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Pennsylvania Superior Court Upholds Finding That Fraudulent Acts Exclusion of Policy Bars Coverage in Underlying Federal Class Action for ERISA Violations

In Cigna Corporation v. Executive Risk Indemnity, Inc., 3538 EDA 2013, 2015 PA Super 43 (Feb. 27, 2015), the Pennsylvania Superior Court upheld the lower court's finding that the fraudulent acts exclusion in Appellant Cigna Corporation's ("Cigna") insurance policy barred coverage for an underlying federal class action involving violations of Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461.

In 1998, Cigna amended its retirement plan and converted its traditional defined benefit pension plan to a cash balance plan. Cigna sent out notification materials to plan participants, contending that the conversion did not affect benefits. However, it was undisputed that Cigna withheld or declined to provide certain documentation that some plan participants would have their expected benefits or accruals reduced or frozen. In 2001, plan participants brought a class action lawsuit in a Connecticut federal district court, alleging the reduction of benefits or benefit accruals for some plan participants violated ERISA.

After appeals were taken and on remand from the United States Supreme Court, the Connecticut federal district court ("Connecticut court") decided to reform the contract as the appropriate means of remedy given that Cigna engaged in fraud or similarly inequitable conduct. According to the Connecticut court, Cigna's deficient notice led to its employees' misunderstanding of the content of the contract and Cigna failed to take steps to rectify the mistake. As a result, Cigna affirmatively misled and prevented its employees from obtaining accurate information about the pension plans. The Second Circuit affirmed and likewise held that Cigna misrepresented the terms of the new pension plan and actively prevented employees from learning the truth about the plan.

In 2012, Cigna filed a complaint against Appellees Executive Risk Indemnity, Inc. and Nutmeg Insurance Company (collectively referred to as "Appellees"), seeking, inter alia, a declaration of coverage for the federal class action under the fiduciary liability provisions of its policy. The lower court granted Appellees' motion for summary judgment and dismissed Cigna's complaint with prejudice. Cigna appealed, contending the lower court erred in applying the "deliberately fraudulent acts" exclusion to preclude coverage under the fiduciary liability provisions of the policy. Cigna also argued that the lower court erred in finding that the Connecticut court's decision constituted a "final judgment," sufficient to trigger the applicability of the "deliberately fraudulent acts" exclusion.

The Pennsylvania Superior Court noted that Cigna did not take issue with Connecticut court's finding that Cigna's summaries of plan descriptions and modifications were "affirmatively and materially misleading." However, Cigna argued that the fraudulent acts exclusion does not apply because the policy covers Cigna's conduct under the definition of "wrongful act" in the policy. The policy defined "Wrongful Act" to include "any actual or alleged... misstatement, misleading statement, act, omission' on the part of the insured." Reading the policy in its entirety, the Superior Court determined that the plain meaning of the policy is "that the fraudulent or criminal act exclusion operates as an exception to the more general wrongful acts coverage provision." In addition to the findings of Cigna's fraud by the Connecticut court and the Second Circuit, the Superior Court itself determined that Cigna's conduct, "including affirmative efforts at concealment and intentionally misleading representations that the benefits under the previous plan would not be disturbed, would clearly qualify as fraudulent under Pennsylvania law."

Cigna attempted to argue that the Connecticut court's finding regarding fraud was dictum, which the Superior Court rejected based on the definition in Black's Law Dictionary and the fact that the determination of fraud by the Connecticut court "was integral, if not critical, to its finding of the appropriateness of the remedy, as well as to the Second Circuit's reasoning in affirmance." In rejecting Cigna's second argument on appeal that the Connecticut court's finding of fraud failed to constitute a final judgment, the Superior Court noted that a federal court's finding of fraud is a final judgment under Pennsylvania law, reasoning "what effect a civil appeal has on an otherwise final judgment has been answered. A judgment is deemed final for purposes of res judicata or collateral estoppel unless or until it is reversed on appeal."

As a result, the Pennsylvania Superior Court affirmed the lower court's grant of summary judgment in favor of Appellee and dismissal of Cigna's complaint with prejudice.

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