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BOC Group, Inc. v. Federal Insurance Co.


July 30, 2007


On appeal from the Superior Court of New Jersey, Law Division, Union County, Docket No. L-4271-03.

Per curiam.


Argued: March 21, 2007

Before Judges Cuff, Winkelstein and Baxter.

Plaintiffs BOC Group, Inc. (Delaware), BOC Group, Inc. (Nevada), BOC Transports, Inc. (Transports), and The BOC Group Pension Plan (the Plan), collectively referred to as BOC, are an assemblage of employers and sponsors of employee benefit plans. They were sued in a class action by William McClintock on the ground that BOC's payments to those who took lump sum distributions varied from the terms of the employee benefit plan contrary to ERISA.*fn1 The McClintock litigation settled for approximately $69,000,000 and BOC commenced this action to compel defendant Federal Insurance Company (Federal) to indemnify it pursuant to a fiduciary liability insurance policy issued by Federal to BOC. Federal declined coverage on the ground that the McClintock claims and the settlement constituted benefits due under the employee benefit plan, an exclusion under the policy.

BOC appeals from an order barring discovery of certain policy drafting documents and striking BOC's amended answers to interrogatories identifying an expert, and from an order granting Federal's motion for summary judgment. Judge John Malone held that the policy language was clear and unambiguous, that the policy excluded coverage for benefits due under an employee benefit plan, and that the underlying litigation was a claim for benefits under the BOC Plan. We affirm.

On November 25, 2003, BOC filed a complaint against Federal under the executive protection liability insurance policy for 2001-02 seeking, among other things, a declaratory judgment and contract damages for payments plaintiffs made to class action parties in federal litigation known as William McClintock v. The BOC Group Cash Balance Retirement Plan, No. 01-CV-382-DRH (S.D. Ill.) ("underlying litigation" or "McClintock"). On January 27, 2004, Federal filed its answer and counterclaim seeking a declaration that the claim was not covered under the policy. BOC filed its answer to the counterclaim.*fn2

During discovery, BOC sought among other things material concerning the drafting and interpretational history of the exclusions in the policy that Federal had raised as a defense in its answer. Federal answered interrogatories and produced documents as requested, except those regarding the drafting history or the so-called interpretational materials.

Thus, in light of Federal's position, BOC filed a motion to compel more responsive answers to its discovery requests. In December 2004, Judge Malone determined that the materials sought by BOC were, in fact, not discoverable because they were irrelevant to the coverage questions.

The judge required Sean Fitzpatrick, Federal's chief underwriter during the period when the policy was issued, to be deposed, but barred BOC from asking any questions concerning the policy drafting history or related documents. The judge also permitted BOC to take the deposition of a former defendant employee.

On October 14, 2005, BOC served Federal with "revised" discovery responses, including an attorney's expert report addressing, among other things, fiduciary duties, the meaning of the pension plan language, and the relationship between the plan language and the payments made in the underlying litigation. Counsel included a certification of due diligence explaining the delay in identifying the expert. In response, Federal moved to strike BOC's revised answers, including the expert report. On November 22, 2005, Judge Malone signed an order striking BOC's revised responses and prohibiting it from offering the expert report or testimony of their newly disclosed expert, or of any other expert at trial.

As the discovery dispute was unfolding, both parties filed cross-motions for summary judgment in November 2005. Following oral argument, Judge Malone granted Federal's motion and denied BOC's motion on the bases that the policy language was clear, that coverage was not provided for benefits paid under the Plan, and the McClintock litigation sought benefits under the Plan rather than losses resulting from wrongful acts associated with the administration of the Plan.

BOC's pension Plan was a defined benefit plan under ERISA, also known as a "cash balance" plan. It provided pension and pension-related benefits to eligible employees of BOC (Nevada), the Plan's sponsor, and to the employee-participants of both BOC (Delaware) and BOC (Transports), which had adopted the Plan with BOC (Nevada's) approval. BOC (Delaware), however, had the largest number of employees covered by the Plan and was "primarily responsible for maintaining" the Plan's funded status. The Plan was administered by a Plan administrator at BOC (Delaware) as well. Benefits under the Plan were entirely funded through "employer contributions and earnings thereon," and under the Plan, BOC (Delaware) and BOC (Transports) were required to make contributions in accordance with generally accepted accounting principles. Participants made no contributions to the Plan.

