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The Collaborative Clearinghouse for Lawsuits and Other Claims Against ACE Group Insurance Companies

AIT HOLDING COMPANY et al v. ACE AMERICAN INSURANCE COMPANY

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ACE Group party(s): 
Opposing Party: 
AIT HOLDING COMPANY
Court Type: 
Federal
US District Court: 
Southern District of Indiana
Date Filed: 
Apr 6 2015

COMPLAINT

Plaintiffs AIT Holding Company (“AIT Holding”) and Dr. Michael A. Evans
(“Dr. Evans”) seek a declaration that defendant ACE American Insurance Company (“ACE”), an
excess-liability insurer, must abide by the terms of the underlying insurance policy and provide
excess-liability coverage for loss incurred as a result of claims made against Dr. Evans and other
AIT Insureds by the Department of Labor in a related suit in this District—Perez v. PBI Bank,
Inc. et at., Cause No. 1:14-CV-01429-SEB-MJD. For their complaint against ACE, AIT and
Dr. Evans state:

THE PARTIES

1.    AIT Holding is an Indiana corporation with its principal place of business in
Indianapolis. American Institute of Toxicology, Inc. d/b/a AIT Laboratories (“AIT Labs”) is a
wholly-owned subsidiary of AIT Holding (together AIT Holding and AIT Labs, “AIT”).
2.    Dr. Evans is a citizen of Indiana and is a member of AIT’s Board of Directors.
3.    ACE is a Pennsylvania corporation with its principal place of business in
Philadelphia.

JURISDICTION & VENUE

4.    This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §
1332 because there is diversity of citizenship between the parties and the amount in controversy
exceeds $75,000, exclusive of interest and costs.
5.    This Court may declare the rights and other legal relations to the parties pursuant
to the provisions of the Declaratory Judgment Act, 28 U.S.C. § 2201 et. seq., because this is a
case of actual controversy within this Court’s jurisdiction seeking a declaratory judgment that
ACE is obligated to abide by the terms of the underlying insurance policy and provide excess-
liability coverage for the defense of claims made against AIT and Dr. Evans by the Department
of Labor.
6.    Venue in this District is proper pursuant to 28 U.S.C. § 1391(b)(2) and (3)
because the events giving rise to the claims in this action occurred in and ACE is subject to
personal jurisdiction in this District.

