Fiduciary Fallout: Market Basket Sues Chubb, Seeking Full $15 Million Payout Following $17.5M ERISA Settlement

Demoulas Super Markets, Inc. (“Demoulas”), better known as “Market Basket,” has filed suit in the United States District Court against Federal Insurance Company (“Chubb”) for breach of contract and unfair claim practices. The lawsuit arises from Chubb’s refusal to contribute its $15 million fiduciary liability policy limit towards Demoulas’s $17.5 million settlement of a class action. The class action alleged breaches of fiduciary duties by Demoulas and the trustees of its Profit-Sharing Plan and Trust (“Plan”) under the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiff’s counsel claimed that these breaches resulted in $90 million in damages to the Plan.

Upon reaching a $17.5 million settlement with the plaintiff, Chubb only paid $7.8 million of its limit. After paying the settlement, Demoulas subsequently sued Chubb in March 2023, for breach of contract and punitive damages after paying the settlement.

This case highlights the growing prevalence of fiduciary liability suits under ERISA and their substantial settlements. Demoulas’ complaint also underscores the importance of fiduciary liability policies for businesses with officers or directors serving as trustees for 401k plans or other ERISA-related plans.

Demoulas’s fiduciary liability insurance policies

Demoulas carried a stand-alone fiduciary liability insurance policy with Chubb) for the period from August 1, 2018, to August 1, 2019, providing $15 million in coverage (the “Chubb Policy”).

Additionally, Demoulas was insured by a National Union Fire Insurance Company of Pittsburgh, PA (“AIG”) Excess Edge Insurance Policy for the same period as the Chubb Policy with a $10 million liability limit. This coverage attached after the payment of the Chubb Policy’s $15 million limit.

The ERISA class-action lawsuit

On July 30, 2019, while the policies were in full force and effect, a lawsuit was filed in the U.S. District Court for the District of Massachusetts, alleging a class action on behalf of employees participating in the Demoulas Plan. The suit alleged Demoulas and the Plan’s trustees had breached their fiduciary duty under ERISA to prudently manage the Plan and to monitor fiduciaries (the “ERISA Action”). The ERISA Action sought damages on behalf of the Plan, interest, and attorney’s fees.

The ERISA Action alleged that Demoulas and the Plan’s trustees, as ERISA fiduciaries, failed to prudently invest the assets of the Plan using a “one-size-fits-all” strategy, investing a substantial portion of the Plan’s investments in low-interest cash accounts while better fixed-income options were available.

As an example, the plaintiffs alleged that in 2014, the defendant trustees had held 66% of the Plan’s total assets, totaling $401,076,285, in cash accounts earning 0.05% interest or less, where they could have achieved higher returns with similar risks in other fixed income investment options but failed to do so.

As a result of Demoulas’s alleged imprudent investment strategy and poor execution, the plaintiffs alleged, the Plan ranked as the worst-performing Plan in the country over the five years before the ERISA Action’s filing relative to similar plans.

Upon being served with the ERISA action, Demoulas promptly notified Chubb of the fiduciary liability claims alleged in the ERISA Action and sought coverage under Chubb’s Policy.

Demoulas’s Counsel Urges Chubb to Consider Mediation for Case Settlement

In accordance with the Chubb policy, Demoulas selected counsel, approved by Chubb, to represent its interests in the ERISA Action. In August 2019, Demoulas’s Counsel discussed the case defense and a potential motion to dismiss Chubb’s assigned Senior Claim Director. The chosen strategy was to focus on a strong motion to dismiss based on a favorable Federal Appeals Court decision limiting fiduciary liability for conservatively managed retirement plans like the Demoulas Plan.

In September 2019, Demoulas and the Plan’s trustees filed their motion to dismiss the ERISA Action. Demoulas’s Counsel successfully delayed document production until the Court denied the motion to dismiss in April 2020.

Following the denial of the motion to dismiss, Demoulas’s Counsel allegedly emphasized to Chubb via emails and memoranda the importance of settling through mediation, as further discovery would prolong litigation and reveal damaging information, increasing Demoulas’s financial exposure. According to Demoulas’s lawsuit against Chubb, Demoulas’s counsel emphatically informed Chubb that without an early settlement through mediation, legal fees from extensive discovery, including possible actions by hostile directors involved in a publicized corporate fight for Demoulas’s control in 2014 and 2015, would significantly deplete the $15 million insurance coverage cap.

Agreement to Mediate and Selection of Renowned ERISA Mediator

After the class-action defendants filed their answer, Demoulas’s Counsel and the plaintiffs’ counsel agreed to conduct mediation. Demoulas’s Counsel successfully delayed the production of most documents until after mediation. However, the plaintiffs’ counsel required certain documents as a precondition for attending any mediation. Demoulas provided the requested documents, but other potentially relevant documents that could increase liability were not produced before mediation.

The parties selected a highly regarded ERISA-claim mediator and scheduled the mediation for September 2020. Both Chubb and AIG were informed of the Mediator’s selection and had previous experience with him. The Mediator was a Distinguished Fellow in both The College of Labor and Employment Lawyers and the American College of Civil Trial Mediators, having served as a neutral in numerous national class, collective, and mass actions. His focus included ERISA claims and securities fraud cases.

In May 2020, preparatory to the September mediation, the plaintiffs’ counsel claimed in a letter to Demoulas’s Counsel that the plaintiffs could prove the Plan had suffered $90 million in damages and set a demand to settle the ERISA Action for $45 million. Demoulas’s Counsel shared this letter with Chubb and AIG.

