Court reverses Zurich’s win in coverage dispute over 401(k) errors

The 11th U.S. Circuit Court of Appeals said Monday that a federal judge in Atlanta erred when finding nearly $500,000 in corrective payments a company made to resolve clerical errors when administering its 401(k) plan were not covered under commercial liability policies issued by Zurich American Insurance Co.

The three-judge panel in North American On-Site LLC v. Zurich American Insurance Co. said the corrective payments qualified as covered damages because the staffing company was legally obligated to make them in order to keep the plan’s qualified status.

Between 2015 and 2018, Duluth, Georgia-based North American On-Site made clerical errors that affected some of its employees’ contributions to its 401(k) plan and resulted in insufficient paycheck deductions for some participating employees. On the advice of a law firm, North American made corrective contributions to the plan in 2019 and also paid to resolve two administrative cases lodged by the U.S. Department of Labor. The payments totaled $500,839.51, court records show.

North American sought coverage from Zurich, which refused on grounds that the corrective payments were made without its consent, that the payments were not covered losses, that it was not provided with timely notice of the claim, and that an Employee Retirement Income Security Act exclusion was applicable.

The denial prompted North American to sue Zurich in August 2020 for breach of contract and bad faith. The trial judge awarded summary judgment to Zurich, ruling that the corrective payments were not covered under the policy because North American was not legally obligated to pay them. North American appealed.

A spokesperson for Zurich declined comment. Representatives for North American did not respond to a request for comment.