On appeal from the Superior Court of New Jersey, Law Division, Union County, Docket No. L-4271-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
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 ...