Enterprising Solutions, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA

Filing 115

OPINION AND ORDER, denying Plaintiff's 109 Motion for Telephonic Status Conference; denying Plaintiff's 71 Motion for Partial Summary Judgment; granting Defendant's 81 Renewed Motion for Summary Judgment; the Parties shall inform the court within 20 days as to what remains of the case as a result of this decision. Signed by Judge Robert E Jones on 9/11/12.(REW)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
Enterprising Solutions, Inc., a Nevada
corporation, doing business as
Sunwest Employer Services,

No. 2:10-cv-01430-PHX-REJ
OPINION AND ORDER

Plaintiff,
v.
National Union Fire Insurance Company o
Pittsburgh, PA, a Pennsylvania
corporation,
Defendant.
Joyce N. Van Cott
Ryan J. Talamante
VAN COTT & TALAMANTE PLLC
2025 N. Third Street, Suite 260
Phoenix, AZ 85004
Attorneys for Plaintiff
Adam E. Lang
SNELL & WILMER
1 Arizona Center
400 E. Van Buren
Phoenix, AZ 85004-0001
Amy M. Samberg
SNELL & WILMER LLP - Tucson, AZ
1 S. Church Avenue, Suite 1500
Tucson, AZ 85701-1630
In this insurance coverage dispute, plaintiff Enterprising Solutions, Inc., dba Sunwest
Employer Services, filed this action against defendant National Union Fire Insurance Company in
Arizona state court, alleging claims for declaratory relief, breach of contract, and breach of the
implied covenant of good faith and fair dealing. Defendant removed the action to federal court on

the basis of diversity jurisdiction.
The action is now before the court on plaintiff’s renewed motion for partial summary
judgment and defendant’s renewed motion for summary judgment (## 71, 81). Both motions address
only plaintiff’s first claim, for declaratory relief. I have thoroughly reviewed the parties’ arguments
and submissions, and for the reasons explained below, I deny plaintiff’s motion and grant
defendant’s motion. Plaintiff’s Request for Telephonic Status Conference (#109) is denied.
STANDARD
Summary judgment should be granted if there are no genuine issues of material fact and the
moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). If the moving party
shows that there are no genuine issues of material fact, the non-moving party must go beyond the
pleadings and designate facts showing an issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 32223 (1986). A scintilla of evidence, or evidence that is merely colorable or not significantly probative,
does not present a genuine issue of material fact. United Steelworkers of America v. Phelps Dodge,
865 F.2d 1539, 1542 (9th Cir. 1989).
The substantive law governing a claim determines whether a fact is material. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also T.W. Elec. Service v. Pacific Elec.
Contractors, 809 F.2d 626, 630 (9th Cir. 1987). Reasonable doubts as to the existence of a material
factual issue are resolved against the moving party. T.W. Elec. Service, 809 F.2d at 631. Inferences
drawn from facts are viewed in the light most favorable to the non-moving party. Id. at 630-31.
The standard of review is the same for cross-motions as individual motions for summary
judgment: “‘The court must consider each motion independently and, when evaluating each, the
court must consider the facts in the light most favorable to the non-moving party.’” Winans v.
Starbucks Corp., 796 F.Supp.2d 515, 517-18 (S.D.N.Y. 2011)(quoting Morales v. Quintel Entm’t,
Inc., 249 F.3d 115, 121 (2d Cir. 2001)); see also, e.g., Nipponkoa Insurance Co. v. Norfolk Southern
Railway Co., 794 F.Supp.2d 838 (S.D. Ohio 2011).

PAGE 2 - OPINION AND ORDER

FACTUAL BACKGROUND
This coverage dispute arises out of plaintiff’s admitted failure to properly calculate the
necessary contributions to fully fund a group medical and group dental plan, which caused plaintiff
to terminate the plans effective August 19, 2009. The present action, between plaintiff and its
insurer, defendant National Union Fire Insurance Co., concerns whether plaintiff’s policies with
defendant cover the claims against plaintiff resulting from termination of the plans.
The following factual background is drawn from the parties’ statements of fact and is limited
to those facts the court deems relevant to this decision. Unless otherwise noted, the facts set forth
below are undisputed for purposes of the present motions.1
a.

