Pennsylvania Superior Court Holds That Fraudulent Acts Exclusion Precludes Liability Coverage for ERISA Class Action

​The Pennsylvania Superior Court has held that pursuant to a fraudulent acts policy exclusion, a policyholder was not entitled to liability coverage for a class action verdict arising from the policyholder’s misleading description of an ERISA benefits plan. In Cigna Corp. v. Executive Risk Indem., Inc.,the policyholder sought coverage for a class action challenging the policyholder’s 1998 conversion of its defined benefit pension plan to a cash balance plan. This conversion had the effect of freezing or reducing the benefits of some participants.

While a trial court determined that the conversion did not violate ERISA, the court also found that the policyholder’s communications regarding the conversion were misleading and in violation of ERISA. The court ordered contract reformation as a remedy, in a decision that was overturned by the United States Supreme Court on the grounds that the trial court relied upon the wrong ERISA remedy provision. On remand, the trial court held that contract reformation was appropriate under another ERISA remedy provision. In so doing, the court emphasized that the policyholder had engaged in fraud “or similarly inequitable conduct.” In upholding the trial court’s decision, the Second Circuit also stressed the fraudulent nature of the policyholder’s conduct.

The policyholder subsequently filed a declaratory judgment action against two excess insurers, seeking coverage for the lawsuit. The trial court granted summary judgment in the insurers’ favor, holding that coverage was precluded under a policy exclusion for “deliberately fraudulent acts.”

On appeal, the policyholder argued that coverage should be provided under the policy’s “wrongful acts” exclusion, which provides coverage for “any actual or alleged … misstatement, misleading statement, act, [or] omission” by the policyholder. The Court declined to hold that this exclusion effectively negated the “deliberately fraudulent acts” exclusion. Instead, emphasizing the need to give effect to all policy provisions, the Court concluded that the fraudulent acts exclusion acted as an exception to the wrongful acts exclusion.

The Court also rejected the policyholder’s contention that there was no final judgment that the policyholder had committed fraud. The Court observed that both the federal trial court in the underlying case and the Second Circuit determined that the policyholder’s conduct was fraudulent. In response to the policyholder’s contention that the trial court’s discussion of fraud was merely dictum, the Court noted that the trial court’s determination of fraud was “integral, if not critical, to its finding of the appropriateness of the remedy.”

The Court also rejected the policyholder’s contention that the trial court’s statement that the policyholder had engaged in “fraud or similarly inequitable conduct” was not a finding of fraud. The Court concluded that the trial court’s use of “alternative formulations” to describe the policyholder’s conduct did not detract from the courts’ “unequivocal finding of fraud.” The Court therefore affirmed the trial court’s determination that the policyholder was not entitled to coverage pursuant to the fraudulent acts exclusion.

​On two occasions during its opinion, the Court observed that insurance coverage for intentional acts was contrary to Pennsylvania public policy. In light of this recognition, Pennsylvania courts are likely to approach any arguments against the enforcement of policy exclusions for intentional acts (including exclusions for fraudulent acts) with a great deal of skepticism.