Insurance Company of the State of Pennsylvania v. OCE-USA Holdings, Inc. et al

Filing 35

MEMORANDUM Opinion and Order Signed by the Honorable Edmond E. Chang on 3/26/2013:Mailed notice(air, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INSURANCE COMPANY OF
THE STATE OF PENNSYLVANIA,
Plaintiff,
v.
OCÉ-USA HOLDINGS, INC.,
Defendant.

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No. 12 C 04713

Judge Edmond E. Chang

MEMORANDUM OPINION AND ORDER
Plaintiff Insurance Company of the State of Pennsylvania (ISOP) filed this
action against Océ-USA Holdings, Inc. seeking a declaration that it has no duty to
defend or indemnify its insured, Océ, in connection with a lawsuit filed in the U.S.
District Court for the Northern District of Illinois encaptioned Krase v. Océ-USA
Holdings, Inc., No. 11 C 7659 (“Underlying Lawsuit”).1 The Underlying Lawsuit arises
from Océ’s alleged failure to uphold its duties and obligations as an employee welfare
benefit plan sponsor and administrator under the Employee Retirement Security Act
of 1974 (ERISA), 29 U.S.C. § 1001 et seq. In this insurance coverage dispute, ISOP

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This Court has subject matter jurisdiction under 28 U.S.C. § 1332. Specifically,
Plaintiff ISOP is a citizen of Pennsylvania and New York because it is incorporated in
Pennsylvania and has its principal place of business in New York. R. 9, Am. Compl. ¶ 2.
Defendant Océ is a citizen of Delaware and Illinois because it is incorporated in Delaware and
has its principal place of business in Illinois. Id. ¶ 3. The amount in controversy requirement
is satisfied because the potential cost of both defending and indemnifying Océ in the
Underlying Lawsuit exceed $75,000, which is not a “legally impossible” amount given the fact
that Krase seeks $226,000 in life insurance benefits in the Underlying Lawsuit. Back Doctors
Ltd. v. Metro. Property & Cas. Ins. Co., 637 F.3d 827, 829 (7th Cir. 2011); see also Am. Compl.
¶ 17.

argues that it need not defend or indemnify Océ in the Underlying Lawsuit because the
ISOP Policy contains an ERISA Exclusion. ISOP now moves for judgment on the
pleadings pursuant to Federal Rule of Civil Procedure 12(c). R. 13.2 For the reasons
explained below, ISOP’s motion is denied.
I. Background
A. The ISOP Policy
ISOP issued a commercial general liability insurance policy to Océ in 2008,
which was effective from December 1, 2008 to December 1, 2009. R. 9-2, Pl.’s Exh. B
(ISOP Policy). The Policy contains an Employee Benefits Liability Insurance
Endorsement, which does provide for insurance coverage for Océ’s administration of
its employee benefit program:
COVERAGE – EMPLOYEE BENEFITS LIABILITY
We will pay the Insured for those sums which the Insured shall become legally
obligated to pay as damages because of any “claim” made against the Insured
due to any “Wrongful act” of the Insured, or any other person for whose acts the
Insured is legally liable, in the “administration” of the “employee benefit
program” of the Insured.
Except with respect to the Retained Limit as indicated in Item 2 of the
Additional Declarations, we have the right and duty to defend any suit against
the Insured seeking damages on account of such negligent act, error or omission,
even if any of the allegations of the suit are groundless, false or fraudulent, and
we may make such investigation and settlement of any “claim” or suit as we
deem expedient. However, we will have no duty to defend the insured against
any “suit” seeking damages to which this insurance does not apply.

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Citations to the docket are indicated by “R.” followed by the docket entry.

