., No. 2:92CV00716, 1994 WL 698314 (M.D.N.C. Aug. 3, 1994); Sommers Drug Stores Co., supra.
Fiduciaries are required under ERISA to discharge their duties "with respect to a plan solely in the interest of the participants and beneficiaries." 29 U.S.C. § 1104(a)(1). Courts have interpreted this language as requiring fiduciaries to act "with an eye single to the interests of the participants and beneficiaries." Donovan v. Bierwith, 680 F.2d 263, 271 (2d Cir.), cert. denied, 459 U.S. 1069 (1982). The statute also establishes four general standards of conduct, which are known as the duty of loyalty or exclusive benefit rule, the duty of prudence, the duty to diversify plan assets, and the duty to follow the terms of plan documents unless to do so would otherwise breach the foregoing duties. 29 U.S.C. § 1104(a)(1).
Although these fiduciary duties are extensive, they are not meant to be exclusive. Courts, relying primarily on the duty of loyalty, have imposed on fiduciaries a duty to disclose complete and accurate information about plan benefits relevant to the participant's circumstances, even when no specific inquiry has been made. This includes not only a negative duty not to mislead, but also an affirmative duty to inform when a fiduciary knows that his silence might be harmful. See Bixler v. Central Pennsylvania Teamsters Health and Welfare Fund, 12 F.3d 1292 (3d Cir. 1993); Eddy v. Colonial Life Insurance, 919 F.2d 747 (D.C. Cir. 1990). Cf. Acosta v. Pacific Enterprises, 950 F.2d 611 (9th Cir. 1992)(court limits affirmative duty to disclose to circumstances that threaten funding of benefits). In some cases, as discussed below, this duty to disclose has been applied in situations involving the management of plan assets.
II. RECENT LAWSUITS
The decline of the stock market and the financial collapse of companies such as Enron, Global Crossing and WorldCom have generated numerous shareholder class action lawsuits against directors and officers alleging violations of federal securities law for issuing false and misleading public statements that failed to disclose the company's true financial condition and various accounting improprieties. At the same time, a significant number of ERISA class action lawsuits have been filed by employees whose retirement and stock savings plans were heavily invested in their companies' now worthless stock. Based on similar factual allegations, if not the identical language, found in the securities fraud cases filed against the same companies, these lawsuits seek to impose broad fiduciary liability on corporate defendants, including directors and officers not otherwise designated as plan fiduciaries. The following is a brief description of the lawsuits filed as a result of some of the more prominent recent corporate scandals:
- Pamela Tittle, et al. v. Enron Corp., et al., C.A. No. H-01-3913 (S.D. Texas)–Plaintiffs filed suit on behalf of themselves and a class of approximately 24,000 Enron employees who participated in the company's pension benefit and ESOP plans, alleging inter alia breach of fiduciary duty under ERISA against various corporate and individual defendants, including Kenneth Lay, Jeffrey Skilling, members of the plans' administrative committees and the Enron directors who served on the board's compensation committee. (The complaint also asserts claims for RICO and civil conspiracy.) Based on virtually the same factual allegations as those raised in various Enron-related securities fraud lawsuits, plaintiffs claim that defendants issued false and misleading public financial statements that artificially inflated Enron's earnings and income by failing to disclose the company's improper accounting of its extensive "off-the-books" transactions. Plaintiffs further claim that the defendants knew about the company's financial problems but failed to disclose this information to plan participants and beneficiaries. Instead, defendants Lay, Skilling and others are alleged to have affirmatively misled them by consistently making representations at company-wide meetings and in company newsletters that Enron was in strong financial shape and that the company's stock price was likely to increase. Plan participants were thus encouraged to hold and purchase additional Enron stock for their benefit plans at a time when defendants knew that the stock was trading at artificially inflated prices. Finally, the complaint asserts that defendants failed to disclose facts about Enron's true financial condition to the plans' administrative and investing fiduciaries, thereby preventing them from monitoring and investigating the propriety of further investment of plan assets in Enron stock.
