Compliance is its own reward. I think that’s my new motto for one of the underlying themes of this blog, which is the importance of strong operational compliance in running any ERISA governed plan. The return on that investment takes many forms, running from happier – or at least less disgruntled – employees, to better returns on participant and employer contributions, to fewer lawsuits, and to better outcomes on those occasions when a lawsuit is filed. Along those lines, here’s a neat post on complying with SPD requirements. At the risk of sounding harsh, which I don’t meant to, if you administer a plan and the information in that post is news to you, you need to focus more on compliance, and find at least a good consultant on the nuts and bolts of running your plans.

Wow. This is a fascinating insurance coverage story – I know, people who don’t practice in that area will email me in droves to tell me there is no such thing, but still – that illustrates some important points. It is the story of the corporate officer of a juvenile facility that was involved, apparently without his knowledge, in bribing a judge to feed kids to the facility, and who has now been found to have no coverage, including of his defense costs, for the claims against him that resulted. There are two teaching moments in this story. The first is an insurance law point: despite his lack of involvement in the events at issue, he lost coverage because the policy contained exclusions that barred coverage for claims arising from the criminal acts of any insured, and it is well established that exclusions that apply when “any insured” commits the excluded act preclude coverage for all insureds, even those who played no role in the acts that triggered the exclusion. In contrast, policies often include exclusionary language that is much narrower and prevents exclusions from applying to insureds who were not actually involved in the excluded conduct, such as language stating that the exclusion only applies to “an insured” or “the insured” who commits the excluded act (rather than to “any insured”) or language stating that the exclusion does not apply to an insured who did not “in fact” participate in the conduct that triggered the exclusion. The insured in the story has learned the hard way that an exclusion that applies when “any insured” commits an excluded act deprives uninvolved insureds of coverage as well.

This leads to the second teaching moment provided by the story, and which echoes something I have often said in posts: insurance coverage cannot just be purchased and ignored until the time, if ever, a claim arises. It is important in advance to understand the scope of what is being purchased and what is excluded. The “any insured” problem posed in this case could have been avoided had the insured and its broker sought out a policy that uses narrower exclusionary language to avoid the exclusions applying to innocent insureds. I suspect without knowing that for a few dollars more, the company could have found a policy along those lines. It’s a day late and a dollar short to figure this out after the fact.

Here is a fine overview of employee benefit issues that arise after a corporate transaction. Of interest to me in particular is the discussion of compliance problems – broadly defined – in maintaining or running off the seller’s benefit plans and in amending the buyer’s plan to deal with the acquired employees or the coordination of the benefit plans. I preach regularly on this blog and in seminars, webinars and the like about the sheer importance, from a litigation perspective, in focusing like a laser on compliance issues. Compliance issues can often lead down the road to litigation, and thus strong compliance is the best way to avoid litigation. Beyond that, though, a focus on compliance at the operational level is indicative of a well run plan, and a well run plan is less likely to make the types of errors – whether of compliance or otherwise – that result not just in litigation, but also in liability. Although other issues may be in the foreground of a corporate transaction, the centrality of compliance in these ways makes it important that the details of the benefit plans not get short shrift during or after the transaction. Indeed, in some ways it’s a penny wise, pound foolish issue; I know from my own practice a company can spend years in litigation and many thousands of dollars sorting out problems with benefit plans after a transaction, and avoiding that outcome through a little extra planning and foresight is always a worthwhile investment.

I had the pleasure yesterday of presenting the September Advisor Success Webinar for BrightScope, in which I discussed the law and practice of fiduciary liability and exposure in detail. Its for subscribers only and not publicly available, but for those of you in the Boston area who are in the insurance industry, I will be touching on some of the same points when I speak as a member of a panel next month at a meeting of the Professional Liability Underwriting Society; more details on that to follow.