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ISOP Policy, Empl. Benefits End. ¶ A.1.a. But the Policy also contains an exclusion
entitled, “ERISA,” which excludes coverage for:
Damages for which any insured is liable because of liability imposed on a
fiduciary by the Employee Retirement Income Security Act of 1974, as now or
hereafter amended, or by any similar federal, state or local laws.
Id. ¶ A.2.g. The sole dispute in this lawsuit is whether ISOP has a duty to defend and
indemnify Océ in the Underlying Lawsuit, or instead does the Policy’s ERISA
Exclusion apply.
B. The Underlying Lawsuit
In October 2011, Donald Krase, on behalf of his late wife Sandra Hansen-Krase,
filed a complaint against Océ and Life Insurance Company of North America, alleging
the following: Sandra Hansen-Krase was employed by Océ and received group life
insurance coverage and long term disability benefits under a group life insurance
policy provided by Océ and insured and underwritten by Life Insurance Company of
North America (LINA). R. 9-1, Underlying Compl. ¶¶ 1, 9. Due to a diagnosis of
terminal pancreatic cancer, Hansen-Krase stopped working and was placed on
disability leave on July 18, 2008. Id. ¶ 10. Her group life insurance coverage
terminated in January 2009. Id. ¶ 11. Hansen-Krase alleges that Océ was obligated,
under the group life insurance policy, to notify Hansen-Krase of her right to convert
the policy into an individual life insurance policy. Id. ¶ 12. In the alternative, Océ, as
the sponsor and administrator of the group life insurance plan, had a fiduciary duty
to notify Hansen-Krase of the availability of a “Terminal Illness Benefit” (a payment

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made if an insured is determined to be terminally ill) provided for in the group life
insurance policy. Id. ¶¶ 8, 12. Neither Océ nor LINA provided that notice. Id. ¶ 16.
On January 19, 2009, Océ sent a letter to Hansen-Krase informing her of her
conversion rights under the policy, but failed to mention the terminal illness benefit.
Id. ¶ 13. But because the letter was sent via a private courier and was misdirected,
neither Hansen-Krase nor her husband received the letter within the time allowed to
convert coverage. Id. Hansen-Krase died due to pancreatic cancer on April 9, 2009
without ever converting the group life insurance policy to an individual life insurance
policy or receiving the terminal illness benefit. Id. ¶¶ 15, 17.
In July 2009, Donald Krase, the surviving spouse of Hansen-Krase and the
designated beneficiary of her life insurance benefits under the policy, submitted an
initial claim for life insurance benefits. Id. ¶ 18. His request was denied by Océ, who
claimed that Hansen-Krase was not covered under the policy at the time of her death.
Id. Krase made several attempts to appeal the denial to Océ and LINA, arguing that
neither he nor his wife had received notice of her conversion rights under the policy,
but was met with little success. Id. ¶¶ 19, 20. Krase thus filed the underlying
complaint alleging that he is entitled to recover the life insurance benefits due to him
as the beneficiary of his wife’s life insurance plan under § 502(a)(1)(B) of ERISA, 29
U.S.C. § 1132(a)(1)(B). Id. ¶¶ 4, 21. In the alternative, Krase alleges that Océ and
LINA breached their fiduciary duty under § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3),
by failing to notify Hansen-Krase of her conversion right and right to the terminal
illness benefit under the policy. Id. ¶ 21.
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C. The Present Declaratory Judgment Action
In July 2012, Plaintiff ISOP filed this action seeking a declaration of ISOP’s
rights and obligations under the commercial general liability policy that it issued to
Océ. R. 9, Am. Compl. ISOP’s sole contention is that it has no duty to indemnify Océ,
basing the contention on the ERISA Exclusion contained in the Policy’s Employee
Benefits Liability Insurance Endorsement. Id. ¶¶ 24-32. Specifically, ISOP contends
that the ERISA Exclusion excludes coverage for the Underlying Lawsuit because
Krase’s claims against Océ arise solely from Océ’s alleged violations of its fiduciary
duties pursuant to ERISA. Id. ¶¶ 28-29. Because the coverage dispute turns on the
interpretation of the ERISA Exclusion, which is a pure question of law, ISOP now
moves for judgment on the pleadings [R. 13].
II. Legal Standard
A party may move for judgment on the pleadings after the pleadings are closed.
Fed. R. Civ. P. 12(c). A motion for judgment on the pleadings is subject to the same
standard as a motion to dismiss under Rule 12(b)(6). N. Ind. Gun & Outdoor Shows,
Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998). In ruling on a motion for
judgment on the pleadings, the Court must “accept as true all well-pleaded
allegations,” Forseth v. Vill. of Sussex, 199 F.3d 363, 368 (7th Cir. 2000), and view the
alleged facts in the light most favorable to the non-moving party, Flenner v. Sheahan,
107 F.3d 459, 461 (7th Cir. 1997). Judgment on the pleadings is proper if it appears
beyond doubt that the non-moving party can prove no set of facts sufficient to support
his claim for relief. Id. In ruling on a motion for judgment on the pleadings, the Court
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considers the pleadings alone, which consist of the complaint, the answer, and any
documents attached as exhibits. Northern Indiana, 163 F.3d at 452.
III. Analysis
To escape a duty to indemnify and to defend Océ, ISOP relies on the ERISA
Exclusion, which excludes coverage for “[d]amages for which any insured is liable
because of liability imposed on a fiduciary by [ERISA].” ISOP Policy, Empl. Benefits
End. ¶ A.2.g. According to ISOP, this policy language means that there is no coverage
for any liability that an insured, who happens to be a fiduciary, incurs under ERISA.
See R. 13, Pl.’s Mot. J. Pl. at 7. And, because Océ—who is a fiduciary by virtue of its
status as a sponsor and administrator of an employee benefit plan governed by
ERISA—faces ERISA-related liabilities in the Underlying Lawsuit, ISOP argues that
it has no duty to defend or indemnify Océ under the Policy. Id.
A. Duty to Defend Standard
Under Illinois law,3 the interpretation of an insurance policy is a question of law.
Crum & Forster Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073, 1077 (Ill.
1993). An insurer’s duty to defend its insured is much broader than its duty to
indemnify. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1220 (Ill.
1992). “Whether an insurer must defend the insured is a question resolved by
comparing the allegations of the underlying complaint against the insured to the