- In re Qwest Savings and Retirement Plan ERISA Litigation, No. 02-RB-464 (D. Colo.)–This ERISA class action lawsuit was brought on behalf of all participants and beneficiaries of the Qwest Savings and Investment Plan and its predecessor plans. The defendants include Qwest, Joseph P. Nacchio (CEO and Chairman of the Board), the company's other senior officers, its entire board of directors and the members of the plan's investment and administrative committees. Echoing allegations contained in the Qwest securities litigation, the plaintiffs claim that the corporate defendants publicly issued materially false and misleading information about the company's financial condition that failed to disclose that Qwest had inflated its revenues and earnings through various accounting irregularities. According to the plaintiffs, these disclosures constituted a breach of the defendants' fiduciary duties to the plan participants because, by providing them with false information relative to the company's performance and stock value, they encouraged participants to continue investing their plan assets in Qwest stock when defendants knew, or should have known, that the stock was overvalued. Of note, plaintiffs allege that Nacchio and the directors were plan fiduciaries as a result of their communications to plan participants concerning "the revenue, earnings, and financial condition of the Company" that affected plan assets and investments and the participants' decisions in relation thereto. According to the complaint, these communications primarily included the company's SEC filings, which allegedly were incorporated in the plan's Summary Descriptions. The complaint asserts that defendants had a duty under ERISA: (1) not to make materially false and misleading statements or misinform participants about Qwest's true financial condition; and (2) to inform participants about all materially adverse information that affected the company.
- Judy Wilson Rambo, et al. v. WorldCom, Inc., et al., No. 3:02-CV-1088 (S.D. Miss.)–Plaintiffs filed an ERISA class action complaint against WorldCom, Bernard J. Ebbers (President and CEO), Scott D. Sullivan (CFO), James C. Allen and Max E. Bobbitt (directors and members of the audit committee) and various unknown fiduciary defendants on behalf of all persons who were participants or beneficiaries of WorldCom's 401(k) Salary Savings Plan between January 3, 2000 and the present. Asserting wrongful acts generally found in securities lawsuits, plaintiffs claim that defendants issued false and misleading financial statements that failed to reflect the true value of the goodwill and other intangible assets that the company had obtained in connection with its acquisition of numerous other telecommunications companies. When the truth of WorldCom's financial difficulties was finally revealed, the value of the company's stock, including the shares held by participants in their 401(k) plans, plummeted to $2.35 per share; in 2002 alone, this resulted in losses to the participants of millions of dollars in retirement funds. Plaintiffs claim that the defendants, all of whom are alleged to be fiduciaries under ERISA, breached their fiduciary duties by failing to disclose complete and accurate information regarding WorldCom's true financial condition, encouraging participants to purchase company stock for their 401(k) accounts without disclosing that, because of the company's true financial condition, such purchases were not a prudent investment, and affirmatively misrepresenting that WorldCom stock was under-valued and a sound investment.
- Jagdeo Ramkissoon et al. v. Gary Winnick, et al., No. 02-CV-1478 (W.D. Cal.)–This purported ERISA class action suit was brought on behalf of all persons who were either participants or beneficiaries of Global Crossing's Employee Retirement Savings Plan from September 28, 1999 to the present. The defendants include Global Crossing's directors, officers and individual members of the company's employee benefits committee. As with the lawsuits filed in Enron, Qwest and WorldCom, this complaint contains factual allegations sounding in securities law, namely a detailed description of Global Crossing's statements to the general public-in its press releases and SEC filings-regarding the company's financial condition, and of the subsequent collapse of Global Crossing's stock price when information about the scope of the company's losses and accounting irregularities was finally disclosed. Plaintiffs claim that by issuing false and misleading financial statements, defendants breached their fiduciary duties under ERISA: (1) to provide complete and accurate information material to the circumstances of the participants and beneficiaries, including information with respect to the plan's use of company stock as an investment; and (2) not to misinform plan participants and beneficiaries by withholding and concealing material information about Global Crossing's earnings prospects and financial condition, thereby encouraging participants to continue to make and maintain substantial investments in company stock.
The disclosure claims raised in these complaints, as well as similar ones alleged in ERISA lawsuits filed against the directors and officers of such companies as Xerox, Lucent Technologies, Tyco International and Nortel, can be summarized as follows:
Claims against company officers and directors for deceiving plan participants and beneficiaries by knowingly providing false and misleading information about the company's financial condition and future performance either in statements made to the general public in SEC filings and press releases or in statements made directly to employees;
Claims against directors and officers for failing to affirmatively provide accurate information about the company's true financial picture; and
Claims against plan fiduciaries, who are also corporate officers, that they had knowledge of the company's financial irregularities and misrepresentations but (1) failed to disclose this information to plan participants and beneficiaries; (2) failed to disclose the same information to other plan fiduciaries who had responsibility for investing plan assets; and (3) failed to correct misleading statements made to plan participants and beneficiaries by other corporate officers and fiduciaries.