Participants' accrued balances were defined by reference to individual "cash" accounts which reflected periodic "pay and interest credits." Specifically, according to Gerard Murray, director of compensation and benefits for BOC (Delaware), prior to the period subsequently implicated by the underlying McClintock litigation, the Plan was converted in form from a traditional defined benefit plan to a cash balance plan. The cash balance format was designed, in significant part, to assist with hiring and retention of younger employees by having benefits accrue at higher rates in early portions of participants' tenures. In addition to individual participant accounts (which also provided an ease of understanding not available with a traditional defined benefit plan), the cash balance format permitted the Plan to include other features normally associated with so-called defined contribution plans, such as lump-sum payouts at termination of employment regardless of age. So that certain participants who were close to the Plan's normal retirement date on the date of the conversion were not penalized, the Plan contained an optional "grandfather" provision.

Following "conversion," the Plan was responsible for paying benefits to participants in accordance with their cash account balances while the other plaintiffs "were responsible for any shortfall."

Generally, participants began participation in the Plan automatically on the first of the month following full-time employment. Each calendar quarter the Plan credited a contribution to each account based on the participant's earnings and service, and accounts grew from year to year by virtue of the Plan's interest credits. Participants were fully vested after seven years, or at disability, normal retirement age or death, and partially vested after three years.

Participants who also participated in prior plans could receive additional credits based on the benefits earned to the date of merger. Among the payment options at retirement were lump sums and monthly lifetime installments for the participant, the participant's spouse, or the participant's surviving annuitant. Participants exercising an option when leaving the Plan prior to their sixty-fifth birthday could receive, as a lump sum, an amount defined in the Plan as their cash account, and employees who left BOC's employment "often elected to leave the Plan and receive such a lump sum." More specifically, if a vested participant left before retiring, the value of the account would be paid in a lump sum if $5000 or less; if more than $5000, however, the participant could defer payment until age sixty-five. If the participant deferred payment, his or her account continued "to increase by the interest credit determined for each year your account remains in the Plan."

A provision of the 1999 Plan summary book explained how accounts could grow, expressing in part that the value of a participant's account depended on a number of different factors, including "your earnings, annual service credits, the annual interest credited to your account, whether you were a plan participant before [the cash balance retirement plan became effective] (and have a prior plan service account), and your years of participation." Thus, while the summary could not "predict how your individual accounts in the Plan will grow," it nonetheless sought to explain to participants the "concept of account growth" through reference to examples and assumptions.

The fulcrum of the McClintock litigation turned on calculation questions involving the "periodic adjustment percentage" in the Plan. Specifically, under the Plan, the "periodic adjustment percentage" was defined as the "rate of increase in credits and in payments under an increasing annuity, as determined in accordance with the provisions in Section 3.6." Section 3.6, in turn, was a lengthy provision entitled "Periodic Adjustments," and stipulated as follows:

(a) Beginning January 1, 1988 and during each Plan Year after 1987, each Participant's Basic Account and Prior Service Account, if any, shall be automatically increased during the Plan Year in the manner described in Section 3.6(b) by a Periodic Adjustment Percentage equal to the lesser of (1) or (2)[.]

(1) The percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (as published by the U.S. Department of Labor, Bureau of Labor Statistics), measured from October 1 of the second year preceding the applicable Plan Year to September 30 of the year immediately preceding the applicable Plan Year. If the index has decreased, the percentage increase shall be deemed to be zero. If the percentage increase is not a multiple of 1/4 percent, the closest lower percentage increase which is a multiple of 1/4 percent shall be used.

(2) The 12 month average of one-year Treasury Constant Maturities as published in the Federal Reserve Statistical Release H.15 (519) of the Board of Governors of the Federal Reserve System, measured from October 1 of the second year preceding the applicable Plan Year and ending on September 30 of the year immediately preceding the applicable Plan Year. If the average is not a multiple of 1/4 percent, the closest lower interest rate which is a multiple of 1/4 percent shall be used.

(b) Until the Benefit Commencement Date, each Participant's Basic Account and Prior Service Account, if any, shall be adjusted at the end of each calendar quarter by an amount equal to a factor multiplied by the balance at the beginning of the quarter. The factor is that which when compounded quarterly would produce the Periodic Adjustment Percentage for the applicable Plan Year.

