Court Allows Contract Breach Claims Alleging Failure to Defend Stock-Drop Case

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Matthew Loughran

Aug. 29 — Federal Insurance Co. was unable to convince a federal district court in Nevada to dismiss complaints against the insurer for its failure to defend a gaming company in a stock-drop case, which the gaming company settled with its employees in June 2013.

In an Aug. 26 opinion, Judge Robert C. Jones denied summary judgment to the insurer, finding that the gaming company had presented a genuine question of material fact as to whether the earlier lawsuit brought by employees who participated in the company's Section 401(k) plan fell within the “Securities Exclusion” of the company's fiduciary liability coverage policy.

However, the court did dismiss the company's claims for tortious breach of the implied covenant of good faith and fair dealing, finding that the company misrepresented the record in presenting this claim and warning the company that any further attempts to “manipulate the record” wouldn't be tolerated.

Stock-Drop Lawsuit

The surviving claims relate to a stock-drop case against International Game Technology Inc. and its top officials that was originally filed by participants in IGT's Section 401(k) plan, alleging that the plan fiduciaries breached their duties under the Employee Retirement Income Security Act by allowing the participants to continue to invest in IGT stock despite that stock plummeting in value in 2008 and 2009.

The district court originally dismissed most of the fiduciary breach claims in March 2011, applying the now-defunct Moench presumption of prudence and finding that the 83 percent drop in stock price by itself wasn't sufficient to assert a breach of fiduciary duty (Carr v. Int'l Gaming Tech., Inc., 770 F. Supp. 2d 1080, 51 EBC 1140 (D. Nev. 3/16/11)).

A year before the U.S. Supreme Court disapproved of the use of the Moench presumption in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 58 EBC 1405 (U.S. 2014), IGT and its plan participants settled the claims in this case with IGT agreeing to pay $500,000 in compensation to the plan participants (Carr v. Int'l Game Tech., Inc., 2013 BL 184328 (D. Nev., settlement approved, 6/26/13).

Duty to Defend

According to the court in the instant case, IGT contacted Federal, the underwriter for its executive protection policy, which included a fiduciary liability coverage section.

Federal denied any duty to defend or indemnify IGT, relying on a “Securities Exclusion” in the policy that disclaimed any coverage for actions “arising from, or in consequence of” company stock offerings or violations of various securities laws.

As the case progressed, IGT continued to demand coverage under the policy and Federal continued to assert that it wasn't required to provide that coverage as a result of this exclusion.

After the stock-drop suit settled, IGT brought the instant suit in district court, alleging breach of contract on Federal's failure to defend or indemnify. IGT also requested declaratory judgment and asserted claims for violation of the covenant of good faith and fair dealing.

In a February order, the court dismissed the declaratory judgment and good faith and fair dealing allegations. Federal then moved for summary judgment on the breach of contract claims.

In the instant order, the court determined that the question of whether the securities exclusion applied to all of the ERISA claims asserted in the stock-drop case was still an unsettled question of material fact.

According to the court, Nevada law requires an insurance contract to be strictly construed against the drafter and in favor of coverage for the insured.

The court found that the securities exclusion was sufficiently ambiguous so as to require that the court err on the side of coverage for the ERISA claims and thus deny the summary judgment motion from Federal.

IGT was represented by John K. Gallagher of Guild, Russell, Gallagher & Fuller Ltd. in Reno, Nev., and John A. Moss, John D. Shugrue, Kevin Bernard Dreher and Noel C. Paul of Reed Smith LLP in Chicago.

Federal was represented by Karen Y. Bonvalot and Stanley J. Lehman of Sherrard, German & Kelly PC in Pittsburgh, and James P. Silvestri of Pyatt Silvestri & Hanlon Chtd. in Las Vegas.

To contact the reporter on this story: Matthew Loughran in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Text of the opinion is at


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