III. CURRENT CASE LAW
Given the recent filing of these post-Enron ERISA cases, there is to date little in the way of reported case law to suggest whether courts are likely to adopt the expansive reading of the ERISA disclosure requirements urged by plaintiffs. Courts presented with these cases will have to resolve two issues: (1) when are directors and officers acting as functional fiduciaries; and (2) when are misleading disclosures a breach of fiduciary duty under ERISA. In Varity Corp. v. Howe, 516 U.S. 489 (1996), the Supreme Court provides a framework for answering these questions, although in a context somewhat different from the cases described here.
In Varity, the plaintiffs were participants and beneficiaries in the company's self-funded benefit (non-retirement) plan. In an effort to reduce debt, Varity decided to consolidate several of its unprofitable divisions into a new subsidiary. Varity then held a special meeting to persuade employees to transfer to this new entity, which would release it from having to pay employee benefits under the old plan. At the time of the meeting, however, Varity allegedly knew that the new subsidiary had a negative net worth of $46 million and was in serious financial trouble. Nevertheless, it assured the employees that the new company had a positive financial outlook and that if the employees transferred, their benefits would remain the same. As a result of the meeting, 1,500 employees transferred to the new subsidiary. Two years later, the new company was in receivership and employee benefits were lost.
The Supreme Court was asked to decide: (1) whether Varity was acting in its corporate capacity or fiduciary capacity when it knowingly misrepresented to employees that their benefits would be secure if they transferred to the company's new subsidiary; and (2) if acting in its fiduciary capacity, whether this knowing misrepresentation constituted a breach of fiduciary duty.
Varity argued that when it made statements about the financial condition of the new subsidiary, it was acting in its corporate capacity, not as the plan administrator, and thus was not liable for breach of fiduciary duty under ERISA. The Court disagreed, however. Noting that the purpose of the meeting had been to convey benefits information to the employees, the Court found that the company had intentionally linked its statements about the new subsidiary's financial performance with its reassurances about benefits in an effort to persuade employees that their benefits would remain unchanged and that there would be no risk in transferring to the new company. The Court rejected as too narrow the company's argument that the misstatements about financial condition were not relevant to plan administration because such information was not a disclosure specifically required under ERISA. Significantly, the Court expressly stated that it was not holding that the company had acted as a fiduciary "simply because it made statements about its expected financial condition or because 'an ordinary business decision turn[ed] out to have an adverse impact on the plan.'" Varity, 516 U.S. at 505. This ruling suggests, however, that a corporate entity can act in a fiduciary capacity under ERISA where statements about the company's financial condition are made in the context of communications regarding plan benefits or administration.
With respect to the second issue, the Court ruled that the company had breached its fiduciary duty by knowingly providing misleading information to plan beneficiaries in order to save money at their expense. "As other courts have held, '[l]ying is inconsistent with the duty of loyalty owed by all fiduciaries.'" Id. at 506. The Court, however, did not reach the issue of whether ERISA fiduciaries have an affirmative duty to disclose truthful information either on their own initiative or in response to employee inquiries. Id.
More recently, in Hull v. Policy Management Systems Corp., No. CIV.A.3:00-778-17, 2001 WL 1836286 (D.S.C. Feb. 9, 2001), the court declined to impose fiduciary liability on ERISA claims similar to the ones described here, relying on the distinction drawn in Varity between corporate disclosures made in the ordinary course of business that might have a collateral adverse impact on plan assets–to which fiduciary liability would not attach–and those statements specifically directed toward a plan and its participants, which could give rise to fiduciary liability under ERISA.
The plaintiff in Hull was a participant in the company's 401(k) retirement savings plan, in which employee and employer matching contributions were invested in company stock. The price of Policy Management's stock dropped significantly following the release to the public of certain negative information about the company. This price drop triggered a securities lawsuit against the company and some of its directors and officers. The allegations in the securities case also formed the basis for the ERISA action filed against the company, some of its directors and officers (including one of the securities defendants) and the members of the committee responsible for investment decisions. Plaintiffs claimed that defendants breached their fiduciary duties by, inter alia, providing misinformation relating to the company's value and failing to provide accurate information about the company to plan participants and committee members. As a result, the plan continued to invest and hold company stock at a time when the share price was artificially inflated. Plaintiffs further claimed that the defendants knew, or should have known, that the stock price was overvalued, although they did not allege that the committee defendants participated in or actually knew about the alleged fraud.