(c) For the period from October 1, 1986 to January 1, 1988, the Basic Account and Prior Service Account, if any, of each Participant shall be adjusted as described in Section 3.6(b) above based on an annual Periodic Adjustment Percentage of 8.75%.

(d) The Board of Directors may, in its sole discretion, amend the Plan to increase the Periodic Adjustment Percentage otherwise provided in Section 3.6(a).

Even so, as sponsor, BOC (Nevada) could amend the Plan in its discretion in whole or in part.

Over the years the cash balance retirement plan paid interest as follows: 1988, 8.5%; 1989, 9.25%; 1990, 10.5%; 1992, 8.5%; 1993, 6.25%; and 1994, 5.5%.*fn3 The yearly benefit updates also included provisions expressing the Plan's reservation of rights to change, with notice to participants, deductibles, outof-pocket maximums and interest rates.

On June 11, 2001, William McClintock, a former Plan participant, and others instituted the McClintock litigation as a federal class action suit in Illinois against The BOC Group Cash Balance Retirement Plan, alleging that from 1988 forward the Plan had violated ERISA and the Internal Revenue Code in calculating the periodic adjustments applicable to the lump sum payments they had received in terminating their participation in the Plan. The McClintock plaintiffs received lump sum payments beginning in 1992 and ending in 2000. Specifically, the claimants alleged that in making those lump sum payments the Plan did not determine and/or distribute the present value of their CASH Accounts at normal retirement age by projecting the CASH Accounts at the interest crediting rate they would have received had they remained in the Plan (i.e., the average of the monthly Treasury Bill rates for the prior year plus 2%); instead, the Plan paid the [claimants] the amounts contained in their CASH Accounts as of the date of distribution.

The McClintock plaintiffs alleged, among other things, that, given the Plan's pattern of repeated amendments providing similar benefits in similar situations, an IRS regulation, 26 C.F.R § 1.411(d)-4, referred to as a repetitive amendment regulation, applied, making irrelevant any expressed Plan conditions that the amendments were to be limited in time. In other words, the applicable treasury regulation "ensure[d] that if employers repeatedly offer benefits that are not provided under the terms of a plan, those benefits become part of the plan."

Thus, the McClintock plaintiffs maintained that in computing their lump sum distributions, the Plan was required to determine the present value of Plaintiffs' benefits at normal retirement age by projecting their CASH Accounts to age 65 at the average of the monthly Treasury Bill rates for the prior year plus 2% and then determine the present value of the age 65 benefits in accordance with ERISA.

As a result of the Plan's failure to properly calculate their benefits, the McClintock plaintiffs alleged their lump sum payments were smaller than they should have been. They sought certification of the class, compensatory damages, a permanent injunction against the Plan for future ERISA violations, preand post-judgment interest and costs, and counsel fees.

Federal had issued to BOC an executive protection insurance policy for the period October 1, 2000, to October 1, 2001. The policy provided fiduciary liability coverage with limits of $25,000,000 per loss and a $100,000 deductible. Defense costs were deemed part of and not in addition to Federal's limit of liability. Coverage applied as follows:

The Company shall pay on behalf of each of the Insureds all Loss for which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured during the Policy Period or, if exercised, the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted, before or during the Policy Period by an Insured or by any person for whose Wrongful Acts the Insured is legally responsible.*fn4

The insured also agreed not to settle any claim or admit any liability without defendant's written consent, which would not be unreasonably withheld.

The "loss" for which the policy provided coverage meant the total amount the insured was legally obligated to pay for each claim for "wrongful acts" to which the coverage applied. It included wrongful act claims resulting in damages, or ending in judgments or settlements. "Wrongful act," as to a "sponsored" or employee benefit plan was defined as:

(i) any breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by the Employee Retirement Income Security Act of 1974, as amended, or by the common or statutory law of the United States, or any state or other jurisdiction anywhere in the world;

(ii) any other matter claimed against the Sponsor Organization or an Insured Person solely because of the Sponsor Organization's or the Insured Person's service as a fiduciary of any Sponsored Plan; or

(iii) any negligent act, error or omission in the Administration of any Sponsored Plan; . . . .

"Administration" meant "giving advice to employees or effecting enrollment, termination or cancellation of employees under a Benefit Program."

