Northrop Grumman Corporation v. AXIS Reinsurance Company et al

Filing 52

MEMORANDUM OPINION. Signed by Judge Matthew W. Brann on 10/26/2018. (nmg)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

No. 1:17-CV-01738

NORTHROP GRUMMAN
CORPORATION,

(Judge Brann)
Plaintiff,
v.
AXIS REINSURANCE COMPANY,
Defendant,
Cross-Claimant, and
Cross-Defendant,
v.
NATIONAL UNION FIRE
INSURANCE COMPANY OF
PITTSBURGH, PA
Defendant,
Cross-Claimant, and
Cross-Defendant.
MEMORANDUM OPINION
OCTOBER 26, 2018
Three motions for summary judgment—one filed by each of the three parties
to this action—are pending before this Court. Also pending is a motion to strike or
stay filed by the AXIS Reinsurance Company. For the reasons that follow, the
Court will grant, in part, the summary judgment motions filed by Northrop

Grumman and the National Union Fire Insurance Company of Pittsburgh as well as
the motion to strike or stay filed by AXIS.
I.

BACKGROUND
Like many employers, the Northrop Grumman Corporation gives its

employees the opportunity to participate in retirement plans through which
employees may invest a portion of their earnings in preselected funds. Northrop
Grumman created an “Investment Committee” and an “Administrative Committee”
to manage these plans.
The committees’ stewardship of the plans is governed by the Employee
Retirement Income Security Act of 1974 (“ERISA”).1 This law imposes a number
of fiduciary duties on the committees’ individual members2 and allows them to be
held personally liable when a breach of their duties results in a loss to the plans.3
To protect those individuals, Northrop Grumman purchases fiduciary liability
insurance.
A.

Northrop Grumman’s Fiduciary Liability Insurance

From August 1, 2006, to August 1, 2007, Northrop Grumman carried at least
$45,000,000 worth of fiduciary liability insurance. The first $15,000,000 of that

1

29 U.S.C. § 1001 et seq.

2

29 U.S.C. § 1104.

3

29 U.S.C. § 1109.

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coverage was provided through a policy issued by National Union;4 the second
$15,000,000 (which kicked in when the first $15,000,000 was exhausted) through a
policy issued by Continental Casualty Company;5 and the third $15,000,000
(which kicked in when the first $30,000,000 was exhausted) through a policy
issued by AXIS.6 All three policies in this tower of insurance were “claims-made”
policies—that is, they covered claims “made” during the 2006-2007 period, no
matter when the claims’ underlying conduct allegedly occurred.
Claims, however, are not always considered “made” at the time they are
reported to the insurers. For example, claims reported after the 2006-2007 policy
period are nevertheless considered made during the 2006-2007 policy period if the
claims “alleg[e] any Wrongful Act which is . . . related to any Wrongful Act
alleged” in any other claim made during the 2006-2007 policy period.7 The effect
of this “Relation-Back Provision” was that, once a claim was made during the
2006-2007 policy period, a subsequent claim alleging a related “Wrongful Act” (as
that term was defined by the policies) would also be covered by that period’s
insurance tower.

4

ECF No. 31 at AA1-AA58.

5

ECF No. 31 at AA59-AA72.

6

ECF No. 31 at AA73-AA84.

7

2006-2007 National Union Policy § 8(b), as amended by Endorsement 12.

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Northrop Grumman also had a tower of fiduciary liability insurance
covering the period from August 1, 2016, to August 1, 2017; as before, the first
$15,000,000 of that tower’s coverage was provided through a claims-made policy
issued by National Union.8 Complementing the earlier policies’ Relation-Back
Provision, the 2016-2017 policy specifically excluded coverage for claims
“alleging . . . related Wrongful Act[s] alleged or contained[] in any claim which
has been reported prior to the inception of this policy.”9 Combined with the 20062007 policies’ Relation-Back Provision, this “Prior Notice Exclusion” means that
all claims alleging related Wrongful Acts are covered either by the 2006-2007
tower or the 2016-2017 tower—but not both.
B.

Class Action Lawsuits

On September 28, 2006, a class action lawsuit (“Grabek”) was filed against
members of Northrop Grumman’s Investment Committee and Administrative
Committee on behalf of all participants and beneficiaries of the company’s
retirement plans.10

Grabek’s operative complaint alleged that the committee

members violated their ERISA fiduciary duties by allowing the plans to pay
excessive administrative fees to Northrop Grumman11 and third-party service

8

ECF No. 31 at AA85-AA167.

9

Id. § 5.B, as amended by Endorsement 37.

10

Grabek v. Northrop Grumman Corporation, No. 06-6213 (C.D. Cal. filed Sept. 28, 2006).

11

Grabek’s Revised Consolidated Second Amended Complaint (ECF No. 31 at AA240AA271) ¶ 63.