Defendants filed a motion to dismiss arguing that the plaintiffs' case was "nothing more than an ineffective attempt to recast the securities action as an ERISA action." Hull, 2002 WL 1836286 at *5. They further argued that the claims against the corporate defendants should be dismissed because the alleged wrongful acts, even if true, were not done in defendants' fiduciary capacity. In ruling on the motion, the court divided the defendants into two groups: the corporate defendants who had also been sued in the securities action and the committee defendants who had investment authority under the plan. With respect to the corporate defendants, the court noted that while the plan documents indicated that they had some limited fiduciary duties, these did not include the investment of plan assets. The court concluded, therefore, that the corporate defendants were not liable under ERISA because they had not acted in a fiduciary capacity by allegedly disseminating misleading information and/or by failing to make proper and timely disclosures of accurate information about the company to either the participants or the investment committee. The court further indicated that its decision would not have been different if the allegations against the corporate defendants were true, since "the duties of disclosure owed to the Plan by the corporate defendants [were] not based on the duties owed by an ERISA fiduciary to a Plan and its participants, but the general duties of disclosure owed by a corporation and its officers to the corporation's shareholders." Hull, 2001 WL 1836286 at *8. Of apparent significance to the court was the fact that if these disclosure allegations proved true, the plaintiffs would be entitled to relief under the related securities action.
As for the committee defendants, the court noted that the sole allegation against them appeared to be the claim that they had failed to discover the truth about the company and act on that information. Given the absence of any allegation that the committee defendants either knew about the alleged false information or participated in its disclosure, the court ruled that they had not breached their fiduciary duties by failing to seek out and disclose "insider" information.
Although the Supreme Court in Varity declined to rule on whether ERISA fiduciaries have an affirmative duty to disclose truthful information, as noted in Section I, above, other courts have ruled that the fiduciary duty to disclose encompasses not only the duty not to misinform, but an affirmative duty to provide complete and accurate information not otherwise known to the participant or beneficiary, even in the absence of a specific inquiry, particularly when the fiduciary is aware that his silence could cause harm. Although these cases do not involve the kinds of public disclosures of misleading corporate financial information that form the basis of the post-Enron ERISA cases described here, some of them do involve the duty to disclose information relating to the management of plan assets. For example, in Barker v. American Mobil Power Corp., 64 F. 3d 1397 (9th Cir. 1995), the court ruled that the former trustee of plaintiffs' retirement plan had breached his fiduciary duties by (1) failing to disclose his suspicions that plan assets had been commingled with company operating funds rather than segregated into individual accounts; and (2) affirmatively assuring them, despite his suspicions, that their funds were earning prime interest and would be available upon retirement. See also Glaziers and Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Securities, Inc., 93 F.3d 1171 (3d Cir. 1996)(case remanded to determine whether defendant brokerage firm had breached fiduciary duty by failing to inform fund that former account executive, to whom the fund subsequently transferred its accounts, had left the brokerage firm following investigation into his suspected improprieties); see also Crowhurst v. California Institute of Technology, No. CV 96-5433 RAP, 1999 WL 1027033 (C.D. Cal. July 1, 1999), aff'd, 2001 WL 337849 (9th Cir. April 4, 2001)(providing annuitants with newspaper article describing annuity company's financial problems and reminding annuitants of their rights to transfer funds were sufficient, even though defendant had additional information, not disclosed to annuitants, of annuity company's potentially illiquid state which was not disclosed out of concern that it would cause run on assets).
While these cases may represent the initial steps in what appears to be an evolving, and troublesome, area of ERISA fiduciary liability, it is too early to predict with any certainty how courts will rule on the corporate disclosure claims raised in these post-Enron ERISA lawsuits. These cases do offer some, albeit limited, parameters on the likely success of plaintiffs' various claims:
- With respect to directors and officers of plan sponsors who have no fiduciary responsibility for investment of plan assets, Hull and Varity provide support for dismissal of claims based on disclosure of false and misleading financial information, on the grounds that defendants were acting in their corporate, not fiduciary capacity, even in those circumstances where it is shown that the corporate insiders knew about their company's financial irregularities. In addition, claims based on misleading financial statements made to employees, either through general company meetings or in written communications disseminated to all employees, are likely to be dismissed, so long as these communications are not tied directly to benefit information. It is significant to note that in Tittle, plaintiffs have voluntarily dismissed, without prejudice and without explanation, claims against Messrs. Skilling and Lay for the alleged fraudulent promotion of Enron stock by providing false financial information at company-wide meetings and in company newsletters.