Among the exclusions in the policy were two which, according to Federal, have direct application here, namely 5(h) and 6(d):

5. The Company shall not be liable for Loss on account of any Claim made against any Insured:

(h) based upon, arising from, or in consequence of such Insured having gained in fact any personal profit, remuneration or advantage to which such Insured was not legally entitled; or . . . .

6. The Company shall not be liable for that part of Loss, other than Defense Costs: . . . .

(d) which 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 for the benefits is based upon a covered Wrongful Act.

A "benefit program" included a sponsored plan.

Following service of the McClintock complaint, BOC notified Federal of the suit and sought coverage. On August 16, 2001, Federal denied coverage but nonetheless undertook BOC's defense subject to a reservation of rights. In its denial letter, Federal referred to the "benefits due" plan members exclusion, stating that the McClintock plaintiffs were seeking the "correct lump sum payment calculation" due them and that BOC was not insured "for these benefits." Nevertheless, Federal insisted that it had the right to select counsel for BOC in the McClintock matter and, after authorizing BOC's choice of counsel for the limited purpose of its initial response, required that the attorney chosen for BOC by Federal control BOC's defense and manage all settlement negotiations. BOC also hired independent counsel to defend the McClintock complaint.

In February 2002, counsel designated by Federal advised the insurer that certain terms of the Plan, including the methodology utilized to calculate the lump sum distributions, did not comply with ERISA. Counsel advised Federal that repeated annual amendments contrary to the express terms of the Plan could be interpreted as permanent features of the Plan. Settlement discussions were ongoing in 2003. In May 2003, a Federal representative advised BOC's attorney that the insurer took the position that there was no coverage under its policy, would not consent or comment on the reasonableness of the proposed settlement, but would not withhold consent to a settlement. The settlement was executed in December 2003 and approved by the court in March 2004.

Pursuant to the settlement agreement, each class member was entitled to a portion of the settlement fund based on a calculation factoring the net fund, the individual's claimed recovery and interest paid at 4% from December 2003 through the payment date. The named plaintiffs received an additional $15,000 each and class counsel were permitted to file a request for attorneys fees not to exceed $20,010,000 to be paid from the fund. The release executed by the parties included release of claims relating in any way to "the calculation, determination or payment of lump sum benefits from the Plan."

Effective October 1, 2003, Federal issued so-called Endorsement No. 2 by which it amended the "benefits due" exclusion as follows in pertinent part:

(b) [defendant would not be liable for a loss] which constitutes (i) benefits due or to become due under any Plan or (ii) benefits which would be due under any Plan if such Plan complied with all applicable law, including but not limited to Loss resulting from the payment of plaintiff attorneys' fees based upon a percentage of such benefits or payable from a common fund established to pay such benefits, except to the extent that:

(A) an Insured is a natural person and the benefits are payable by such Insured as a personal obligation; and

B) recovery for the benefits is based upon a covered Wrongful Act. or [sic]*fn5

In a comprehensive written opinion, Judge Malone found that the language of the exclusion for benefits due under the BOC Plan was clear and unambiguous. Further, he held that the policy "only covers losses that arose from wrongful acts or attempted wrongful acts associated with the administration of pension plans." Thus, the issue before the court did not require interpretation of an ambiguous policy. Rather, the issue was solely whether the McClintock litigation claim and the settlement paid constituted benefits under the Plan.

The judge recognized that the McClintock litigation claim was not founded on the express terms of the BOC Plan. He characterized the claim as arising from actions by BOC Plan administrators that created and failed "to negate expectations of the class." Relying on May Department Stores Co. v. Federal Insurance Co., 305 F.3d 597 (7th Cir. 2002), Judge Malone determined that plans governed by ERISA contained both implied and express terms and that the enhanced rate of return repeatedly used by the Plan administrators, although contrary to the express terms of the Plan, should be considered part of the benefits due to Plan participants, such as the McClintock plaintiffs. Thus, the McClintock claim was in actuality a claim for benefits due under the Plan and excluded from coverage.

Judge Malone also determined that the counsel fees incurred by the McClintock plaintiffs were also benefits under the Plan. The fees were paid from the settlement fund created to pay benefits due under the Plan. Similarly, pre- and post-judgment interest was not covered because interest is designed to make a claimant whole. Because the underlying claim was designed to calculate account values as required by law and the Plan, interest on any award should also be considered a part of the benefits due.

