4th Circuit rules Perdue Farms not covered for full $10M deal

Daily Record, The (Baltimore), May 18, 2006 by Cynthia Di Pasquale

Perdue Farms Inc. will have to pay more out of pocket than it expected to in a legal settlement with disgruntled employees, following a federal appeals court decision clarifying the poultry producer's insurance coverage.

The Salisbury-based company was hit with a class action lawsuit in 2001 for allegedly violating both wage and hour statutes and the federal retirement income law. It settled for $10 million, but its insurers, Travelers Casualty and Surety Co. of America and Reliance Insurance Co., balked when asked to foot the bill plus $4.4 million in legal fees.

This week, the 4th U.S. Circuit Court of Appeals said the insurers cannot seek reimbursement for any part of the cost of defending the suit. As for the settlement, however, the insurers are not liable for the portion that resulted from the wage dispute, since those claims were not covered.

We hold that the district court properly denied the insurer reimbursement for defense costs, but that a remand is necessary on settlement indemnification because the district court conflated the duty to defend and the duty to indemnify under Maryland law, Judge J. Harvie Wilkinson III wrote for the court.

Leona Trotter and a handful of additional employees filed suit against Perdue Farms in 1999 claiming the company wasn't paying them wages or contributing to their retirement funds for the time they spent putting on sanitary uniforms or working extra hours on the processing line. They also alleged Perdue failed to keep records of hours worked but not paid for, which prevented some employees from qualifying for retirement benefits.

The litigation was certified in federal court as a class action in 2001 - with the bulk of claims falling under wage and hour statutes, but some under the Employee Retirement Income Security Act of 1974 (ERISA).

The parties settled within one year, with Perdue agreeing to limited injunctive relief and a payment of $10 million - much of it for plaintiffs with combined ERISA and wage and hour claims.

The parties agreed that the insurance policy covered ERISA claims, but not claims solely based on wage and hour laws.

Perdue sought $9.4 million from its insurers in indemnification and sued them in Maryland when they refused to pay. The case was removed to federal court in Baltimore, where both sides moved for summary judgment.

Senior U.S. District Judge William M. Nickerson correctly ruled that the insurers must pay legal fees for defending Perdue in the lawsuit, even for the portion not related to covered claims, according to the appeals court. However, it faulted his holding that the insurers also must pay the Trotter settlement since, in the absence of Supreme Court precedent on point, Perdue was potentially liable for back pay under ERISA as well as traditional ERISA violations.

John C. Hayes Jr., an attorney for the insurers, said his most significant argument to the appellate court was that Nickerson ignored the distinction under Maryland law between the duty to defend and the duty to indemnify, and he in fact merged them, which we thought was a significant change in Maryland law.

Maryland law holds that under typical liability insurance policies, an insurer has to indemnify the insured for a judgment based on covered liability claims. It also has a duty and a right to defend the insured against claims that are potentially covered.

The district court erred in applying this potentially covered rule to the duty to indemnify, according to the opinion. It also erred in concluding the insurers had to indemnify all claims reasonably related to those covered by the policy, which is another extension of the duty to defend.

The appellate panel remanded the case to district court to determine what portion of the underlying Trotter settlement is actually covered by the insurance policy and what is not.

Hayes noted the parties may go to trial over this question.

An attorney for Perdue Farms did not return a phone call seeking comment.

WHAT THE COURT HELD

Case:

Perdue Farms Inc. v. Travelers Casualty and Surety Co. of America, U.S. 4th No. 04-2208. Published. Opinion by Wilkinson, J. Filed May 16, 2006.

Issue:

Must an insurer indemnify an insured for claims in a settlement potentially covered or reasonably related to the covered claims?

Holding:

No; affirmed in part, reversed in part and remanded. Potentially covered and reasonably related are principles applied to the duty to defend an insured, not the duty to indemnify. The insurer must only indemnify for expressly covered claims.

Counsel:

John C. Hayes Jr. for appellant; Stephen R. Mysliwiec for appellee.