Plaintiff

Plaintiff is a professional employer organization (“PEO”) that provides services to employers
by assuming various employer-related responsibilities, such as payroll services. As a PEO, plaintiff
assumes the various employer-related responsibilities by entering into “co-employer agreements”
with its employer-clients. Under the agreements, plaintiff becomes a co-employer of the employerclient’s employees.
One of the PEO services plaintiff offered to its employer-clients was the administration of
an employee health benefit program. The benefit plan documents, Exhibits C (group health) and D
(dental) to plaintiff’s Statement of Facts in Support of Motion for Partial Summary Judgment
(“PSOF”), specify, among other things, the names of the plans, the type of plan, the Plan
Administrator, the Plan Sponsor, and the Claims Administrator. See PSOF, Exhibit (“Exh.”) C,
p. 83; Exh. D, p. 34. The group health plan designates Enterprising Solutions, Inc. dba Sunwest
Employers Services, Inc., as the Plan Name, Plan Sponsor, and Plan Administrator, and Benefit
Systems & Services (“BSSI”) as the Claims Administrator. The only difference between the group
health plan and the dental plan with respect to the above is the Plan Name for the dental plan, which

1

The court will, for the most part, omit citations to the parties’ multiple statements

of fact.
PAGE 3 - OPINION AND ORDER

is Enterprising Solutions, Inc. dba Sunwest Employers Services Inc. Group Standard Dental Plan.
I refer to the plans in this decision as the “Sunwest Plans.” Both plans are self-funded. See Exh. C,
p. 83; Exh. D, p. 34.
Among other things, plaintiff was responsible for determining the amount of contributions
to the Sunwest Plans, making sure that the contributions covered the medical and dental claims and
other expenses of the plans, properly receiving and processing information and noticing errors that
would have reduced or avoided losses sustained by the plans, and taking appropriate remedial
measures when necessary.
Plaintiff established the amount of contributions required to be paid into the Sunwest Plans
by the employers and employees each year based on, e.g., prior claim history, incurred but not
reported claims, records in plaintiff’s possession, general claim trends, and other information
plaintiff received from the Claims Administrator, BSSI. The aggregate amount of contributions from
the employers and employees was intended to cover all costs of the Sunwest Plans for each plan year,
including all claims for benefits.
The contribution levels plaintiff established for 2008 and 2009 were insufficient to cover all
claims and expenses. Consequently, plaintiff notified the plan participants that it was terminating
the Sunwest Plans effective August 19, 2009. According to plaintiff, since April 2009, it has
received over 550 complaints from various Sunwest Plans claimants, which plaintiff describes as
“Sunwest Plan participants,” “the participants’ co-employers,” and “the contracted medical
providers.” Complaint, ¶ 36. Defendant disputes the number of complaints, but the dispute over
numbers is not material to my decision. Defendant notes that of the claims, it has defended or settled
seven on plaintiff’s behalf, subject to a reservation of rights. See National Union’s Renewed Motion
for Summary Judgment, p. 3 and p. 3 n.2.

PAGE 4 - OPINION AND ORDER

b.

The Insurance Policies2

On March 31, 2008, defendant issued a Staffing Services Liability Policy to plaintiff,
effective March 31, 2008, through March 31, 2009. The Staffing Services Liability Policy was
renewed and the renewal policy was effective from March 31, 2009, to March 31, 2010. In all
respects relevant to the pending motions, the policies are identical.3
The Staffing Services Liability Policy gave plaintiff several different types of coverage,
including coverage for “Wrongful Acts, Errors and Omissions” (Coverage A). Coverage A provides:
We will pay those sums you are legally obligated to pay to compensate others for loss
resulting from your wrongful act or that of another for whom you are legally
responsible. The wrongful act must first take place during the policy period and
solely in the conduct of your business as a staffing service or as a personnel
placement service in the Coverage Territory.
Defendant’s Statement of Facts in Support of Renewed Motion for Summary Judgment (“DSOF”),
Exh. 1, p. 003. The Staffing Services Liability Policy included an Employee Benefit Liability
(“EBL”) Endorsement and a PEO Endorsement.
(1)