Summary judgment is appropriate when "the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995); R. 4:46-2(c). The existence of a genuine issue of a material fact depends on the nature of the claim and the evidentiary standard that governs that claim. Brill, supra, 142 N.J. at 539-40. This court applies the same standard of review. Alloway v. Bradlees, Inc., 157 N.J. 221, 232 (1999).

Words in an insurance policy are given their ordinary meaning unless otherwise indicated. Gibson v. Callaghan, 158 N.J. 662, 670 (1999). Where the terms are clear, the policy will be enforced as written in order to accomplish the parties' reasonably objective expectations. Ibid.; Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43 (1960); Stafford v. T.H.E. Ins. Co., 309 N.J. Super. 97, 103 (App. Div. 1998). Ambiguities, however, are construed against the insurer. Meier v. N.J. Life Ins. Co., 101 N.J. 597, 612 (1986). The question whether a contractual provision is clear or ambiguous is a question for the court to resolve as a matter of law. Cooper River Plaza E. LLC v. Briad Group, 359 N.J. Super. 518, 528 (App. Div. 2003).

The insured has the initial burden of showing that the claim is "within the basic terms of the policy." Adron, Inc. v. Home Ins. Co., 292 N.J. Super. 463, 473 (App. Div. 1996). The insurer, however, has the burden to prove that an exclusion applies. Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997). Exclusions are narrowly construed, Jeffer v. National Union Fire Insurance Co., 306 N.J. Super. 82, 87 (App. Div. 1997), but exclusions are presumptively valid. Princeton Ins., supra, 151 N.J. at 95. Thus, a "court should not ignore the clear meaning and intent of exclusionary provisions." Stafford, supra, 309 N.J. Super. at 103. An exception occurs if the exclusion is contrary to public policy. Doto v. Russo, 140 N.J. 544, 559 (1995).

Even so, the insurer has the burden of establishing the lack of any duty to defend, so "[p]resumptive coverage should [be] assumed and a defense provided unless or until [the insurer] can show that [the insured] should not be afforded this defense." Sands v. CIGNA Prop. & Cas. Ins. Co., 289 N.J. Super. 344, 351 (App. Div. 1995). Therefore, "[w]here there are "unresolved questions [relating to coverage], an insurance carrier should at least offer a defense subject to a reservation of rights." Ibid.

Contract interpretation and construction are matters of law for the court subject to de novo review. Fastenberg v. Prudential Ins. Co. of Am., 309 N.J. Super. 415, 420 (App. Div. 1998). On review, an appellate court construes an insurance policy as it would construe any other contract to determine the parties' intentions at the time the agreement was written. French v. N.J. Sch. Bd. Ass'n Ins. Group, 149 N.J. 478, 492 (1997).

Here, the Federal policy clearly and plainly excludes claims for benefits due under an employee benefits plan. The issue before the court was whether the McClintock claim was for benefits due under the BOC Plan. This issue is a question of law for resolution by the court; the inquiry does not create an ambiguity under the policy. As an appellate tribunal, we examine de novo whether the McClintock litigation involved benefits due under the BOC Plan as found by the motion judge or "extra-contractual liability for ERISA violations" as contended by BOC requires consideration of the underlying litigation.

Under 29 U.S.C.A. § 1132(a)(1)(B),*fn6 a plan participant may bring a civil action to, among other things, "recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan . . ." The McClintock claimants did not sue under that section, but rather pursuant to 29 U.S.C.A. § 1132(a)(3), which authorizes a plan participant, beneficiary or fiduciary to bring suit, (A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan;

[29 U.S.C.A. § 1132(a)(3)(A) and (B).]

BOC argues that the exclusionary language of the policy substantially tracks the "benefits due" terminology of § 1132(a)(1)(B), and was therefore not intended to apply to claims brought pursuant to § 1132(a)(3).

Admittedly, the McClintock claimants asserted rights to relief under 29 U.S.C.A. § 1132(a)(3). Concentrating on the substance of their claims rather than the form, the pivotal basis for the alleged ERISA violations was that BOC had breached so-called Treasury Regulation § 1.411(d)-4 ("Section 411(d)(6) protected benefits," sometimes referred to as an IRS "Q & A" because of the question-answer format of the regulation). The section provides in part that, while generally certain benefits are deemed "[26 U.S.C.A. § 411(d)(6)] protected benefits only if they are provided under the terms of a plan," nevertheless, if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of section 411(d)(6) and, where applicable, the definitely determinable requirement of section 401(a), including section 401(a)(25). . . . [26 C.F.R. § 1.411(d)-4, A-1(c)(emphasis added).]