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The Court must apply state substantive law in diversity cases. Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938). Here, the ISOP Policy is silent as to which state’s law
governs, but because both parties assume that Illinois law governs this coverage dispute, the
Court will join in that assumption. Gould v. Artisoft, Inc., 1 F.3d 544, 549 n.7 (7th Cir. 1993).

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insurance policy.” Conn. Indem. Co. v. DER Travel Serv., Inc., 328 F.3d 347, 349 (7th
Cir. 2003) (citing Lapham-Hickey Steel Corp. v. Prot. Mut. Ins. Co., 655 N.E.2d 842,
847 (Ill. 1995). “If the facts alleged in the underlying complaint fall within or even
potentially within policy coverage, the insurer has a duty to defend its insured against
the complaint.” United States Fire Ins. Co. v. Aetna Life & Cas., 684 N.E.2d 956, 960-61
(Ill. App. Ct. 1997) (internal quotation marks, citation, and emphasis omitted). The key
“is not the legal label that the [underlying] plaintiff attaches to the [insured’s] conduct,
but whether that conduct as alleged in the complaint is at least arguably within one
or more of the categories of wrongdoing that the policy covers.” Curtis-Universal, Inc.
v. Sheboygan Emergency Med. Servs., Inc., 43 F.3d 1119, 1122 (7th Cir. 1994) (citations
omitted). If the underlying complaint alleges several theories of recovery against the
insured, the insurer is obligated to provide a complete defense to all the claims even
if only one such theory falls within the potential coverage of the policy. U.S. Fid.&
Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930 (Ill. 1991) (citation omitted).
The insurer has the burden of proving that an exclusion applies, while the insured has
the burden of proving that an exception to an exclusion restores coverage. Santa’s Best
Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 347 (7th Cir. 2010)
(citations omitted).
In determining whether a duty to defend exists, the underlying complaint and
insurance policy must be construed liberally, resolving all doubts in the insured’s favor.
Wilkin, 578 N.E.2d at 930. “Where a policy provision is clear and unambiguous, its
language must be taken in its plain, ordinary, and popular sense.” Id. (citations and
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quotation marks omitted). But “if the words in the policy are susceptible to more than
one reasonable interpretation, they are ambiguous and will be construed in favor of the
insured and against the insurer who drafted the policy.” Outboard Marine Corp., 607
N.E.2d at 1212 (citations omitted). With these principles in mind, the Court now
considers ISOP’s obligations to defend Océ against the underlying complaint.
B. ISOP’s Duty to Defend
As mentioned above, Donald Krase alleges two separate claims against Océ in
the Underlying Lawsuit. First, he brings a recovery-of-benefits claim under
§ 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B), on the basis that his wife had a
right under the group life insurance policy to personal notification of her conversion
rights. Underlying Compl. ¶ 12. Second, and in the alternative, he alleges that Océ’s
failure to notify his wife of either her conversion rights or the policy’s Terminal Illness
Benefit constituted a breach of fiduciary duty under § 502(a)(3) of ERISA, 29 U.S.C.
§ 1132(a)(3). Id. ¶¶ 12, 21.
Remember again that the ERISA Exclusion excludes coverage for “[d]amages for
which any insured is liable because of liability imposed on a fiduciary by [ERISA] . . . .”
ISOP Policy, Empl. Benefits End. ¶ A.2.g. In its briefs, ISOP seems to advance two
different interpretations of the ERISA Exclusion’s language: In its opening brief, ISOP
broadly contends that the ERISA Exclusion should be read to bar coverage for any
claims against the insured that are brought under ERISA, whether the insured is a
fiduciary under ERISA or not, see Pl.’s Mot. J. Pl. at 7, and cites to Cape Coral Medical
Center, Inc. v. American Continental Insurance Co., 2000 WL 151275 (M.D. Fla. Feb.
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4, 2000), for support. Under this interpretation, there is no coverage for either of
Krase’s claims because both claims are brought under ERISA. But then, in its reply
brief, ISOP urges a narrower reading of the exclusion to bar coverage for any cause of
action brought under ERISA against an insured who happens to be a fiduciary. See R.
21, Pl.’s Reply Br. at 3-4.
Neither of ISOP’s propounded interpretations is tenable in light of the policy
language’s clear command. The ERISA Exclusion precludes coverage for “[d]amages
for which any insured is liable because of liability imposed on a fiduciary by [ERISA].”