For now, though, I thought I would comment on one particular issue that seemed to strike a chord yesterday, which is the current status and likely future direction of stock drop litigation under ERISA. To date, stock drop litigation has not, as a general statement, been terribly successful, as least not from the perspective of those seeking to represent classes of participants; its been pretty darn successful for those representing plan sponsors and fiduciaries. The reason, as many readers already know, is the famous – or infamous, depending on which side of the “v.” you sit on – Moench presumption, which in essence imposes a powerful presumption that allowing substantial amounts of employer stock to be held in a defined contribution plan cannot constitute a breach of fiduciary duty unless the company was in severe financial distress, with severe meaning something more than just a significant decline in the stock price (courts’ exact phrasing on this point can vary).

What was of interest in the webinar was the question of whether this presumption will remain effective, or will instead fall by the wayside, which would open the door to more suits and likely as well to greater liability as a result of electing to offer employer stock as an investment option. The answer is that it will fall by the wayside, resulting in an increase of these types of suits and a rebirth of interest in this theory among the class action bar, if the Department of Labor has its way. In an amicus brief filed before the Second Circuit in the case of Gearren v. McGraw-Hill, the Department has outlined its position in this regard, which is, in a nutshell, that the presumption is inconsistent with ERISA’s mandates, and that, with regard to employer stock, the only exception to the generally high duties of care imposed on fiduciaries is the removal of any duties related to diversification of investment options. A Second Circuit ruling adopting this viewpoint will unquestionably expand stock drop exposure and increase lawsuits based on stock drop claims, by allowing the participants to focus on proving as a factual matter through discovery that it was not prudent to include employer stock, rather than being forced to prove that the company was under the level of severe financial distress needed to trump the Moench presumption before ever being able to investigate and prove that thesis. You can find a copy of the Department’s brief on this issue here.

I have a bias against writing short posts that just, in essence, pass along someone else’s work, without additional analysis, commentary or spin, which is good in many ways but does mean that it is tough to post when I am particularly busy at my day job. Nonetheless, I did want to pass along this short piece from the Legal Malpractice Law Review – which, despite its title, is a blog – on whether a legal malpractice action against an attorney who was providing legal services to a plan participant under a legal services plan can be preempted by ERISA. The answer, according to the case covered in the post, is that it can be, if one is not very careful in pleading the claim and constructing the theory. Its interesting to me because, infrequently but often enough to stick in my head, I hear from a participant in a company or union provided legal services plan who received the promised benefit of legal representation for a covered legal event, but with an outcome that screamed malpractice, and they want to know what claims they can bring against the lawyer or, just as often, the plan.

Here’s an interesting, although at a minimum somewhat overstated, diatribe against 401(k) plans from Forbes, in which the author complains about four specific risks to participants: greater investment risk than would exist investing outside of such a plan; problems with employer or vendor record keeping and management; the possibility of employer failure; and a lack of regulatory oversight, at least in comparison to the extent of regulation applicable to other investments. The author overstates some of his points – for instance, some of his complaints about regulatory oversight are more accurately seen as complaints about sponsor capabilities, such as with regard to publishing and timely distributing summary plan descriptions or making timely distributions.

What’s more interesting to note, though, than quibbling about the details of the author’s complaints, is the extent to which they primarily concern the fact that the 401(k) world, much more than being a regulatory driven regime, is governed more on a private attorney general model, in which breach of fiduciary duty lawsuits and denial of benefit claims are the tools that address and remedy the problems the author identifies. For instance, in his discussion of increased investment risk, he references the fact that, outside of 401(k)s, an investor can pick from the universe of funds, while within the 401(k), the investor is limited to the several funds included in the plan, which may not be the best performers or the cheapest (or, if neither, at least the funds with the optimum combination of performance and cost). This, though, is at heart what all breach of fiduciary duty claims related to excessive fees or other complaints about fund selection are directed at, namely whether the fiduciaries included the right mix of funds. In theory, fiduciaries will do that, if for no other reason than out of fear of being sued if they don’t. Anecdotally, there seems to be, for instance, greater attention being paid now by plans to fees and fund selection in the wake of the class action litigation that has been pursed over excessive fees and alleged non-disclosure of fees. This is a perfect example of a private attorney general mindset, in which the issues of concern – here, the operation of 401(k) plans – are expected to be avoided by the threat of liability and, if they are not, are remedied by private litigation; this is, theoretically anyway, the counter to the type of more regulated regime to which the author compares the 401(k) world.

