Employers nationwide are experiencing a new wave of ERISA litigation targeting so-called “tobacco surcharges” on employees enrolled in employer-sponsored health plans. Because these lawsuits are generally brought as putative class actions, the stakes can be significant and some multi-million dollar settlements have already become public. But employers need not face the costs of defending and resolving these ERISA cases alone. Fiduciary liability insurance policies generally require insurers to pay for defense costs incurred in ERISA class actions and, depending on their terms and conditions, fiduciary liability policies may cover most, if not all, of any eventual settlements or judgments. Employers should carefully review reservation of rights letters and resist efforts by fiduciary liability insurers to improperly resist or limit coverage for tobacco surcharge litigation.
The Emerging Tobacco Surcharge Litigation Landscape
While the specific facts of each tobacco surcharge case vary, the legal theories underlying these cases follow a consistent pattern. The plaintiffs generally allege that:
Based on those allegations, plaintiffs commonly assert three categories of claims:
- Unlawful discriminatory surcharges under ERISA Section 702.
- Failure to provide full retroactive reimbursement and adequate notice of reasonable alternatives under 42 U.S.C. § 300gg-4(j)(3).
- Breach of fiduciary duty under ERISA Sections 404, 406, and 502(a).
The plaintiffs usually seek a wide variety of damages, including reimbursement of the tobacco surcharges, and plaintiffs’ attorneys’ fees.
Most tobacco surcharge cases remain in their early stages and, although some have settled, employers so far have had mixed results when attempting to dispose of these claims at the pleading stage. Compare Plesha v. Ascension Health All., No. 4:24-CV-01459-CMS, 2026 WL 279321, at *9 (E.D. Mo. Feb. 3, 2026) (dismissing all counts with prejudice), and Opinion & Order On Motion To Dismiss at 39, Noel v. PepsiCo, No. 7:24-cv-07516-C (S.D.N.Y. Feb. 27, 2026), Dkt. No. 49 (same), with Bailey v. Sedgwick Claims Mgmt. Servs. Inc., No. 2:24-CV-02749-TLP-TMP, 2025 WL 2779899, at *22 (W.D. Tenn. Sept. 26, 2025) (denying motion to dismiss breach of fiduciary duty claim).
Even those cases that result in early dismissals or settlements can require costly litigation. Employers can offset some, if not all, of that cost by leveraging their fiduciary liability insurance policies.
Fiduciary Liability Insurance: A Coverage Pathway for Tobacco Surcharge Litigation
Fiduciary liability insurance policies are designed to protect individuals and entities charged with managing and administering employee benefit plans from ERISA-based claims arising from wrongful acts in the performance of those duties. The standard fiduciary liability insurance policy provides coverage for “Loss” arising from a “Claim” for a “Wrongful Act.” “Wrongful Act” is commonly defined to include any alleged negligence, breach of fiduciary duty, or breach of any other duty imposed by ERISA with respect to an employee benefit plan.
The breach of fiduciary duty claims in tobacco surcharge cases fit comfortably within the broad insuring agreements found in most fiduciary liability insurance policies. The discriminatory surcharge and reasonable alternatives claims also arise from the duties imposed by ERISA and are arguably covered under these policies.
Notwithstanding the broad grant of coverage in these policies, fiduciary liability insurers may test the boundaries of exclusions in their policies that were not written with tobacco surcharge exposures in mind. For example, many policies exclude from covered “Loss” certain categories of relief sometimes sought in ERISA cases, such as “benefits due or expected to become due under an employee benefit plan” or “reimbursement of monies to which the insured was not legally entitled.” Insurers may argue that claims or damages associated with tobacco surcharges fall within this exclusion. But a surcharge can hardly be categorized as a “benefit,” and depending on the facts of each individual case, policyholders usually have strong arguments that the plaintiffs’ allegations and courts’ characterization of the claims as statutory violations fall outside these exclusions. Moreover, even if plaintiffs purport to seek “restitution” or “disgorgement” in a complaint, those characterizations do not necessarily control—particularly when, as is often the case, the sums sought could equally be characterized as “damages” covered under a fiduciary liability policy. Furthermore, even if certain relief sought in tobacco surcharge litigation is arguably uncovered, policyholders still generally are entitled to coverage for other forms of “Loss,” including defense costs (which are expressly included within “Loss” definitions in most fiduciary liability policies). Finally, unless uncovered relief is actually awarded through a final judgment, mere allegations in a complaint should not bar coverage for settlements or judgments including an award of damages.
Tobacco surcharge litigation represents a significant and developing exposure for employers operating employee benefit programs. As courts continue to grapple with these claims, fiduciary liability coverage may provide meaningful protection. Employers facing tobacco surcharge claims should promptly review their fiduciary liability policies, notify their insurers, and consider engaging experienced coverage counsel to navigate potential coverage disputes.