THE INSURANCE POLICIES

7.    In 2013, AIT purchased from Federal Insurance Company (“Federal”) a
“Forefront Portfolio 3.0” insurance policy, Policy No. 8235-1492 (the “Federal Policy”), that
provides claims-made liability insurance for the period July 1, 2013 to July 1, 2014. The limits
of the Federal Policy are $5 million. A true and accurate copy of the Federal Policy is attached
hereto as Exhibit 1.
8.    To insure against loss in excess of the Federal Policy’s limits, AIT purchased an
Excess-Liability Policy, Policy No. DOX G25575866 001 (the “ACE Policy”), from ACE that
covers the same period and the same risks as the Federal Policy. A true and accurate copy of the
ACE Policy is attached hereto as Exhibit 2.
9.    Section I of the Fiduciary Liability Coverage Part of the Federal Policy provides,
in part:
Insuring Clause (A): Fiduciary Liability Coverage
(A) The Company shall pay, on behalf of an Insured, Loss on account
of a Claim first made against the Insured during the Policy
Period, or the Extended Reporting Period if applicable, for a
Wrongful Act by the Insured or by any natural person for whose
Wrongful Acts the Insured is legally liable.
10.    Section II of the Fiduciary Liability Coverage Part of the Federal Policy defines
“Insured” as “any Organization, any Plan, any Committee and any Insured Person.” It
further defines an “Insured Person” to mean any:
(A)    Executive or Employee of an Organization;
(B)    employee of a Sponsored Plan;
(C)    past, present or future natural person trustee of an Organization or
of the Sponsored Plan; and
(D)    past, present or future natural person trustee or fiduciary, when
such natural person is added as an Insured Person by specific
written endorsement to this Coverage Part.
11.    AIT and Dr. Evans are both “Insureds” under the Fiduciary Liability Coverage
Part of the Federal Policy and therefore are Insureds under the ACE Policy.
12.    Section II of the Fiduciary Liability Coverage Part of the Federal Policy defines
“Loss” to include judgment, settlement, and “Defense Costs,” including costs, charges, fees, and
expenses incurred in investigating, defending, opposing or appealing any “Claim.”
13.    Section II of the Federal Policy actually defines “Claim” as any:
(A)    written demand first received by an Insured for monetary or non-
monetary relief, including injunctive relief;
(B)    civil proceeding commenced by the service of a complaint or
similar pleading;
(C)    criminal proceeding commenced by: (1) an arrest, or (2) return of
an indictment, information or similar document;
(D)    formal administrative or formal regulatory proceeding commenced
by the filing of a notice of charges, formal investigative order or
similar document;
(E)    arbitration or mediation proceeding commenced by the receipt of a
demand for arbitration, demand for mediation, or similar
document;
(F)    written notice of commencement of a fact-finding investigation by
the U.S. Department of Labor, the U.S. Pension Benefit Guaranty
Corporation, or any similar governmental authority located outside
the United States, including, the Pensions Ombudsman appointed
by the United Kingdom Secretary of State for Work and Pensions
or by the United Kingdom Occupational Pensions Regulatory
Authority or any successor thereto; or
(G)    official request for Extradition of an Insured Person,
against an Insured for a Wrongful Act, including any appeal therefrom;
or
(H) a written request first received by an Insured to toll or waive a
statute of limitations relating to a potential Claim as described in
Subsections (A) through (G) above.
14.    Section II of the Fiduciary Liability Coverage Part of the Federal Policy also
defines “Wrongful Act” as any actual or alleged:
(A)    breach of the responsibilities, obligations or duties imposed by
ERISA upon fiduciaries of the Sponsored Plan committed,
attempted or allegedly committed or attempted by an Insured
while acting in the Insured’s capacity as a fiduciary;
(B)    negligent act, error or omission in the Administration of any Plan
committed, attempted or allegedly committed or attempted by an
Insured; or
(C)    matter, other than as set forth in (A) or (B) above, claimed against
an Insured solely by reason of the Insured’s service as a fiduciary
of any Sponsored Plan.
15.    Thus the ACE Policy provides coverage for the “AIT Insureds”—Dr. Evans, AIT,
and other persons described above in subsections (A) through (D) —for any “Loss” on account of
a “Claim” first made between July 1, 2013 and July 1, 2014.
16.    Because AIT has certain obligations to indemnify Dr. Evans and others for losses
they incur as a result of certain claims, such as those at issue here, AIT is also entitled to
coverage for “Losses” that it incurs on account of its indemnity obligations.
THE AIT ESOP PLAN
17.    AIT executed an Employee Stock Ownership Plan and Trust Agreement (the
“Plan Agreement”) effective January 1, 2009 that established an Employee Stock Ownership
Plan (the “Plan”) for the benefit of eligible employees.
18.    AIT was the Plan sponsor under the Plan Agreement, and Dr. Evans was a
member of the “Committee,” as defined in Section 1.7 of the Plan Agreement, charged with
administering the Plan. Under Section 10.12 of the Plan Agreement, AIT is thus obligated to
indemnify Dr. Evans “from any and all claims, loss, damage, expense and liability” that arise
from “any act or omission” by Dr. Evans that a court does not find was fraudulent or was
committed in bad faith.
19.    The Plan Agreement also designated PBI Bank, Inc. (the “Trustee”) as the Plan’s
trustee. AIT’s Board of Directors confirmed Trustee’s appointment on June 30, 2009. Dr. Evans
was a member of AIT’s Board of Directors at this time.
20.    Also on June 30, 2009, the Trustee caused the Plan to purchase from Dr. Evans
and four other shareholders of AIT, all of the outstanding shares of AIT (the “2009
Transaction”).