Bravo. In the context of discussing the Supreme Court’s grant of cert to a case presenting the question of how to resolve conflicts between plan terms and summary plan descriptions, the authors of this client alert, Lisa Brogan and Joseph LaFramboise at Baker & McKenzie, provide, in only four pages, a succinct yet comprehensive overview of the standards applied across the country to this issue. Conflict between plan terms and the terms as described in summary plan descriptions is one of the more frequent issues that arise in benefit litigation under ERISA, raising questions about the level of talent and effort being committed to plan compliance by many companies, since the best defense to cases involving conflicts of this nature is to avoid them in the first place by ensuring that the description in both documents of the substantive benefit terms match up. That said though, as the case of the billion dollar scrivener’s error suggests, some issues are going to arise no matter how much time, effort and compliance dollars are lavished on a plan’s documentation and operations. Either way, though, this client advisory nicely sums up exactly where we are in each circuit right now when it comes to adjudicating these types of conflicts.

Here’s a little story that rung an old bell for me, and provides an object lesson on a point I have made in the past in various forums concerning the protections against liability that need to be sought by officers and directors. The story concerns a decision out of the Tenth Circuit finding that a company did not have to indemnify one of its former corporate officers in total for legal fees related to the officer’s defense of a securities fraud case, despite a written agreement that appeared to impose such an obligation. I have not studied this case enough to hazard a guess as to whether the former officer, or the company indemnifying the officer, might have had access to coverage of those defense costs under a directors and officers policy. However, the case illustrates a principle I have often mentioned with regard to issues concerning service as a director or officer of a company – there is no way to know for certain long in advance of any particular claims being made whether the company will stand by an apparent obligation in its by-laws or other documents to indemnify an officer, nor can one be absolutely certain in the abstract whether the officer will have coverage against any such future claims under a directors and officers policy. There are too many variables to be certain, as the story reflects and evidences. As a result, as I discussed in detail here some time ago, it is important for directors and officers to protect themselves by doubling down on their protections, and requiring both broad indemnification protections in the company’s documentation and that the company acquire directors and officers coverage that is as broad as possible. That way, if and when a claim is made, if one of the two (the company or the directors and officers insurer) balks at paying for the defense of the officer or director, a second avenue of potential payment still exists. Certainly, as appears to have been the case in the little exemplar story discussed in this post, there may be claims in which neither will have to pay for all of the costs of defending the officer or director against a claim, but at least this two pronged approach gives the officer a reasonable shot at having someone pay those fees for him or her.

Well, I have written extensively on my skepticism about commercial arbitration as a tool for solving commercial disputes, and my belief that the courtroom is a better forum for most complex cases. It would take a lot of links to cover my past discussion of the pros and cons of this type of dispute resolution, and my reasons for thinking it a far weaker forum for a dispute between corporate entities than the courthouse. If you click on the category “Arbitration of Coverage Disputes” or the category “Arbitration” over on the left side, however, you will quickly find my past discussions of this topic. If you don’t want to do that, however, you could read this article here, which nicely sums up the same calculus that underlies my earlier posts on the efficacy, and sometimes lack thereof, of commercial arbitration.

Nothing shows up in my practice any more frequently, particularly in this economy and over the last couple of years, than severance packages, and the question of whether a particular severance package program is governed by ERISA. Roy Hoskins, on the ERISABoard.com site, reviews this issue, and its application by the District of Maine under First Circuit law, in this excellent post, along with providing a copy of the opinion by the court. For those of you who may not be able to access the Board’s site for any reason, here is a copy of the decision itself, which is Sawyer v. TD Bank US Holding Company.