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providers,12 and by allowing the plans to pay excessive investment management
fees on various funds offered by the plans, including an “Emerging Markets
Fund.”13 Northrop Grumman notified its insurers about the suit, who determined
that the claim was made during the 2006-2007 policy year; correspondingly, its
defense costs were covered by that year’s insurance tower.14
At its outset, the Grabek plaintiffs were only seeking to hold the committee
members liable for ERISA violations allegedly committed between September 28,
2000, and September 28, 2006.15 They eventually convinced the court to extend
that period to May 11, 2009.16 The Grabek action, however, continued to putter
along, and its plaintiffs eventually sought another expansion, this time to a date
twenty months before the then-unscheduled trial date.17 The court denied that
request on June 21, 2016.18
Less than three months later (and presumably as a result of that denial),
another class action lawsuit (“Marshall”) was filed against members of Northrop
Grumman’s Investment Committee and Administrative Committee on behalf of all

12

Id. ¶ 94.B.

13

Id. ¶ 57.D.

14

See October 9, 2006 Letter from AIG to Northrop Grumman (ECF No. 26-4 at NUMSJ0062NUMSJ0064).

15

See June 21, 2016 Order Denying Plaintiffs’ Motion to modify Discovery Period End Date
(ECF No. 31 at AA411-418).

16

Id.

17

Id.

18

Id.

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participants and beneficiaries of the company’s retirement plans.19 Marshall’s
operative complaint, as did Grabek’s, alleged that the committee members violated
their ERISA fiduciary duties by allowing the plans to pay excessive administrative
fees to Northrop Grumman20 and a third-party service provider,21 and by allowing
the plans to pay excessive investment management fees on the plans’ Emerging
Markets Fund.22 That complaint also specifically notes that Grabek was a “related
case.”23
Northrop Grumman attempted to obtain coverage for Marshall under the
2016-2017 insurance tower,24 but National Union (as noted above, issuer of the
first layer of that tower) took the position that Marshall alleged Wrongful Acts that
were related to the Wrongful Acts alleged in Grabek, and that, therefore, coverage
properly belonged under the 2006-2007 tower.25 Because National Union believed
that the coverage available under the first two layers of that tower ($30,000,000)
had been depleted defending Grabek and a related Department of Labor

19

Marshall v. Northrop Grumman Corporation, No. 16-6974 (C.D. Cal. filed September 9,
2016).

20

Marshall’s Second Amended Complaint (ECF No. 31 at AA551-AA594) ¶¶ 51-63.

21

Id. ¶¶ 64-79.

22

Id. ¶¶ 80-91.

23

Id. ¶ 102.

24

September 22, 2016 Letter from Northrop Grumman to AIG (ECF No. 26-4 at NUMSJ0275NUMSJ-0276).

25

November 16, 2016 Letter from AIG to Northrop Grumman (ECF No. 26-4 at NUMSJ0277NUMSJ0289).

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investigation,26 it argued that coverage for Marshall was owed by AXIS (as noted
above, issuer of the third layer of the 2006-2007 tower). AXIS, however, took the
position that Marshall was not related to Grabek and Marshall’s coverage,
therefore, belonged in the 2016-2017 tower—i.e., that National Union had to pay
as that tower’s first layer.
C.

Procedural History

The dispute between Northrop Grumman, National Union, and AXIS about
coverage for the Marshall action is the genesis of the instant lawsuit. Northrop
Grumman’s complaint, brought against both National Union and AXIS, seeks to
hold at least one of them responsible for covering Marshall’s defense costs.27
Nation Union’s28 and AXIS’s29 cross-claim complaints each argue that the other
defendant is responsible for coverage.
In the pending motions for summary judgment, Northrup Grumman and
National Union argue that AXIS is liable for Marshall defense costs; AXIS asserts
that such liability lies with National Union.

26

See infra § II.B.

27

ECF No. 1.

28

ECF No. 8

29

ECF No. 9.

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II.

DISCUSSION
A.

Whether Grabek and Marshall Allege “Related” Wrongful Acts

When determining if claims are “related”30 under a liability insurance policy,
a court must determine if there is either a “logical” or a “causal” connection
between them.31 No party here argues that there is a causal connection between
Grabek’s and Marshall’s allegations. Northrup Grumman and National Union,
however, assert that there is a logical connection. AXIS disagrees.
As noted above, the allegedly offending behavior in both Grabek and
Marshall is the administration of Northrop Grumman’s employee retirement plans
by Northrop Grumman’s Investment Committee and Administrative Committee.
Each case’s operative complaint relates the same specific behaviors: the plans’
payment of allegedly excessive administrative fees to Northrop Grumman and
third party service providers, and the plans’ payment of allegedly excessive
investment management fees on various funds within the plan, including the
Emerging Markets Fund. In opposing a finding of “relatedness,” AXIS does not
focus on distinguishing the type of complained-of behaviors in Grabek from the

30

Regarding choice of law, National Union’s brief (ECF No. 26-2) notes that California and
Virginia law may both be applicable to the “relatedness” issue, but avers that there is no
meaningful distinction between the two. Id. at 16 n.4. Northrop Grumman’s brief (ECF No.
29) agrees that there is “[n]o significant conflict of law . . . with respect to this motion.” Id.
at 16 n.6. AXIS’s brief (ECF No. 31) also fails to identify any important legal distinctions
between the available bodies of law. See id. at 13 n.13, 25 n.10. This Court, therefore, will
not decide the choice-of-law question, but will cite useful authority as needed.

