August, 2009

Can a Breach of the Duties Owed by Named Plan Fiduciaries Act as a Defense in Cases Against Third Party Service Providers?

By Connie M. Anderson, Esq.

A named fiduciary of an employee benefits plan owes fiduciary duties with respect to its administration of the plan. These duties include a duty to act as a prudent person “familiar with such matters,” as well as a duty to diversify the assets held by the plan. Professional liability claims against third party service providers have increased dramatically over the past year. As such, the issue of whether a named fiduciary’s breach of its duties acts as a defense to professional negligence claims is ripe for determination by the courts.

Named fiduciaries have argued that cases concerning preemption of state claims by ERISA bar consideration of their fiduciary duties in a state law professional negligence claim against a service provider. Further, named fiduciaries claim that because fiduciary duties are owed to plan participants, third party service providers lack standing to assert any breach of those duties as a defense. There is, however, an argument to the contrary, which has support in the reasoning in preemption cases, as well as policy considerations.

Cases holding that state law negligence claims are not preempted by ERISA are based on the reasoning that in pursuing the state law claims, the plan is operating as any other commercial entity, and as such, allowing state claims does not interfere with the scheme of ERISA. However, if such duties are ignored in determining the outcome of state claims, some might argue that the motivation for fulfilling the purpose behind ERISA, protecting beneficiaries, would effectively be removed. This might allow fiduciaries who breached their duties to simply sue their service providers and then feign ignorance, which defendants may argue was not the courts’ original intent when ruling on preemption of state negligence claims. Therefore, defenses based upon a named fiduciary’s breach of its duties should be considered in professional liability claims against employee benefits service providers.

Connie M. Anderson, Esq.
Chair, Financial Products & Services Litigation Group
Klinedinst PC

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