250_C036

TRUST ADMINISTRATORS WERE INDEPENDENT CONTRACTORS, NOT EMPLOYEES OR OFFICERS

Crime/Dishonesty Insurance	Administrator
Definition of Employee	Independent Contractor

Employers-Shopmens Local 516 Pension Trust (Local 516) and Western States Health and Welfare Trust Fund of the OPEIU (Western) were trusts subject to the Employee Retirement Income Security Act of 1974 (ERISA). Local 516 obtained a commercial insurance policy from Travelers Casualty and Surety Company of America (Travelers) that covered loss of money and securities caused by employee dishonesty. Western obtained an identical policy from Hartford Fire Insurance Company (Hartford). Both policies defined “employee dishonesty” to mean “only dishonest acts committed by an ‘employee’” under certain circumstances.

The Crime General Provisions defined “employee” to mean:

“Any natural person:

• While in your service (and for 30 days after termination of service); and
• Whom you compensate directly by salary, wages, or commission; and
• Whom you have the right to direct and control while performing services for you

“But ‘employee’ does not mean any:

• Agent, broker, factor, commission merchant, consignee, independent contractor, or representative of the same general character; or
• Director or trustee except while performing acts coming within the scope of the usual duties of an employee.”

During the coverage period, both Local 516 and Western had agreements with Capital Consultants, LLC (CCL) to provide investment management services. While the agreements were not exactly identical, both agreements authorized CCL to manage designated funds. In 2004, Local 516 and Western each filed a proof of loss with Travelers and Hartford, respectively. They sought coverage for multiple occurrences of “employee dishonesty” during the coverage period. Each stated that the losses were caused by certain CCL principals, each of whom was (1)”an employee of [CCL]” and (2) a “fiduciary[y] and/or handler[ ] of the Trust’s assets” who was “therefore required to be bonded” under ERISA. Travelers and Hartford both denied coverage for the losses alleged.

Local 516 and Western both filed complaints alleging several claims, including claims for breach of contract, the only claim at issue on appeal. Local 516 and Western moved for summary judgment and Travelers and Hartford cross moved for summary judgment. The trial court entered summary judgment in favor of Travelers and Hartford and Local 516 and Western appealed.

The appellate court noted that principals who provide investment services for pension and welfare trusts are “administrators” for the purposes of ERISA’s bonding requirements because they manage trust funds. ERISA requires that administrators be bonded. However, it does not require that the pension and welfare trust insurers provide coverage for losses from dishonest acts of principals the trust hired to manage trust funds.

The appellate court rejected Local 516 and Western’s contentions. It determined that:

• CCL’s principals were “administrators” for the purposes of bonding requirements under ERISA.
• Coverage for dishonest acts of employees was not rendered illusory based on exclusions in the Travelers and Hartford policies for administrators who were independent contractors.
• ERISA provisions that required plan administrators to be bonded did not require that the pension and welfare trust insurers provide coverage for losses from acts of CCL’s principals.

The appellate court affirmed that the trial court properly granted summary judgment in favor of Travelers and Hartford and denied Local 516 and Western’s motions for summary judgment.

Court of Appeals of Oregon. Employers-Shopmens Local 516 Pension Trust and WesternStates Health and Welfare Trust Fund of the OPEIU, Plaintiffs-Appellants, and Coral Construction Company Restated Employee Profit Sharing Plan & Trust, Plaintiff, v. Travelers Casualty And Surety Company of America and Hartford Fire Insurance Company, Defendants-Respondents, and Fidelity and Deposit Company of Maryland; Willis of Oregon, Inc.; and Marsh USA, Inc.,Defendants. 050201821; A137119. Argued and Submitted May 21, 2009. Decided June 16, 2010. 235 Or.App 573, 235 P.3d689