The PEO Endorsement

The PEO Endorsement includes several definitions that amend the Staffing Services Liability
Policy. See DSOF, Exh. 1, pp. 036-037. The PEO Endorsement defines “staffing services” as
“service(s) performed for clients for a fee to supply that client with a staffing service employee(s).”
Id. at 036. Staffing services “includes professional employer organization (PEO).” Id. The PEO
Endorsement defines PEO to mean:

2

Defendant also issued a Commercial Umbrella Policy to plaintiff covering the
same periods. See Complaint, ¶¶ 22-26. The umbrella policy provided excess coverage for sums
plaintiff “becomes legally obligated to pay by reason of liability imposed by law or assumed by
[plaintiff] under an Insured Contract because of Bodily Injury, Property Damage, Personal Injury
or Advertising Injury that takes place during the Policy Period and is caused by an Occurrence
happening anywhere in the world.” Complaint, ¶ 23. Because the umbrella policy provides
excess coverage only, the policy terms do not inform my decision on the present motions.
3

Because the relevant language did not change, the court will cite only to the 20082009 policy and endorsements.
PAGE 5 - OPINION AND ORDER

an employer whose business is to contractually assume defined employer
responsibilities of a client’s workers. This employer provides integrated business
services to manage human resource responsibilities. The employer delivers these
services by establishing and maintaining an employer relationship with the workers
assumed from its clients by a contract that defines certain employer rights and
responsibilities for its clients and leased employees.
Id.
The PEO Endorsement defines “wrongful act” as:
[A]ny breach of duty, neglect, error, misstatement, misleading statement or omission
in performing or failing to perform services for others for a fee in the administration
of leased employees assumed from the client.
DSOF, Exh. 1, p. 037. The PEO Endorsement excludes from Coverage A (Wrongful Acts, Errors
and Omissions) of the Staffing Services Liability Policy “[a]ny Insured’s failure to fulfill any duty
or obligation imposed by the Employment Retirement Income Security Act of 1974, including
amendments to that law, or similar federal, state, or local statutory or common law.” Id.
(2)

The EBL Endorsement

The EBL Endorsement provided coverage to plaintiff pertaining to the employee benefits
program for:
all sums which you shall become legally obligated to pay as damages because of any
claim made against you for “wrongful acts” arising out of the “administration” of
your “employee benefits program”, as defined in the Definitions section of this
endorsement. This insurance applies only if the “wrongful act” occurs on or after the
retroactive date, if any, shown in the schedule above and prior to the end of the policy
period and a claim for damages covered by this endorsement is first made against you
during the policy period.
DSOF, Exh. 1, p. 040. The EBL Endorsement defines “wrongful act” as “any actual or alleged
negligent act, error or omission in the “administration of your “employee benefits program.” DSOF,
Exh. 1, p. 041. “Employee benefits program” is defined to include, among other things, “group
accident or health insurance” and “any other similar employee benefits” in programs “offered by you
to your ‘employees.’” Id. at p. 040. “Administration” means:
(a) giving counsel to employees with respect to your “employee benefits program”;
(b) interpreting your “employee benefits program”; (c) handling of records in
connection with your “employee benefits program”; or (d) effective enrollment,
termination or cancellation of “employees” under your “employee benefits
PAGE 6 - OPINION AND ORDER