Significantly, the McClintock claimants sought "[a] sum of money that represents the restitution owed [them] and the Class under the law."

In other words, regardless of whether the plan itself expressly entitled the claimants to the benefits they sought, the treasury regulation provided that, under the circumstances asserted by the McClintock claimants, such benefits "will be treated as provided under the terms of the plan." 26 C.F.R. § 1.411(d)-4, A-1(c). The claimants, moreover, sought those unpaid benefits as damages, which they termed "restitution." Thus, by whatever name, once the relief the McClintock claimants sought constituted "benefits under the plan," the policy exclusion applied.

Judge Malone's holding that the claim in the McClintock litigation was a claim for benefits due under the Plan even though the claimed benefit was not within the express terms of the Plan was consistent with other cases where courts have recognized that, under certain circumstances, ERISA can imply a claim which would otherwise not fall within the express terms of the plan. In May, supra, the court found that coverage under the plan's executive protection insurance policy was barred based on the "benefits due" exclusion. 305 F.3d at 600-02. One of the two class actions was based on the plan's alleged failure under ERISA to pay the proper interest rate the plan had specified when converting an annuity to a lump sum, and the other suit asserted an ERISA violation for failing to notify employees who continued working after retirement age about the status of certain benefits. Id. at 600-01. The plan had sought coverage for both actions, both of which eventually settled. Ibid. The May court, however, concluded that those suits involved plan benefits and "how to compute them"; therefore, coverage for such claims was excluded by the policy. Id. at 601. See also Pac. Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584, 591 (1st Cir. 2004) (a qualified profit-sharing plan denied coverage from its mutual fund errors and omissions carrier for indemnification for related contributions made for some employees).

Judge Malone reasoned that the same principles guiding the court in May compelled a similar result here. More specifically, he determined that pension plans governed by ERISA contained implied as well as express terms, and that the enhanced rate at issue, though not expressly provided for in the Plan, was nonetheless implied under the circumstances and, therefore, should be considered part of the benefits due the Plan participants. It was of little moment that ERISA did not prescribe a specific fixed rate because BOC was still under an obligation to correctly calculate the participants' cash accounts.

BOC seeks to distinguish May because it applied Missouri rather than New Jersey law, and May is contrary to the law of this State, which encourages the use of clear and nontechnically written policy language. It argues that Morton International, Inc. v. General Accident Insurance Co. of America, 134 N.J. 1, 25 (1993), cert. denied, 512 U.S. 1245, 114 S.Ct. 2764, 129 L.Ed. 2d 878 (1994) compels a result contrary to May. In Morton, an environmental clean-up case, the Court rejected the insurers' assertion that the term "as damages," not defined in the policy, was nonetheless "unambiguously . . . understood in the context of insurance coverage to have a technical but settled meaning" and should not apply to the "equitable-type relief" of environmental remediation. Id. at 23. In fact, Judge Malone's construction is actually in keeping with the straight-forward approach the Morton Court applied, 134 N.J. at 27, reasoning in part from Justice O'Hern's dissent in New Jersey Department of Environmental Protection v. Signo Trading International, Inc., 130 N.J. 51, 75-76 (1992) (O'Hern, dissenting), that "[d]amages means money to most people," and money was what DEP was seeking from the insured. Likewise, here, BOC's agreement to pay additional sums to Plan beneficiaries because of BOC's miscalculation or misrepresentation of pension benefits would, in turn, be deemed by most people to be "additional plan benefits," or "benefits due." See Webster's Ninth New Collegiate Dictionary, 144 (9th ed. 1985) (defining "benefits" as, among other things, "financial help in time of sickness, old age or unemployment" and "payment or service provided under an annuity, pension plan or insurance policy").