ISOP Policy, Empl. Benefits End. ¶ A.2.g (emphasis added). Unlike the ERISA
Exclusion described in Cape Coral, which simply—and sweepingly—excluded coverage
for “[l]iability based upon [ERISA],” 2000 WL 151275, at *1, the language in ISOP’s
ERISA Exclusion confines the exclusion to liability “imposed on a fiduciary by
[ERISA].” So Cape Coral does not apply here, and the Court rejects an interpretation
that would sweep all ERISA-based liability within the ambit of the ERISA Exclusion.
ISOP’s second interpretation—that coverage should be barred for any ERISA
claim brought against an insured who happens to be a fiduciary, even if liability does
not arise out of an alleged breach of fiduciary duty—is also unreasonable. In effect,
ISOP wants the exclusion to read as if it excluded coverage for any ERISA claim
seeking “damages imposed on a fiduciary by ERISA.” But the policy language does not
say that; rather, it says that there is no coverage for an action seeking “[d]amages for
which any insured is liable because of liability imposed on a fiduciary by [ERISA].”
ISOP Policy, Empl. Benefits End. ¶ A.2.g (emphasis added). Not all actions seeking
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damages under ERISA seek damages “because of liability” for a fiduciary-duty breach;
it is only fiduciary-duty breach claims that are excluded from coverage.
ISOP insists that Just v. Accu-Turn, Inc., 2012 WL 1067106 (E.D. Wis. Mar. 28,
2012), is instructive in interpreting the exclusion language. There, the district court
interpreted an ERISA exclusion that excluded coverage for “[l]oss for which the insured
is liable because of liability imposed on a fiduciary by the Employee Retirement
[Income] Security Act of 1974 . . . .” Id. at *3. The district court stated that “[t]his
language is unambiguous. It does not exclude all ERISA claims and it does not exclude
all claims arising from a breach of fiduciary duty. Rather, it excludes losses arising
from a liability imposed on a fiduciary by ERISA.” Id. at *4. Relying on the conclusion
that the language was “unambiguous,” Just held that the exclusion should be read to
exclude neither all ERISA claims nor only those claims arising from a breach of
fiduciary duty. Instead, the policy “excludes losses arising from a liability imposed on
a fiduciary by ERISA.” Id. at *4. It would seem, then, that the district court interpreted
the policy language to exclude coverage for any ERISA claims brought against an
insured who is also a fiduciary.
But another part of Just’s analysis suggest that, perhaps, an insured who
sometimes acts as a fiduciary might not be excluded from coverage if the underlying
lawsuit alleged that the insured committed a wrong in the insured’s non-fiduciary
capacity. Just involved similar facts to the case at hand: there, the claimant in the
underlying suit brought a recovery-of-benefits claim under ERISA against his employer
for failing to notify him of his COBRA rights. Id. at *2. The insurer then brought a
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declaratory judgment action against the employer-insured to establish that it had no
duty to defend the employer in the underlying action. Id. at *1. In holding that the
ERISA exclusion excluded coverage, Just reasoned that “[the insured] came forward
with no evidence that it acted as plan administrator but not a fiduciary when advising
or failing to advise [the claimant] of his rights under COBRA and refusing payment.”
Id. at *6 (emphasis added). This reasoning suggests that whether the insured “acted
as” a fiduciary had some bearing on the applicability of the ERISA exclusion. Thus, it
cannot be the case that the insured’s mere status as a fiduciary is dispositive in
bringing the underlying complaint within the ambit of the ERISA exclusion. As Just’s
reasoning seems to suggest, the insured must have also been acting as a fiduciary in
the alleged wrongdoing to trigger the exclusion. So it appears that ISOP misplaces
reliance on Just for the proposition that the ERISA Exclusion applies so long as the
insured is being sued under ERISA and also happens to be a fiduciary.
It is worth repeating the pertinent exclusion language one more time: there is
no coverage for a lawsuit that seeks “[d]amages for which any insured is liable because
of liability imposed on a fiduciary by [ERISA] . . . .” ISOP Policy, Empl. Benefits End.
¶ A.2.g. Contrary to ISOP’s proffered interpretations, the Court concludes that the
plain and ordinary meaning of the policy’s ERISA Exclusion is that it excludes only
those ERISA claims that allege a breach of fiduciary duty under ERISA. This is so
because the limiting phrase, “because of liability imposed on a fiduciary by [ERISA],”
applies to the word immediately preceding it (here, “liable”), and does not extend to or