programs”, provided any action which gives rise to a “Wrongful Act” was authorized
by you.
DSOF, Exh. 1, p. 040.
Similar to the PEO Endorsement, the EBL Endorsement excludes coverage for:
all sums which you shall become legally obligated to pay as loss because of any
“breach of fiduciary duty” or because of any “breach of fiduciary duty” by any person
for whom you are legally responsible and arising out of your activities as a fiduciary
of any plan covered by this endorsement.
DSOF, Exh. 1, p. 041. “Breach of fiduciary duty” is defined as:
the violation of any of the responsibilities, obligations or duties imposed upon
fiduciaries by the EMPLOYEE RETIREMENT INCOME SECURITY ACT OF
1974 or amendments thereto (hereinafter referred to as “ERISA”[)] with respect to
any plan formed under ERISA which is [covered] by this endorsement.
Id.
DISCUSSION
Plaintiff’s claim for declaratory relief asks the court to find that plaintiff “is afforded
insurance coverage for the claims of the Sunwest Plan Claimants under the Staffing Services Policy
and/or the Umbrella Policy, and that [defendant] has the obligation to immediately investigate those
claims and provide [plaintiff] with a defense to those claims.” Complaint, p. 12. In its motion
papers, plaintiff clarifies that what it really seeks is a declaration that defendant must defend and
indemnify plaintiff for the claims brought against it.4 See Plaintiff’s Motion for Partial Summary
Judgment, p. 2. In essence, plaintiff asserts that under Arizona contract law, defendant is obligated
under the Staffing Services Liability Policy and the EBL Endorsement to provide coverage.
Defendant, in turn, makes numerous arguments against a finding of coverage. Several of
defendant’s arguments ask the court to decide issues that are fact-specific and not appropriate for
summary judgment. These arguments include: how many actual claims against plaintiff remain;
whether plaintiff properly tendered any of the claims to defendant; whether plaintiff is “legally

4

The parties do not separately address issues of defense v. indemnification, thus,
the court will not address these issues separately.
PAGE 7 - OPINION AND ORDER

obligated to pay” the remaining claims; whether the claimants submitted all necessary information
to obtain benefits; and finally, who is the “insured” under the policy. See generally Defendant’s
Renewed Motion for Summary Judgment, pp. 12-22. If these were defendant’s only arguments,
material issues of disputed fact would preclude summary judgment.
Defendant also contends, however, that plaintiff’s actions that resulted in termination of the
Sunwest Plans do not qualify for coverage as “wrongful acts” under the Staffing Services Liability
Policy and endorsements, but more importantly, are specifically excluded from coverage. These
arguments raise issues of contract interpretation, which are appropriate for this court to address in
the context of summary judgment.
a.

Arizona Principles of Insurance Policy Interpretation

The interpretation of an insurance policy presents a question of law. Colorado Cas. Ins. Co.
v. Safety Control Co., Inc., 228 Ariz. 517, 525, 269 P.3d 693 (Ariz. App. 2012). Arizona courts
interpret insurance contracts “‘according to their plain and ordinary meaning,’” id. (quoting Keggi
v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43, 46, 13 P.3d 785 (Ariz. App. 2000)), and
“examine the policy’s terms from the standpoint of one untrained in law or the insurance business.”
Id. (citing Thomas v. Liberty Mut. Ins. Co., 173 Ariz. 322, 325, 842 P.2d 1335 (Ariz. App. 1992)).
“‘[A]mbiguity in an insurance policy will be construed against the insurer’; however, this rule
applies only to provisions that are ‘actually ambiguous.’” Keggi, supra, 199 Ariz. at 46 (citation
omitted). When interpreting an insurance contract, an Arizona court “ha[s] a duty to ‘harmonize all
parts of the contract by a reasonable interpretation in view of the entire instrument,’” and “the
‘specific provisions of a contract qualify the meaning of a general provision.’” Aztar Corp. v. U.S.
Fire Ins. Co., 223 Ariz. 463, 475, 224 P.3d 960 (Ariz. App. 2010) (citations omitted).
“Generally, the insured bears the burden to establish coverage under an insuring clause, and
the insurer bears the burden to establish the applicability of any exclusion.” Keggi, 199 Ariz. at 46
(citation omitted).

PAGE 8 - OPINION AND ORDER

b.