31

Bay Cities Paving & Grading, Inc. v. Lawyers’ Mutual Ins. Co., 5 Cal.4th 854, 873 (1993).

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type of complained-of behaviors in Marshall.

Instead, AXIS focuses on

differences in the two actions’ parties and the fact that Grabek and Marshall seek
to recover for actions taken at different points in time.
It is true that there are differences between the Grabek parties and the
Marshall parties. Regarding the plaintiffs, Grabek’s class is composed of all
participants and beneficiaries of the Northrop Grumman plans during the period
running from September 28, 2000, to May 11, 2009; Marshall’s class, on the other
hand, comprises all participants and beneficiaries of the Northrop Grumman plans
during a period that begins September 9, 2010. AXIS correctly points out that the
sixteen-month gap between the end of the Grabek class and the beginning of the
Marshall class means that some members of the Grabek class are not members of
the Marshall class, and vice-versa. The flip side of that coin, however, is that there
is likely a very large overlap between members of the Grabek and Marshall
classes.
Regarding the defendants, AXIS notes that the actual composition of the
Administrative Committee and the Investment Committee has changed over time,
with the result being that, since ERISA imposes personal liability, judgment in the
two actions, if imposed, could be against completely different individuals. While
perhaps true, that does not change the fact that all defendants were acting in their

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committee-member capacities and, most importantly to this Court, were all
continuing in the same course of allegedly illegal conduct.
The existence of that continuing course of allegedly illegal conduct also
overcomes AXIS’s focus on the fact that Grabek and Marshall are seeking
recovery for actions taken at different points in time. While it is true that all
alleged fiduciary duty breaches in Grabek occurred earlier in time than all alleged
fiduciary duty breaches in Marshall, the type of breaches alleged (and the damages
alleged to have resulted) are all of exactly the same type and are, on their face, part
of a “single course of conduct.”32
This Court concludes, therefore, that Marshall and Grabek alleged related
Wrongful Acts. Consequently, Northrop Grumman’s claim for coverage of the
Marshall action should, pursuant to the 2006-2007 policies’ Relation Back
Provision and the 2016-2017 policies’ Prior Notice Exclusion, be considered made
at the time Northrop Grumman made its claim for coverage of the Grabek action—
i.e., during the 2006-2007 policy year.
B.

The Amount of Coverage Remaining Available Under the 20062007 AXIS Policy

As a result of the “relatedness” finding above, coverage for Marshall should
be provided under the 2006-2007 insurance tower.

There remains a dispute,

32

Continental Cas. Co. v. Wendt, 205 F. 3d 1258 (11th Cir. 2000).

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however, about the amount of coverage remaining available under the 2006-2007
AXIS policy.
While Grabek was underway, the Department of Labor initiated an ERISAbased investigation into Northrup Grumman’s retirement plans,33 which
investigation eventually ended in settlement.34 The insurers determined that the
investigation alleged Wrongful Acts that were related to the Wrongful Acts alleged
in Grabek. Therefore, the investigation was covered by the 2006-2007 policy
year’s insurance tower pursuant to the Relation-Back Provision discussed above.
For reasons unimportant to the disposition of the instant motions, AXIS
believes that National Union and Continental should not have covered the DOL
Investigation under their 2006-2007 policies, and that even if Marshall coverage
belongs under the 2006-2007 insurance tower, some of the $30,000,000 limits of
those policies is still available to cover Marshall. Attempting to assert that claim,
AXIS sued National Union and Continental in the United States District Court for
the Central District of California (the “California coverage action”) on November
30, 2017—one day before Northrop Grumman filed the case before this Court.35

33

See June 21, 2016 Letter from the United States Department of Labor (ECF No. 30-1 at 883896).

34

See Confidential Settlement Agreement (ECF No. 30-1 at 942-949).

35

AXIS Reinsurance Company v. Northrop Grumman Corporation, No. 17-8660 (C.D. Ca.
filed Nov. 30, 2017).

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In its summary judgment motion here, Northrop Grumman asks this Court to
decide how much coverage remains available under the 2006-2007 AXIS policy.
Resolution of this question, however, will necessarily require this Court to answer
the question presented squarely in the California coverage action—i.e., to decide
whether Nation Union and Continental should have covered the DOL investigation
under their 2006-2007 policies. AXIS’s motion to strike or stay asks this Court to
either strike all references to what it refers to as “the DOL settlement issue” from
Northrop Grumman’s briefs or, in the alternative, to stay further litigation here
until the California coverage action is resolved. This Court believes that a stay is
more appropriate, and will order one.
III.

CONCLUSION
For the reasons discussed above, Northrop Grumman’s claim for coverage of

the Marshall action should be considered made at the time Northrop Grumman
made its claim for coverage of the Grabek action. Having resolved that issue, the
Court will stay this action pending resolution of the California coverage action.
An appropriate order follows.
BY THE COURT:

s/ Matthew W. Brann
Matthew W. Brann
United States District Judge

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