Our courts hold that an ambiguity exists in a contract where the terms "'are susceptible to at least two reasonable alternative meanings.'" Nester v. O'Donnell, 301 N.J. Super. 198, 210 (App. Div. 1997) (quoting Kaufman v. Provident Life & Cas. Ins. Co., 828 F. Supp. 275, 283 (D.N.J. 1992), aff'd, 993 F.2d 877 (3d Cir. 1993)). Under the facts of this case, namely the claims asserted by the McClintock plaintiffs and the purpose of the Federal policy, the term "benefits due" is not reasonably susceptible to any other meaning than the one the motion judge gave it. See Morrison v. Am. Int'l Ins. Co. of Am., 381 N.J. Super. 532, 541 (App. Div. 2005) (court concludes that a step-down clause in an automobile policy was not ambiguous, noting that the question of ambiguity "is not resolved by focusing upon the language contained in one section of the contract").

There are other sound reasons as well to reject BOC's claims. In this case, the "lump sum pension distributions," which BOC miscalculated, were clearly Plan benefits. Moreover, according to the settlement, the basis for each claimant's recovery amount was the "lump sum distribution that the Class Member previously received from the Plan"--again indisputably a Plan "benefit"--as then augmented by the terms of the settlement.

As noted by Judge Malone, and Judge Posner in May, supra, any other result would encourage plan administration contrary to public policy by inducing a so-called "moral hazard":

It would be passing strange for an insurance company to insure a pension plan (and its sponsor) against an underpayment of benefits, not only because of the enormous and unpredictable liability to which a claim for benefits on behalf of participants in or beneficiaries of a pension plan of a major employer could give rise, but also because of the acute moral hazard problem that such coverage would create. ("Moral hazard" is the term used to denote the incentive that insurance can give an insured to increase the risky behavior covered by the insurance.) Such insurance would give the plan and its sponsor an incentive to adopt aggressive (just short of willful) interpretations of ERISA designed to minimize the benefits due, safe in the belief that if, as would be likely, the interpretations were rejected by the courts, the insurance company would pick up the tab. [305 F.3d at 601.]

And see Waste Corp. of Am., Inc. v. Genesis Ins. Co., 382 F. Supp. 2d 1349, 1354-55 (S.D. Fla. 2005) (in addressing the public policy implicated in cases involving "whether to read breach of contract coverage into the insuring agreement," the court asked: "Who wouldn't buy insurance if he could decide whether to perform or decline to perform some act which would give him coverage for that action?"), aff'd, 2006 U.S. App. LEXIS 30030 (11th Cir. 2006).

BOC's contention that the McClintock plaintiffs' resort to § 1132(a)(3), which authorizes equitable relief, is determinative of the nature of claim is without merit. May, supra, addressed and rejected this same argument, expressing that "[i]f we are correct that 'terms of his plan' include terms implied by law, it is irrelevant under which provision the class actions were brought." 305 F.3d at 602. In either case, "[w]hat was being sought were benefits, and characterizing an award of benefits as a form of equitable relief would not bring it outside the exclusion in the policy." Ibid.

In short, the substance, rather than the form, of the claim asserted in the McClintock litigation demonstrates that the claimants sought benefits due under the Plan. Moreover, we are able to glean from this record that the McClintock litigation settled because there was a substantial likelihood that the plaintiffs would prevail on their claim that they received less than their due under the Plan. Under the clear and unambiguous terms of the policy exclusion, the McClintock claim was not covered under the policy.

Moreover, having found the exclusion clear and unambiguous, further discovery of the drafting history of the exclusion, other versions of the exclusion in other policies, and other claims was unnecessary. Nav-Its, Inc. v. Selective Ins. Co., 183 N.J. 110 (2005) does not require an examination of the development of each exclusionary clause. Nav-Its concerned a pollution exclusion clause. Id. at 112. Justice Wallace observed that the Court had reviewed the development of the pollution exclusion to assist its resolution of the insurance carrier's interpretation of that exclusion, id. at 123, which the Court characterized as "overly broad, unfair, and contrary to the objectively reasonable expectations" of the regulatory authorities in this and other states. Ibid. That is not this case.

BOC also argues that counsel fees and pre-judgment interest were not excluded from coverage. As Judge Malone stated, however, under the settlement agreement, counsel fees were to be paid, upon application to the court, from the settlement fund and based on the settlement fund. They were capped at $20,010,000, and defense counsel agreed not to oppose the counsel fee application. The settlement fund represented the amount paid to settle all the class-claimants' claims arising from the action which, as noted, sought to recover benefits the claimants claimed they were entitled to under the law. Thus, the counsel fee award was clearly paid from monies representing "benefits due," and therefore, excluded under the policy. For that reason, therefore, it is of no moment that the policy generally expressed that coverage was provided for "judgments," "settlements" and "[d]efense costs."