- A closer question is presented where corporate officers make false and misleading statements about the company's financial condition in the context of providing information relating to plan administration or benefits. The ruling in Varity suggests that such conduct could lead to the imposition of fiduciary liability, particularly if it is proven that: (1) the officers knew they were providing incorrect financial information; and (2) the statements were intentionally made to induce participants to invest their plan assets in company stock.
- Left unresolved is the issue of potential liability for corporate defendants who also have some fiduciary responsibility with respect to the management or investment of plan assets. Such defendants may be able to avoid liability if they had no knowledge about the company's precarious financial condition or wrongdoing, a factor which was critical to the court in Hull when it dismissed claims against the committee defendants. On the other hand, in situations where plan fiduciaries with investment responsibility knowingly issue false and misleading financial statements to the general public, courts may be willing to extend cases such as Barker to find such conduct to be a breach of fiduciary duty to participants and beneficiaries, because of the potentially disastrous impact on plan assets and benefits.
- Equally unsettled is the question of whether corporate fiduciaries with knowledge will be found liable for failing to affirmatively inform either plan participants, or other plan fiduciaries, of the true state of the company's financial difficulties. While courts may be reluctant to require a full public disclosure of insider information that would undoubtedly result in a drop in share price, and thus damage to the company and plan assets, they may require affirmative disclosure to other plan fiduciaries so as to allow investigation and consideration into the appropriateness of further investment in company stock.
IV. INSURANCE IMPLICATIONS
Although the success of these expanded ERISA claims is uncertain, they nevertheless present new issues for D&O and fiduciary liability insurers. In the first instance, these lawsuits usually combine misleading disclosure allegations with other ERISA claims for breach of fiduciary duty, such as the failure to adequately diversify plan assets or investigate the suitability of other investments. Fiduciary liability policies generally afford coverage for named fiduciaries, who are often named as defendants in these lawsuits, as well as for corporate officers, directors, trustees and employees who meet the definition of a functional fiduciary, so long as they are acting in a fiduciary capacity with respect to a covered plan. Thus, even if the claims involving misleading financial disclosures are ultimately dismissed by the courts as not governed by ERISA, the filing of these complaints potentially implicates coverage under the fiduciary policy, which triggers the insurer's duty to defend or obligation to advance defense costs.
More problematic are the implications if these new ERISA claims are, in fact, successful. Since they are based on the same facts that form the basis for securities fraud lawsuits, underwriters may find themselves facing exposure under two sets of policies-D&O and fiduciary liability policies. Although many D&O policies contain an exclusion for ERISA claims, the parallel securities and ERISA actions may implicate both policies. While the financial impact of this may be mitigated in those situations where the underwriter has issued a combined policy that is subject to a single aggregate limit of liability, insurers that have issued stand-alone fiduciary and D&O policies to the same insured may find themselves paying separate limits for what are essentially related, if not the same, claims.
V. CONCLUSION
The employee lawsuits filed in response to the recent flurry of corporate collapses signal a growing trend to expand liability under ERISA for disclosures now governed by federal securities laws. Based on the same factual allegations generally found in securities fraud cases, these lawsuits assert breach of fiduciary duty claims against corporate officers and directors for publicly issuing false and misleading financial statements and for failing to disclose accurate information about their company's troubled financial outlook. Although the courts have yet to rule on these cases, Varity and Hull suggest that directors and officers who otherwise have no responsibility for plan management or administration are not acting in a fiduciary capacity when they make misleading financial disclosures, unless the misrepresentations are made in the context of plan administration. Less clear is whether plan fiduciaries who knowingly make misleading statements or fail to disclose the truth are liable under ERISA. Just how far the courts–and Congress–are willing to expand ERISA liability remains to be seen. Nevertheless, D&O and fiduciary liability underwriters, and the corporations they insure, need to respond now to the increased risk of exposure and costs that these lawsuits present.