FCE Benefit Administrators, Inc. v. Indian Harbor Insurance Company

Background

FCE provides third-party administrator services for employee benefit plans governed by the Employee Retirement Income Security Act. Indian Harbor issued FCE an errors-and-omissions policy covering damages and defense expenses arising from FCE’s professional services. The policy covered FCE’s third-party-administration services and contained different per-claim limits depending on when the underlying acts or omissions occurred:

- The limit was $3 million for a claim based exclusively on acts or omissions before June 6, 2017. - The limit was $5 million for a claim based exclusively on acts or omissions on or after June 6, 2017.

The policy also provided that two or more claims arising from the same or related facts, events, or acts would be treated as one claim made on the earliest applicable date. Defense expenses and damages reduced, and could exhaust, the liability limit.

Standard Security Life Insurance Company of New York and Madison National Life Insurance Company, Inc. had filed an arbitration petition against FCE. They alleged that FCE breached an administrative-services agreement by mishandling healthcare claims, taking excessive and unearned fees, and causing penalties, fines, and fees. The arbitral panel awarded the claimants $5,348,352.81, and the award was confirmed by a federal district court. The Seventh Circuit affirmed.

FCE timely submitted the arbitration claim to Indian Harbor. Indian Harbor paid FCE $2,348,596.30 in defense expenses and later paid $1,049,175.65 toward the judgment. FCE then sued, alleging that Indian Harbor had breached the policy and the implied covenant of good faith and fair dealing by treating the applicable limit as $3 million rather than $5 million. FCE sought declaratory relief, indemnity for the arbitration award, attorney’s fees and costs, punitive damages, and prejudgment interest.

Summary-judgment ruling

Summary judgment is a ruling entered when the evidence shows no genuine dispute about a fact that could affect the result and the moving party is entitled to win under the law. Indian Harbor argued that the policy’s correct limit was $3 million. FCE later moved for partial summary judgment based on the same arguments it had raised in opposition.

The court rejected FCE’s argument that its defense expenses were not subject to the policy limits. The policy expressly stated that defense expenses and damages reduced and could exhaust the liability limits, and that Indian Harbor’s obligation to defend or pay ended when the limit was exhausted. The court concluded that costs incurred under the duty to defend were defense expenses under the policy.

The court also rejected FCE’s arguments that the arbitration involved multiple claims or that later expenses triggered the $5 million limit. The court treated the arbitration petition as one written demand for money arising from related acts and omissions. Those acts and omissions occurred before June 6, 2017, even though some defense expenses and damages were incurred later. The court therefore held that the $3 million limit applied once. It also rejected FCE’s argument that the possibility of coverage under the higher limit required Indian Harbor to defend or pay beyond $3 million.

Amended answer and counterclaims

Indian Harbor asked for permission to file an amended answer and counterclaims after discovering an apparent overpayment of $397,771.96 beyond the $3 million limit. It proposed counterclaims for reimbursement under the policy and unjust enrichment.

FCE argued that the amendment would be futile, meaning that no set of facts could support a valid claim or defense under the proposed amendment. FCE did not argue that the amendment would prejudice it, and it did not argue that the unjust-enrichment counterclaim was legally insufficient. The court concluded that FCE had not shown that the proposed amendment would be futile and granted Indian Harbor leave to amend.

Disposition

The court granted summary judgment to Indian Harbor, denied FCE’s motion for partial summary judgment, and granted Indian Harbor leave to file its amended answer and counterclaims within 21 days of the order.