THE DOL’S WRITTEN NOTICE OF CLAIM,

Federal’s Confirmation of Coverage, and ACE’S Denial
21.    In September 2013, the DOL made a written request that AIT, Dr. Evans, and
other AIT Insureds execute a tolling agreement in order to toll the statute of limitations set forth
in ERISA to preserve the time in which the DOL Secretary could assert a claim under ERISA.
Then in November, the DOL faxed a letter to Trustee asserting that Trustee may have violated
provisions of ERISA.
22.    On November 19, 2013, AIT, through its insurance broker Hays Companies,
notified Federal and ACE of the allegations made in the DOL letter to the Trustee and that the
letter alleged Wrongful Acts that could arise from activities of the Insureds.
23.    On December 11, 2013, ACE responded to AIT’s November 19 notice with a
letter (i) acknowledging receipt of notice, (ii) affirming that the ACE Policy follows the form of
the Federal Policy, and (iii) requesting a copy of Federal’s position regarding coverage.
24.    On December 20, 2013, Federal agreed to provide coverage for the defense of the
matter, subject to the terms of the Federal Policy.
25.    On March 7, 2014, the DOL sent a letter to AIT alleging for the first time that
AIT, Dr. Evans, and other AIT Insureds had violated provisions of ERISA in connection with the
2009 Transaction (the “DOL Claims”).
26.    Following receipt of the DOL Claims, Dr. Evans’ counsel wrote separately to
Federal and ACE to confirm Dr. Evans’ status as an Insured under the Federal, and thus the
ACE, Policy.
27.    Federal responded to Dr. Evans’ counsel and confirmed that its December 20
letter applied to Dr. Evans and that his rights under the Federal Policy were secure. Federal has
since followed through on its commitment to AIT Insureds and has continued to provide
coverage for various AIT Insureds’ defense and settlement of the DOL Claims, including for
AIT’s indemnity obligations, as contemplated by the Federal Policy.
28.    In stark contrast to Federal and despite Federal’s continued provision of coverage
under the Federal Policy, ACE refused to issue a coverage position in response to Dr. Evans’
counsel’s inquiry, despite reiterating that the ACE Policy follows the form of the Federal Policy.
Then on June 2, 2014, ACE flatly denied coverage for the DOL Claims and asserted that the
DOL Claims are not covered because they were not first made during the ACE Policy coverage
period. A true and accurate copy of the ACE Policy is attached hereto as Exhibit 3.
29.    In its June 2 letter, ACE asserted that it was denying coverage on two grounds.
First, ACE claimed that the DOL Claims were not first made during the policy period. Second,
and based on the same theory, ACE claimed that the DOL Claims should have been disclosed in
the June 2013 application for the policy.
30.    ACE’s denial is specifically based on its contention that the DOL Claims were
first made in January 2011, when the DOL initiated an audit of the AIT ERISA plan.
31.    The DOL audit was initiated by a letter dated January 4, 2011, from its Regional
Director Paul C. Baumann to Mr. Edvin Xhabo, Controller and Director of Finance of AIT Labs,
requesting cooperation with the DOL’s “examination of the Plan to determine compliance with
provisions of ERISA” (the “DOL Audit Notice”). The DOL Audit Notice did not assert that
anyone had committed violation of ERISA or that such a violation was threatened. The DOL
Audit Notice clearly indicated that the purpose of the review was to determine the Plan’s
compliance with ERISA. It did not indicate that it was commencing an investigation of any
alleged wrongful act by any Insured. A true and accurate copy of the DOL Audit Notice is
attached as Exhibit 4.
Case l:15-cv-00541-JMS-MJD Document 1 Filed 04/06/15 Page 8 of 12 PagelD #: 8
32.    In support of its June 2 denial of coverage, ACE’s counsel purports to quote the
Federal Policy’s definition of “Claim.” His letter states:
Based on the information submitted to ACE to date, there does not appear
to be any coverage for this matter under the ACE Excess Policy for the following
reasons:
1.    The ACE Excess Policy is a claims made policy that covers only
claims that are first made against the Insureds during the policy period from July
1, 2013 to July 1, 2014. The term "Claim" is defined in section II of the Fiduciary
Coverage Part of the Federal Policy, to which the ACE Excess Policy follows
form, as follows:
Claim means any:
(A)    written demand first received by an Insured for monetary or non-
monetary relief, including injunctive relief;
(B)    civil proceeding commenced by the service of a complaint or
similar pleading;
(C)    criminal proceeding commenced by: (1) an arrest, or (2) return of
an indictment, information or similar document;
(D)    formal administrative or formal regulatory proceeding commenced