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include other words, phrases, or clauses that are more remote.4 Moreover, “liability
imposed on a fiduciary by [ERISA],” most logically modifies “liable,” because the
modifying phrase itself describes a form of liability. Thus, the exclusion covers only
ERISA liability that is incurred by virtue of the fact that the insured is a fiduciary.
This reading is bolstered by the fact that the modifying phrase, “because of liability
imposed on a fiduciary by [ERISA]” describes a causal connection between a fiduciary
and the liability incurred. In other words, but- for the unique liabilities imposed on
fiduciaries under ERISA, the insured would not be liable, and the exclusion would not
apply.
Having established that the ERISA Exclusion applies only to breach of fiduciary
duty claims, the only remaining question is whether the underlying complaint alleges
any claims that do not implicate the insured’s fiduciary duties, thus triggering ISOP’s
duty to defend. Here, the underlying complaint alleges two distinct causes of action
against Océ: one for recovery of benefits under 29 U.S.C. § 1132(a)(1)(B), and another
for breach of fiduciary duty under 29 U.S.C. § 1132(a)(3). Because the latter claim is
excluded from coverage, the Court must now determine whether the recovery-ofbenefits claim also falls within the ERISA Exclusion. It is true that the Court may not
rely on legal labels to determine whether there is a duty to defend, see CurtisUniversal, 43 F.3d at 1122, but rather must determine whether it is clear from the face
of the underlying complaint that the allegations state facts that bring the case within,
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This rule is generally applied in statutory interpretation as the “last antecedent
doctrine.” See Board of Educ. v. Regional Bd. Of Sch. Trustees, 481 N.E.2d 1266, 1271 (Ill.
1985); see also O’Kane v. Apfel, 224 F.3d 686, 690 (7th Cir. 2000).