It is also not significant that ERISA allows counsel fee awards in the court's discretion. 29 U.S.C.A. § 1132(g). This grant of authority does not override an exclusion of the litigated claim in the liable party's applicable insurance policy. BOC's reliance on Sokolowski v. Aetna Life & Casualty Co., 670 F. Supp. 1199, 1209 (S.D.N.Y. 1987), is also misplaced. Sokolowski did not involve a settlement of the underlying claims, let alone one which expressly contemplated that the fees were to be paid from the settlement. Moreover, the court concluded that at least some of the underlying claims for which coverage was sought--particularly those against individual plan trustees--were covered under the policy. Id. at 1210.

The McClintock plaintiffs sought counsel fees pursuant to the so-called "common fund doctrine or any other applicable law." Common fund awards are based on the equitable principle that those who have benefited from litigation should share in its costs, as opposed to awards based on fee-shifting principles applied to encourage private enforcement of statutory rights. McLendon v. Cont'l Group, Inc., 872 F. Supp. 142, 156 (D.N.J. 1994).

For the purposes of coverage for settlement of counsel fees, it is irrelevant in this case that the McClintock claimants might have successfully obtained counsel fees from BOC if they proceeded to a trial. The McClintock plaintiffs sought benefits, which were excluded from coverage, and the settlement combined any separate counsel fee claims with the benefit claims. See id. at 152 ("[b]ecause the settlement achieved in this litigation extinguished any liability defendants might have had under the statutes for plaintiffs' attorneys' fees, the settlement converted the [underlying class action] litigation into a common fund case, notwithstanding the fact that the causes of action arose under fee-shifting statutes").

BOC also seeks coverage for the pre-judgment interest sought by the McClintock plaintiffs. Under the settlement, each class member's recovery factored in a "claimed interest recovery amount" defined in the settlement and based in part on "using time weighted prime rates," which amount, in turn, was used along with the "Interest Crediting Rate in effect for the year of distribution," discounted to a present value as of the distribution, to calculate each claimant's total recovery amount.

Allowance of pre-judgment interest in a contract action is a matter based on equitable principles. Manning Eng'g, Inc. v. Hudson County Park Comm'n, 71 N.J. 145, 159 (1976), vacated by 74 N.J. 113 (1977). The law recognizes payment of pre-judgment interest as "damages for the illegal detention of a legitimate claim or indebtedness." Small v. Schuncke, 42 N.J. 407, 415 (1964). In granting or denying interest, courts should apply equitable principles to "accomplish justice in each particular case." Ibid. See also Busik v. Levine, 63 N.J. 351, 358 (interest awarded in that tort action was not "punitive" but "compensatory," to "indemnify the claimant for the loss of what the moneys due him would presumably have earned if payment had not been delayed"), appeal dismissed, 414 U.S. 1106, 94 S.Ct. 831, 38 L.Ed. 2d 733 (1973).

Here, to the extent the McClintock claimants sought prejudgment interest, it was part and parcel of their claim for benefits owed and therefore not covered by the policy. In fact, by the formula applied in the settlement, it was compensation for those unpaid benefits which the settlement sought to achieve. See Pac. Ins. Co., supra, 369 F.3d at 590 n.8 (under ERISA, pre-judgment interest payable in the court's discretion to make a participant "whole" was "part and parcel of what is due the employees under the [p]lan and, as such, is not a liability incurred by reason of a breach of fiduciary duty").

Finally, BOC asserts that, regardless of the merits, Federal waived its denial of coverage for counsel fees and interest and was estopped from challenging these aspects of coverage. Our review of the record does not reveal that this issue was expressly raised before the motion judge. We decline to address on appeal an issue that has not been raised and adjudicated in the first instance in the trial court. Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973).

In the course of this opinion, we have concluded that, as held by the motion judge, the terms of the exclusion were clear and unambiguous, that the McClintock litigation asserted a claim for benefits due under the BOC employee benefit Plan, and that the McClintock claim fell squarely within the exclusion of the fiduciary policy. Having so concluded, we need not address the balance of the arguments regarding discovery, including the order striking BOC's proposed expert. The several orders barring further discovery and granting summary judgment in favor of Federal are affirmed.


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