Analysis

Although it is a stretch to categorize plaintiff’s conduct as “wrongful acts” within the
meaning of the various definitions set forth above, for purposes of this decision, I find that the
language of the policy and the endorsements is broad enough to cover plaintiff’s potential losses
from “wrongful acts” in the administration of the Sunwest Plans, assuming all the conditions
precedent for valid claims under the policy were, as a factual matter, satisfied. I conclude, however,
that even assuming that plaintiff’s failure to pay medical and dental claims and termination of the
Sunwest Plans qualify as “wrongful acts” under the policy and that plaintiff properly tendered the
claims against it to defendant, the policy excludes coverage for the conduct that resulted in plaintiff’s
termination of the Sunwest Plans.
Plaintiff admits that it failed to properly calculate the contributions necessary to fully fund
the Sunwest Plans, and that the miscalculation of contributions resulted in termination of the plans.
Complaint, ¶¶ 30 and 31-35; see also Plaintiff’s Motion for Partial Summary Judgment, p. 4
(“Unfortunately, the contributions levels that [plaintiff] established during 2008 and 2009 were
insufficient to cover the cost of medical and dental claims and other expenses of the Sunwest Plan
that were incurred during 2009, and [plaintiff] was forced to terminate the Sunwest Plan as of August
19, 2009").
Plaintiff contends that miscalculation of benefits does not implicate ERISA fiduciary duties
but rather fits within the definition of “administration” of an employee benefit plan covered under
the Staffing Services Liability Policy and EBL Endorsement.5 Plaintiff further contends that
5

Plaintiff compares its miscalculation of contributions to fund the Sunwest Plans to
the improper calculation of benefits resulting in underfunding of a plan, citing Maryland Cas. Co.
v. Economy Bookbinding Corp. Pension Plan and Trust, 621 F.Supp. 410 (D. N.J. 1985). The
Maryland Cas. court did conclude that the calculation of benefits fell within the clause
“interpreting the Employee Benefits Programs” in the definition of “administration,” but more
importantly (which plaintiff fails to mention), the court noted that the employee benefits liability
policy in that case did not, through the insurer’s oversight, contain a specific exclusion
concerning ERISA violations, in stark contrast to the policy at issue in this case. See Maryland
Cas., 621 F.Supp. at 412.
PAGE 9 - OPINION AND ORDER

defendant has failed to identify any ERISA provision that plaintiff’s conduct breached.
As noted above, the EBL Endorsement defines “administration” as:
(a) giving counsel to employees with respect to your “employee benefits program”;
(b) interpreting your “employee benefits program”; (c) handling of records in
connection with your “employee benefits program”; or (d) effective enrollment,
termination or cancellation of “employees” under your “employee benefits programs”
....
DSOF, Exh. 1, p. 040. Courts have differed in how they interpret “administration” in similar policy
endorsements - some narrowly to mean purely ministerial acts,6 and others more broadly7 - but I have
found no authority for the proposition that discretionary decision-making activities such as
determining the amount of contributions necessary on yearly basis to sustain a benefit plan’s ability
to reimburse medical and dental claims and pay the plan’s expenses qualify as “administration”
under the policy definition.
Plaintiff’s calculation of contribution levels involved the exercise of discretion and was not,
therefore, merely administrative. In that respect, plaintiff’s exercise of discretion in failing to
properly calculate contributions is not included within the definition of “administration” and is
beyond the scope of the policy.
In any event, I find that to the extent plaintiff’s miscalculation of contribution levels might
qualify as “administration,” it nonetheless was a discretionary action undertaken in a fiduciary

6

E.g., Maryland Casualty Co. v. Economy Bookbinding Corporation Pension Plan
and Trust, 621 F.Supp. 410, 413-14 (D. N.J. 1985) (“It is clear that the policy limits coverage to
liability incurred in relatively routine, ministerial acts performed in relation to the Pension Plan,
and avoids coverage of liability incurred in the decision-making and monitoring involved in
managing the Plan’s investments.”)
7

