How a Recent Ruling May Affect Insurance Coverage for Wage & Hour Claims

Many wage and hour claims are specifically excluded in Employment Practices Liability (EPL) insurance policies, but a recent case in California demonstrates the exclusions may have some grey areas, causing insureds and carriers alike to re-examine the precise language in their EPL policies.

Wage and hour claims are tricky and can be quite expensive. Moreover, Employment Practices Liability insurance policies typically contain exclusions for wage and hour claimsHowever, not all wage and hour claims or policy exclusions are the same. Part of robust claims advocacy is taking the time—and having the expertise. —Priya  

It’s generally accepted that Employment Practices Liability (EPL) insurance policies don’t cover wage and hour claims. They typically have an exclusion aimed straight at allegations brought under the Fair Labor Standards Act (FLSA) and its state law equivalents. Carriers also cite the definition of Claim, which refers to specific examples of Wrongful Acts (also a defined term), and since nothing about a wage and hour claim constitutes an Employment Tort, Wrongful Termination, Discrimination, and so on, carriers decline to cover the claim. This leaves insureds to face a landscape of federal and state lawsuits on single plaintiff, class, collective, and hybrid bases without insurance protection. Filed every day, these suits present a significant risk for employers.

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A recent case in the California Court of Appeal, 4th Appellate District, exposes the importance of carefully examining the specifics of each claim against the language found in an EPL policy. In Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Number 11EPL-20208, the court found that the wage and hour exclusion in the Lloyds EPL policy at issue had to be interpreted narrowly, meaning that the exclusion only barred coverage for claims related to “laws concerning duration worked and/or remuneration received in exchange for work.” As a result, the “wage and hour” exclusions did not provide a basis to decline coverage for claims that didn’t arise from the employee’s actual compensation for work performed.

Let’s take a look at the decision in the context of the broader employment practices liability landscape. It’s a landscape employer companies are entirely too familiar with.

One source of wage and hour claims is the Fair Labor Standards Act (FLSA). The Fair Labor Standards Act establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments. The Wage and Hour Division (WHD) of the US Department of Labor (DOL) enforces the FLSA with respect to private employment, state and local government employment, and federal employees of the Library of Congress, US Postal Service, Postal Rate Commission, and the Tennessee Valley Authority. The FLSA is enforced by the US Office of Personnel Management for employees of other Executive Branch agencies, and by Congress for covered employees of the Legislative Branch. Various state laws can also be sources of wage and hour claims.

How Wage and Hour Claims Are Defined—and Excluded from Coverage

Wage and hour allegations can include misclassification of employees (including misclassification of employees as independent contractors); inaccurate payment of wages, including tip credit issues; incomplete pay stub disclosures; “donning and doffing” claims (changing into and out of work clothes); non-compliance with meal and break period requirements; failure to pay wages for off-the-clock work; miscalculation of wage and/or overtime rates; failure to reimburse for business expenses; and so on.

Finding insurance for such claims is challenging, to put it mildly. The insurance marketplace hasn’t been willing to pick up this risk save in limited circumstances and under tight underwriting constraints, such as offshore options or endorsements providing small sub-limits for defense only. The majority of the EPL products in the market avoid these claims, leaving employers responsible for the bulk of what can be exorbitant defense cost, settlement and judgment exposure.

Here’s a typical wage and hour exclusion, found in an EPL Policy issued by Chubb. It states that the insurer will not pay the loss:

“…on account of any Claim alleging, based upon, arising out of, or attributable to: (i) improper payroll deductions, unpaid wages, on-call time including but not limited to rest periods or meal breaks, misclassification of exempt or nonexempt employee status, compensation earned by or due to the claimant but not paid by the Insured (including but not limited to commission, vacation and sick days, retirement benefits, and severance pay), overtime pay for hours actually worked or labor actually performed by any Employee of the Company, or any violation of any federal, state, local or foreign statutory law or common law that governs the same topic or subject, or any rules, regulations or amendments thereto; or (ii) (ii) any violation of the responsibilities, obligations or duties imposed by the Fair Labor Standards Act (except the Equal Pay Act), as amended, or any rules or regulations promulgated thereunder, or similar provisions of any common or statutory federal, state, local or foreign law; provided that for that part of any Loss covered under Insuring Agreement B, Employment Practices Liability, this exclusion does not apply to: (a) any back pay or front pay allegedly due as the result of discrimination or that part of any Loss for Retaliation; or (b) Wage and Hour Defense Costs;..”