Demoulas’s Counsel warns Chubb of potential ‘policy limit’ payout in mediation

Before the mediation began, Demoulas’s Counsel, with Chubb’s approval, engaged a reputable expert experienced in over fifty ERISA cases. The expert’s analysis shared with Chubb and AIG before mediation valued plaintiffs’ claims conservatively at $32.5 million. Notably, the expert was unaware of additional relevant documents which had not yet been produced in the litigation. Chubb allegedly neither contested the estimate nor disclosed any independent value analysis it might have had to Demoulas’s Counsel.

Based on the expert’s conclusion, Demoulas’s Counsel informed Chubb that the case was a “policy limits exposure” situation, meaning the Chubb policy’s full value would be needed for settlement. According to Demoulas, its counsel repeatedly requested Chubb’s settlement authority before mediation, but Chubb refused to respond, giving no explanation. As a result, Demoulas claims it entered the mediation without knowing if Chubb would agree to pay any settlement amount under its policy.

Mediation and a $17.5 million settlement without Chubb offering its $15 million policy limit

The mediation occurred on September 30, 2020, with Chubb representatives present. The parties did not reach any settlement at the mediation. However, after the mediation adjourned, the Mediator continued separate discussions.

On October 2, the Mediator informed Demoulas’s Counsel the plaintiffs had made an offer, open until October 5, for a $20 million settlement. Demoulas’s Counsel communicated this to Chubb and sought a discussion on settlement authority.

Chubb allegedly did not provide timely settlement authority, despite repeated requests. Eventually, on October 8, the Mediator proposed a so-called “Mediator’s Proposal” for a $17.5 million settlement. Demoulas’s Counsel informed Chubb and AIG of the Mediator’s Proposal and urged acceptance, emphasizing that further negotiation attempts to offer lower than the Mediator’s Proposal could risk plaintiffs walking away.

After Chubb, according to Demoulas’s complaint, offered only $10 million of its $15 million limit, Demoulas accepted the Mediator’s Proposal as the most reasonable approach considering their liability, potential damages, and the added costs of ongoing litigation.

On October 12, Demoulas’s Counsel informed Chubb that the class-action plaintiffs had also accepted the $17.5 million settlement.

Final settlement and a continuing dispute over Chubb’s coverage and contribution to the settlement

On November 20, 2020, parties in the ERISA Action sought preliminary approval for the class-action Settlement Agreement. The Court preliminarily approved it on November 24, 2020.

Following the Settlement Agreement’s report to the Court, Demoulas kept communicating with Chubb about what Demoulas considered as Chubb’s unreasonable refusal to contribute its $15 million policy limit towards the agreed $17.5 million ERISA Action settlement.

Chubb, for its part, asserted that its assessment of what the ERISA Action should have settled for was based on Demoulas’s Counsel allegedly having assessed the fair settlement value based on 1% of plan assets, or about $8.5 million. Demoulas denied that its Counsel had ever made such an assessment; but, instead, had only suggested that 1% of total plan assets might have been a reasonable starting point for negotiations.

On December 1, 2020, Chubb, through counsel, also advised Demoulas that it “reserve[s] all rights as to its ongoing investigation, including the right to deny coverage for the [ERISA action] if warranted by the circumstances. According to Demoulas, this reservation involved “certain facts” which Chubb supposedly knew before the mediation and before it offered $10 million of its $15 million policy limit towards the settlement agreement.

The Court granted final approval of the class action settlement on April 7, 2021

On June 10, 2021, Chubb paid $7.8 million without prejudice. Demoulas acknowledged the payment and reserved its rights to recover the remaining $15 million (plus damages and costs) due under the Chubb Policy and applicable law.

On June 21, 2021, Chubb offered to pay Demoulas an additional $2.35 million to its already paid $7.8 million in exchange for a full release of all claims. Demoulas rejected the offer, and on July 2, 2021, it paid the full $17.5 million under the Settlement Agreement to resolve the ERISA Action.

AIG contributes $2 million, and Demoulas files its lawsuit against Chubb

A week after Demoulas made its $17.5 million payment to fund the ERISA Action settlement agreement, AIG paid $2 million to Demoulas under its excess policy.

Eventually, on March 30, 2023, Demoulas filed its lawsuit against Chubb in the United States District Court in Boston. Demoulas’s five-count complaint alleges:

Count I: Violation of Mass. Gen. Laws c. 176D § 3(9)(d) – Chubb refused to pay Demoulas’s claim before conducting a reasonable investigation, committing unfair or deceptive acts in the insurance business.

Count II: Violation of Mass. Gen. Laws c. 176D § 3(9)(f) – Chubb failed to effectuate a prompt, fair, and equitable settlement of Demoulas’s claim after liability was clear, committing unfair or deceptive acts in the insurance business.

Count III: Violation of Mass. Gen. Laws c. 176D § 3(9)(g) – Chubb intentionally lowballed Demoulas in settlement offers and baselessly threatened to deny coverage, committing unfair or deceptive acts in the insurance business.

Count IV: Violations of Mass. Gen. Laws c. 93A §§ 2 and 11 – Chubb’s “lowballing,” threat to deny coverage, and refusal to effectuate a prompt, fair, and equitable settlement constitute knowing and willful unfair and deceptive acts in trade or commerce in Massachusetts.

Count V: Breach of Contract – Chubb failed to pay settlement amounts and defense costs incurred by Demoulas up to the policy limit as required by the Chubb Policy.

The lawsuit seeks breach of contract damages for the $7.2 million difference between the $7.8 million Demoulas received from Chubb without prejudice and Chubb’s policy limit of $15 million. The suit also seeks to have the court double or treble the$7.2 million in damages under G.L. c. 93A, based on Chubb’s denial of payment being knowing and willful violations of G.L. c. 93A and 176.D  

This lawsuit is in its initial stages, and Agency Checklists will keep its readers informed of its progress.

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

Connect with me directly, by calling me at 617-598-3801.