Finding of Fraud for ERISA Violation Implicates Fraud Exclusion

The Pennsylvania Superior Court has held that a fraud exclusion bars coverage for a suit in which the trial court found that the insured committed fraud and the court’s ruling was upheld on appeal.  Cigna Corp. v. Exec. Risk. Indem. Co., 2015 WL 836933 (Pa. Super. Ct. Feb. 27, 2015).

Employees of the insured sued the insured for violation of the Employee Retirement Income Security Act (ERISA) for alleged misrepresentations made to the employees concerning conversion of their pensions from a defined benefit plan to a cash balance plan.  The employees alleged that the insured misled plan participants into believing that the conversion would not result in a decrease in benefits.  The trial court found that the insured made misrepresentations regarding the conversion and held that the insured’s misrepresentations constituted fraud.  The appellate court affirmed the trial court’s fraud finding.

The insured sought coverage under a fiduciary liability policy for the underlying action, and several insurers denied coverage based on an exclusion barring coverage for deliberately fraudulent or criminal acts or omissions (the “Fraud Exclusion”).  In the coverage litigation that followed, the court held that the Fraud Exclusion barred coverage for the underlying matter.  The court reasoned that the trial and appellate courts in the underlying action made express determinations that the insured’s conduct was fraudulent under federal law, and the court observed that the insured’s intentionally misleading statements also were also fraudulent under Pennsylvania law.  The court rejected the insured’s argument that the fraud exclusion did not apply because the policy provided broad coverage for wrongful acts.  The court held that it could not “read the wrongful acts provision as negating the fraudulent acts exclusion” as “the fraudulent or criminal act exclusion operates as an exception to the more general wrongful acts provision.”

The court also held that the trial court’s finding of fraud constituted a “final judgment” and triggered the fraud exclusion.  The court explained that, where a trial court makes an express determination of fraudulent conduct, that finding constitutes a “final judgment” unless and until it is reversed on appeal, which it was not.