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or potentially within, the policy’s coverage. DER Travel Serv., Inc., 328 F.3d at 349
(citation omitted). But the underlying complaint has satisfied that burden here. Krase
alleges that his wife had a right under the policy to personal notification of her
conversion rights, and that Océ’s failure to provide that notification constituted a
breach of contract that entitles him to recover life insurance benefits. Underlying
Compl. ¶ 12. As pleaded, Krase’s recovery-of-benefits claim stems from his wife’s
contractual rights under the policy, not any general fiduciary duty owed by Océ.
Accordingly, Krase’s recovery of benefits claim is separate and distinct from Océ’s
duties as a fiduciary, and does not trigger the ERISA Exclusion.5
ISOP contends that even if the Court were to accept Océ’s more limited reading
of the ERISA Exclusion, ISOP has no duty to defend with respect to the recovery-ofbenefits claim because Krase is not seeking “damages,” as required by the Policy, but
rather only seeks to recover amounts already due to him under the group life insurance
plan. Pl.’s Reply Br. at 6-7. The Court need not wade into the morass of case law on
whether recovery of benefits under ERISA constitutes relief in law or equity because
the ISOP Policy does not use the term “damages” with this distinction in mind. Rather,
“damages,” as used in the Policy, plainly and ordinarily means any amount that the
insured becomes legally obligated to pay because of a claim brought against it for a

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Whether Krase’s recovery-of-benefits claim can succeed on the merits is another
matter. But the Court does not decide the merits of the underlying claim when deciding
whether a duty to defend exists. See Universal Underwriters Ins. Co. v. LKQ Smart Parts, Inc.,
963 N.E.2d 930, 946 (Ill. App. Ct. 2011) (“The duty of defense depends on the nature of the
claim and has nothing to do with the merits of the claim.” (internal quotation mark and
citation omitted)).

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wrongful act committed in the administration of the insured’s employee benefit
program. See ISOP Policy, Empl. Benefits End. ¶ A.1.a. Accordingly, the Court rejects
ISOP’s argument that Krase’s recovery of benefits is excluded from coverage because
he is supposedly not seeking “damages.” Because Krase’s alternative claim for recovery
of benefits is entitled to defense and indemnification under the ISOP Policy, ISOP
must defend Océ as to the entire Underlying Lawsuit. Wilkin, 578 N.E.2d at 930.
C. Ambiguity
There is a second, independent basis for denying ISOP’s motion for judgment on
the pleadings: Even if it is not clear from the policy language that the ERISA Exclusion
applies only to breach of fiduciary duty claims, ISOP still owes a duty to defend
because the Exclusion is, at worst, ambiguous. Under Illinois law, an insurance policy
that is ambiguous or susceptible to at least two reasonable interpretations must be
construed in favor of the insured. Loftis v. Vesta Cos., 686 N.E.2d 383, 385 (Ill. App. Ct.
1997) (citation omitted). Even assuming that ISOP’s proposed interpretation of the
ERISA Exclusion is a reasonable one, we must construe the policy language in favor
of Océ, who has advanced a reasonable alternative reading. Thus, to the extent that the
ERISA Exclusion is ambiguous, the policy language must be construed in favor of Océ,
the insured, and judgment on the pleadings must be denied.
IV. Conclusion
For the reasons discussed above, ISOP’s motion for judgment on the pleadings
[R. 13] is denied. On or before April 3, 2013, the parties must submit position papers
stating their positions as to whether discovery is needed, or whether instead Defendant
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Océ intends to itself move for judgment on the pleadings or for summary judgment.
The next status hearing remains scheduled for April 4, 2013, at 9:30 a.m.

ENTERED:
s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge

DATE: March 26, 2013

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