Twin City Fire Ins. Co. v. Glenn O. Hawbaker, Inc.

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TWIN CITY FIRE INSURANCE CO., Plaintiff, v. GLENN O. HAWBAKER, INC., DANIEL HAWBAKER, PATRICK HAWBAKER, and D. MICHAEL HAWBAKER, Defendants.

No. 4:22-CV-01485

United States District Court, M.D. Pennsylvania

August 31, 2023

MEMORANDUM OPINION

Matthew W. Brann, Chief United States District Judge.

Many people believe that they are criminally underpaid. According to the Pennsylvania Attorney General, the prevailing wage employees of Defendant Glenn O. Hawbaker, Inc. (“GOH”) might agree. In 2021, the Pennsylvania Attorney General accused GOH of wage theft, alleging that it stole $20.7 million in fringe benefits from its employees. GOH entered into a plea agreement with the Attorney General agreeing to a restitutionary payment reimbursing the allegedly stolen wages.

In short order, GOH and its Directors, Daniel Hawbaker, Patrick Hawbaker, and D. Michael Hawbaker, (“Director Defendants”) found themselves on the wrong end of two class action lawsuits brought by former employees, claiming the underfunding of retirement accounts was a breach of Defendants' fiduciary duties which resulted in lost interest and investment returns. The Defendants, insured by a Policy that provides coverage for alleged violations of fiduciary duty, notified their insurance company, Plaintiff Twin City Fire Insurance Co. and asked it to defend Defendants in the class actions. Twin City refused, citing provisions that exclude from coverage any claims that arise out of allegations of unpaid wages or benefits.

Twin City then initiated this litigation, asking the Court to issue a declaratory judgment confirming as much. In response, Defendants filed a Counterclaim asking the Court to find that Twin City is required to defend the class actions and that it has breached the insurance agreement by failing to do so. Twin City has moved to dismiss Defendants' Counterclaim. Because Twin City has no obligation to defend or indemnify Defendants from claims arising from unpaid wages or benefits, the Court grants Twin City's Motion and dismisses Defendants' Counterclaims.

I. BACKGROUND

A. Underlying Facts

1. The 2021 Insurance Policy

Defendants are Insureds under a Policy issued by Twin City effective from April 1, 2021 to April 1, 2022.^[1] The Policy contains three separate coverage parts, including a Fiduciary Liability Coverage Part which the parties agree is the coverage at issue in this dispute.^[2] Determining what is covered by the Policy requires wading through a morass of defined terms and cross-references. The Court accordingly will not recite Policy provisions verbatim, but instead summarize the terms and provisions relevant to the instant dispute.

As part of the Fiduciary Liability Coverage, Twin City has the “duty to defend [covered] Claims” and “pay Loss on behalf of the Insureds” for “a Wrongful Act by the Insureds or any person for whose Wrongful Acts the Insureds are legally responsible.”^[3] Excluded from this duty are Claims which “involve allegations, in whole or in part, of a Wage and Hour Violation” or claims for unpaid wages.^[4] The Policy also provides that “[a]ll Claims “based upon, arising from or in any way related to the same Wrongful Act or Interrelated Wrongful Acts” are deemed a single Claim made on the earliest date that any such Claim was first made or notice of any Wrongful Act was given to Twin City.^[5]

The Policy and Fiduciary Liability Coverage define the bold terms above as follows:

• A Claim is any (1) “written demand for monetary damages or other civil non-monetary relief commenced by the receipt of such demand” or (2) “civil proceeding . . . commenced by the service of a complaint . . . or similar pleading.”^[6]

• Loss means the amount that Insureds are legally liable to pay solely as a result of a Claim and the reasonable legal fees and expenses incurred in the defense or appeal of a Claim.^[7]

• Insureds includes the GOH, Director Defendants, and any employee welfare or pension benefit plan as defined by ERISA^[8] sponsored by GOH for the benefit of GOH employees.^[9]

• A Wage and Hour Violation is “any actual or alleged violation of the duties and responsibilities that are imposed” on GOH by any law “which govern[s] wage, hour and payroll practices.”^[10] Such practices include, but are not limited to the calculation and payment of wages and benefits, and the classification of persons or entities for wage and hour purposes.^[11] • A Wrongful Act is any actual or alleged “error, misstatement, misleading statement, act, omission, neglect, or breach of duty constituting a violation or responsibilities, obligations or duties imposed upon fiduciaries or an Insured Plan by ERISA or any similar law” or “matter claimed against an Insured due to such Insured acting in the capacity of a fiduciary of an Insured Plan.”^[12]