E.g., Medford v. Argonaut Ins. Group, 2007 WL 4570713 * 4 (D. Or. Dec. 26,
2007 (Panner, J.) (“The policy itself does not restrict the definition of ‘administration’ to
ministerial acts” -- finding that decision not to obtain health insurance that did not cover retirees
‘[e]ffect[ed] enrollment, termination or cancellation of employees under the employee benefit
programs.”); Stinker Stores, Inc. v. Nationwide Agribusiness Ins. and Order Co., 2010 WL
1338380 (D. Idaho March 31, 2010) (“decision to terminate an employee benefit plan may
qualify as a negligent act, error or omission which causes the termination or cancellation of an
employee under an employee benefit plan.”)
PAGE 10 - OPINION AND ORDER

capacity and was subject to ERISA fiduciary standards of care. Plaintiff, the named plan
administrator, was the ERISA fiduciary for the Sunwest Plans. See PSOF Exh. C, p. 83-84 (“The
named fiduciary is the plan administrator”), and Exh. D, p. 34-35 (same). ERISA defines a
“fiduciary” as follows:
[A] person is a fiduciary with respect to a plan to the extent (I) 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; (ii) 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 (iii) he has any discretionary authority or
discretionary responsibility in the administration of the plan.
29 U.S.C. § 1002(21)(A). Thus, ERISA defines fiduciary in functional terms of control and
authority over a plan. DeLuca v. Blue Cross Blue Shield of Michigan, 628 F.3d 743, 747 (6th Cir.
2010). The Sunwest Plans specify the control and authority over the plans: “The Plan Administrator
shall have the sole discretionary authority to control and manage the operation and administration
of the Plan.” PSOF, Exh. C, p. 84; Exh. D, p. 35. And as the plan fiduciary, plaintiff was charged,
by statute, to discharge its duties “with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with like aims. . . .” 29
U.S.C. § 1104(a)(1)(B).
As plaintiff states in response to defendant’s motion:
Courts must . . . determine whether the conduct at issue constitutes management or
administration of the plan that may give rise to a fiduciary obligation, or whether it
involves a settlor function or merely a business decision that has an effect on an
ERISA plan but is not subject to fiduciary standards. See Hunter v. Caliber System,
Inc., 220 F.3d 702, 718-19 (6th Cir. 2000) (“[I]t is not the exercise of discretion alone
that makes an employer’s action subject to fiduciary standards . . . [r]ather , the
exercise of discretion must relate to plan management or administration.”)
Plaintiff’s Response to Defendant’s Renewed Motion for Summary Judgment, p. 13. Having
thoroughly considered the issue, I conclude that plaintiff’s failure to properly calculate the
contributions necessary to fully fund the Sunwest Plans was, indeed, the exercise of discretion
relating to plan management and administration and was, consequently, subject to ERISA fiduciary
PAGE 11 - OPINION AND ORDER

standards. Consequently, plaintiff’s conduct was excluded from coverage under the Staffing
Services Liability Policy and the PEO and EBL Endorsements.
I also note the evidence of record of communications between plaintiff’s president, Rebeccah
Sotelo, and plaintiff’s insurance agent concerning pricing for specific fiduciary liability coverage.
See DSOF, Exhs. 3-6. Plaintiff declined fiduciary coverage and instead purchased the Staffing
Services Liability Policy and endorsements in issue, which, in more than one place, specifically
exclude coverage for any breach of fiduciary duty as defined in the policy. The plain language of
the policy exclusions thus belie plaintiff’s argument that its reasonable expectation was that
defendant’s policy covered plaintiff as a fiduciary of the benefit plans.
CONCLUSION
Plaintiff’s Motion (# 71) for Partial Summary Judgment is DENIED. Defendant’s Renewed
Motion (# 81) for Summary Judgment is GRANTED. The parties shall inform the court within 20
days as to what remains of the case as a result of this decision.
IT IS SO ORDERED.
DATED this 11th day of September, 2012.

/s/ Robert E. Jones
ROBERT E. JONES
U.S. District Judge

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