Thinking ESOPs: Sixth Circuit Enforces ERISA Exclusion in ESOP Trustee’s Insurance Policy

A recent Sixth Circuit Court of Appeals decision serves as a warning to policyholders: read your entire policy, understand each provision and confirm that the policy language accurately reflects your understanding of the coverage you purchased.

Navigating an insurance policy is not easy. A policy’s declarations, general terms, insuring agreements, definitions, exclusions, conditions and endorsements collectively set forth the scope of the policy’s coverage. With very rare exceptions, both the insurer and the policyholder will be bound by the language found in the policy. This is true even if the language in the policy is unfavorable to the policyholder and does not cover risks the policyholder was attempting to mitigate through insurance.

A recent decision from the Sixth Circuit Court of Appeals demonstrates some rather unforgiving rules of insurance-policy interpretation. See Secretary of Labor, et al. v. Potts, et al., No. 20-3856, 20-3895 (Sixth Circuit, Nov. 24, 2021). The case involved an errors and omissions policy (also called a professional liability policy) that provided coverage to an independent ESOP trustee. The policy insured against claims for acts, errors, or omissions in performing “professional services.” But the policy’s standard insurance form contained an exclusion for “[v]iolation of or failure to comply with [ERISA] . . .”

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