• Interrelated Wrongful Acts are Wrongful Acts that have as a common nexus any fact or circumstance, or series of causally connected facts or circumstances.^[13]

2. The King and Packer Class Actions and Coverage Dispute

In May 2021, James C. King filed a class action lawsuit against GOH in the Court of Common Pleas of Centre County, Pennsylvania (the “King Class Action”).^[14] The King Class Action plaintiffs allege three state law causes of action: breach of contract as to GOH's failure to pay their wages in a timely fashion (King Count I); breach of contract as to GOH's efforts to misappropriate funds from their retirement accounts (King Count II); violations of the Wage Payment and Collection Law, 43 P.S. § 260.1 et seq. (King Count III).^[15] In October 2021, Lester Packer Sr., Lester Packer II, and Shawn Dyroff filed a class action lawsuit in this Court against GOH, the administrator of GOH's benefit plan, GOH's Board of Directors, and other unnamed fiduciaries (the “Packer Class Action”).^[16] The Packer Class Action plaintiffs allege that Defendants breached their fiduciary duties under ERISA in two ways. First, they allege that GOH and GOH's plan administrator breached their duties of loyalty and prudence “by failing to make required contributions to [the plaintiffs'] individual 401(k) accounts within the strict time limitations for making such contributions and in the required amounts . . . in violation of 29 U.S.C. § 1104.”^[17] Second, the Packer Class Action plaintiffs allege that GOH and its Board breached their fiduciary duties to adequately monitor GOH's plan administrator by failing to monitor the administrator of GOH's benefits plan, the process by which contributions were distributed to plan participants, and failing to remove the inadequately performing plan administrator.^[18]

The Classes in both Actions are prevailing wage employees of GOH.^[19]Contractors awarded public works projects funded with state or federal funds are required to pay their employees on those projects in accordance with prevailing wage laws.^[20] Prevailing wages determinations include an hourly wage and the cash value of fringe benefits.^[21] Fringe benefits include health and welfare benefits, pension or retirement benefits, life insurance, disability, and vacation and holiday pay.^[22] The Class Actions both allege that GOH undertook a “scheme to underpay workers” by misrepresenting the value of the fringe benefits.^[23] The allegations regarding this scheme are virtually identical and are as follows:^[24]

GOH represented it was contributing 50% of the fringe benefit amount to health and welfare benefits and 50% to pension benefits.^[25] An investigation by the Office of the Attorney General of Pennsylvania found that, between 2015 and 2018, GOH had overstated the value of the fringe benefits by $20.7 million.^[26]

Regarding retirement benefits, the PWA and DBA allow employers to use prevailing wage fringe benefit money to fund retirement contributions.^[27] However, GOH was using retirement contributions earned by prevailing wage earners “to fund all GOH pension contributions for all employees, including hundreds of nonprevailing wage employees.”^[28] Between 2015 and 2018, this resulted in the misappropriation of $15.5 million in prevailing wage workers' retirement contributions.^[29] GOH also overstated the value of the health and welfare benefits by: (1) misrepresenting the amount paid by GOH for health insurance claims;^[30] (2) including ineligible business expenses;^[31] (3) including matching 401(k) matching funds;^[32] (4) failing to include employee contributions to health insurance premiums;^[33] and (5) improperly calculating the value of paid time off.^[34] As a result, GOH overstated the value of the health and welfare benefits from 2015 to 2018 by $5.3 million.

GOH should have paid the difference between the stated value of the fringe benefits and the actual value to its prevailing wage employees either in cash or as additional pension contributions.^[35] The failure to do so deprived prevailing wage employees of the wages earned, as well as lost interest and growth of their retirement accounts.^[36]

Defendants notified Twin City of the King and Packer Class Actions.^[37] In October and December 2021, Twin City denied coverage for the Packer and King Class Actions and refused to defend GOH in either lawsuit.^[38]

B. Procedural History

Twin City's First Amended Complaint seeks a declaration “that Twin City does not have a duty to provide any coverage, including any defense, in connection with the [King and Packer Class Actions].”^[39] Defendants answered the First Amended Complaint and filed an Amended Counterclaim.^[40] Defendants' Amended Counterclaim alleges that Twin City breached the Policy by wrongfully denying coverage and/or its duty to defend GOH in connection with the King and Packer Class Actions (Count I).^[41] Defendants also seek a judgment declaring that the Policy...