by the filing of a notice of charges, formal investigative order or
similar document;
(E)    arbitration or mediation proceeding commenced by the receipt of a
demand for arbitration, demand for mediation, or similar
document;
(F)    written notice of commencement of a fact-finding investigation by
the U.S. Department of Labor, the U.S. Pension Benefit Guaranty
Corporation, or any similar governmental authority located outside
the United States, including, the Pensions Ombudsman appointed
by the United Kingdom Secretary of State for Work and Pensions
or by the United Kingdom Occupational Pensions regulatory
Authority or any successor thereto; or
(G)    official request for Extradition of an Insured Person, against an
Insured for a Wrongful Act, including any appeal therefrom; or
(H) a written request first received by an Insured to toll or waive a
statute of limitations relating to a potential Claim as described in
Subsections (A) through (G) above.
As noted above, the DOL initiated an investigation of AIT on January 4,
2011 that included an investigation regarding the Transaction, which constitutes a
Claim as defined in subparagraph F of the definition. This was 2 1/2 years before
the inception of the ACE Policy Period. Moreover, defense counsel for AIT met
with and produced documents to the DOL in connection with its Investigation of
the Transaction in June 2013, prior to the July 1, 2013 inception of the ACE
Excess Policy. This also comes within the definition of Claim in subparagraph F.
Accordingly, the DOL Investigation is not a Claim that was first made
during the Policy Period of the ACE Excess Policy and coverage is not afforded
for this matter.
33.    ACE’s June 2 letter moves the phrase “against an Insured for a Wrongful Act,
including any appeal therefrom,” to modify only subparagraph (G) and then exploits this
erroneous definition of “Claim” to incorrectly assert that AIT’s receipt of the DOL’s Audit
Notice in January 2011 constituted a “Claim” first made against AIT in 2011 —and therefore not
covered by the ACE policy and required to be disclosed in AIT’s June 2013 Application.
34.    Despite requests to reevaluate its coverage position, ACE refused to do so, and on
July 7, 2014, ACE reiterated its position that the ACE Policy provides no coverage for the DOL
Claims.
35.    In the meantime, Federal continued to adhere to its commitment to provide
coverage under the Federal Policy for the ongoing defense of AIT, Dr. Evans, and other AIT
Insureds, as well as for AIT’s indemnity obligations, as contemplated by the Federal Policy.
36.    In August 2014, the DOL agreed to settle its claims against AIT and others who
the DOL had claimed had committed Wrongful Acts, with the exception of Trustee and Dr.
Evans.
37.    On August 29, 2014, the DOL, filed an action in this District against Trustee, Dr.
Evans, and the Plan, Cause No. 1:14-cv-01429-SEB-MJD and asserted allegations first made in
the DOL’s November 2013 letter (the “ERISA Action”).
38.    On September 4, 2014, ACE sent another letter to AIT reaffirming its denial of
coverage.
39.    Despite AIT’s persistent assertion—and ACE’s own acknowledgement—that the
ACE Policy requires ACE to follow the coverage terms of the Federal Policy, ACE continues to
deny its obligation to do so.
40.    As a result of Federal’s payment of settlement and defense costs, the coverage
limits of the Federal Policy have been substantially exhausted, but the ERISA Action continues.
41.    A present and actionable controversy exists between AIT and Dr. Evans, on the
one hand, and ACE regarding ACE’s obligation under the ACE Policy to adhere to the terms of
the Federal Policy and to provide coverage for the AIT Insureds’ defense of the DOL Claims and
the ERISA Action, including AIT’s indemnity obligations covered by the Federal Policy.
42.    ACE's proffered reason for denying coverage is without basis in law or fact.
43.    This Court’s declaration of the parties’ respective rights and obligations will
resolve the present controversy between AIT and Dr. Evans and ACE.
44.    Pursuant to Federal Rule of Civil Procedure 57, AIT and Dr. Evans request a
speedy hearing of this action and that the hearing be advanced on the Court's calendar.
WHEREFORE, plaintiffs AIT and Dr. Evans pray that judgment be entered in
their favor and against the defendant ACE:
1.    Declaring that ACE is obligated to:
(a)    Defend Dr. Evans in the ERISA Action upon exhaustion of the
underlying Federal Policy, and
(b)    Pay on behalf of Dr. Evans, AIT, and other AIT Insureds, all
covered Losses incurred in the ERISA action subject only to the ACE
Policy’s limit of liability; and
2.    Awarding AIT and Dr. Evans their costs of this action; and
3.    Awarding AIT and Dr. Evans such other relief as is just and equitable.
 

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