Language like this affords carriers their primary basis for declining coverage. One of the more recent cases interpreting the wage and hour exclusion is Admiral Ins. Co. v Kay Automotive Distributors, Inc., 2015 U.S. Dist. LEXIS 11357 (C.D. Cal. Jan. 29, 2015).  The Admiral case involved an underlying lawsuit against the insured asserting several causes of action for wage and hour violations. The carrier denied coverage for the lawsuit based on the FLSA exclusion. The district court agreed, interpreting the exclusion as encompassing claims under sections of the California Labor Code dealing with pay and hours of work regardless of whether those sections were similar to any provision of the FLSA.  The court then went even further, holding that the exclusion barred claims “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving” such laws.  In other words, because the court concluded that no action would have been brought but for the wage and hour claims, the exclusion eliminated coverage for all causes of action against the insured, even claims for employment-related misrepresentation.

Interpretations such as this are essentially mirrored in the coverage positions most insureds receive when they tender a wage and hour claim. Which brings us to Southern California Pizza Co.

Southern California Pizza Co. Sues for Full EPL coverage

Plaintiffs in the underlying action alleged violations of various labor code provisions, including failure to provide overtime wages, accurate work-hour statements or proper meal and rest periods, as well as failure to reimburse employees for business-related expenses. Southern California Pizza sought coverage under its EPL policy, issued by Lloyds. Lloyd’s largely denied coverage, arguing that the class action was barred by its FLSA exclusion and, in any event, wasn’t a Claim as defined by the policy. Instead, Lloyds accepted coverage under its wage and hour endorsement, which set forth a sublimit of $250,000 applicable to defense costs only. Once exhausted, Lloyds stated, its coverage obligations (including defense) ended. The insured sued to obtain the full EPL Policy limit.

Reversing the trial court holding that sided with Lloyds’ interpretation of its exclusion, the appellate court held that the phrase “wage and hour laws” referred to laws concerning time spent working and/or compensation received in exchange for work. Class claims alleging Southern California Pizza failed to reimburse its employees for travel-related and cellphone expenses weren’t similar to what the FLSA was intended to address, and therefore didn’t come within the scope of the wage and hour exclusion.

Having found that the wage and hour exclusion did not apply, the court next considered whether the matter at hand fell under the policy’s definition of Claim. The carrier argued that the complaint did meet the definition of Claim because the alleged violation was a statutory violation, not a tort.

The court disagreed, holding that “[a] violation of a statutory duty owed to another may be a tort.”  As such, the complaint was deemed to fall within the policy’s definition of Claim.

The court’s decision reversed some, though not all, of the carrier’s declination. Regarding the underlying class claim that Southern California Pizza failed to properly include certain information on wage statements, the court ruled that this claim did fall within the intended scope of the policy’s wage and hour exclusion because laws mandating what wage-related information should be included in wage statements constitutes violation of a “quintessential” wage law.

How the Southern California Pizza Co. Case May Affect the EPL Claims Landscape

The ramifications of the decision in Southern California Pizza Co. are as yet unclear. Certainly, it may give insureds and their representatives some basis to revisit past wage and hour declinations with an eye towards resubmitting them for further review. Courts may be more willing to look closely at challenges to wage and hour declinations to see if the allegations involve actual compensation received in exchange for work or something else not addressed by the wage and hour exclusion. Carriers, on the other hand, may look to modify their exclusion language in light of the appellate court’s ruling. One commentator has opined that if coverage is found for prior EPLI claims (ones that aren’t time-barred due to statutes of limitations or expired policy reporting periods) “…the insurance marketplace may face a huge amount of unanticipated liabilities. This financial burden will almost certainly accelerate an already-firming marketplace for EPLI and other casualty lines of coverage.” (CRC Group, “EPLI Claim Ruling: Previously Denied Claims May Now be Covered”)

In summary, while many California courts may continue to hold that EPL policies don’t cover wage and hour claims, insureds and their representatives should examine the precise language contained in their EPL policy.  As Southern California Pizza Co. demonstrates, the specific wording of the exclusion, including the FLSA exclusion and those defined perils listed in the policy’s definition of “Employment Practices Wrongful Act,” may afford more coverage than might have seemed obvious at first glance.


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