California Courts Maintain Position that EPL Policies Afford No Indemnity Coverage for Wage and Hour Claims

California Courts Maintain Position that EPL Policies Afford No Indemnity Coverage for Wage and Hour Claims

While some EPL policies explicitly provide defense coverage for wage and hour suits subject to a sublimit, virtually all EPL policies exclude indemnity coverage for wage and hour claims. Nonetheless, given the substantial rise in wage and hour class actions being brought in California, and the significant cost associated with settling these lawsuits, California employers have not been deterred in attempting to pass the costs associated with these actions onto their EPL carriers. California courts, however, have repeatedly held that EPL policies do not afford indemnity coverage for wage and hour claims, although they have used different approaches to arrive at that conclusion.

California Dairies, Inc. v. RSUI Indemnity Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], is the seminal case interpreting California law on the issue. In California Dairies, the Eastern District of California held that, because some of the underlying wage and hour claims were matters of state law without an FLSA analogue, those claims were not “similar to” FLSA claims and therefore were not excluded by the policy’s FLSA exclusion. Nevertheless, the district court concluded that the insurer had no duty to defend or indemnify the underlying wage and hour action because none of the underlying causes of action related to the enumerated offenses listed in the insurance policy’s definition of “Employment Practices Wrongful Acts.” The Ninth Circuit affirmed the district court’s ruling and held that, as a matter of law, the claims in the underlying wage and hour action did not arise out of “Employment Practice Wrongful Acts.” Cal. Dairies, Inc. v. RSUI Indem. Co., 462 Fed. Appx. 722, 723-24 (9th Cir. 2011), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance].

The Central District of California subsequently addressed the issue of coverage for wage and hour claims in N.H. Ball Bearings, Inc. v. Nat’l Union Fire Ins. Co., 2014 U.S. Dist. LEXIS 31448 (C.D. Cal. Mar. 10, 2014), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. The underlying complaint at issue in N.H. Ball alleged claims for failure to pay overtime, failure to pay minimum wages, inaccurate wage statements, unpaid wages at discharge, and unfair competition. In the coverage action, the insured argued – pursuant to California Dairies – that the underlying claims for failure to provide accurate wage statements and for the failure to pay non-discretionary bonuses at the time of discharge are not similar to FLSA claims and that coverage for those claims, therefore, was not precluded by the policy’s FLSA exclusion. The district court rejected the insured’s argument and held that the exclusion before it was broader than the FLSA exclusion at issue in California Dairies. Specifically, the N.H. Ball court noted that the exclusion before it contained exclusionary language barring coverage for any claim that “relates to” a “failure to pay wages” or “improper deductions from pay,” while the exclusion at issue in California Dairies did not contain such language.

Among the most recent and most comprehensive cases interpreting California law on this issue is Admiral Ins. Co. v Kay Automotive Distributors, Inc., 2015 U.S. Dist. LEXIS 11357 (C.D. Cal. Jan. 29, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. Admiral involved an underlying action against the insured asserting causes of action for: (1) misrepresentations, (2) failure to pay minimum, regular, and overtime wages, (3) failure to provide mandated meal periods, (4) failure to provide mandated rest periods, (5) failure to make payments within the required time, (6) failure to provide itemized wage statements, (7) failure to maintain adequate records as to wages and hours worked, (8) failure to reimburse business expenses, (9) violation of California’s unfair competition statute, and (10) a claim under the Private Attorneys General Act (“PAGA”). The insured tendered the claim to its EPL carrier, which had issued a policy with an exclusion for all claims “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any federal, state, local or foreign wage and hour laws, including, without limitation, the Fair Labor Standards Act. . . .” The carrier denied coverage for the lawsuit based on that exclusion, and the insured sued. The parties filed cross-motions for summary judgment, and the court granted the carrier’s motion and denied the motion filed by the insured.

The Admiral court rejected the insured’s arguments that the exclusion was intended to refer only to wage and hour laws that were “similar” to the FLSA. According to the district court, the contract’s plain and broad language referred to four possible sources of law dealing with wages and hours, and that the FLSA was only one of those sources. Based on the exclusion’s reference to state wage and hour laws, the district court concluded that the exclusion encompassed 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 further noted that the exclusion not only barred claims directly authorized by wage and hour laws themselves, but also claims “based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving” such laws. Because the court concluded that no action would have been brought but for the wage and hour claims, it held that the exclusion eliminated indemnity coverage for all causes of action against the insured, including the misrepresentation, unfair competition, and PAGA claims.

In summary, while California courts continue to hold that EPL policies do not afford indemnity coverage for wage and hour claims, careful consideration must be given to the precise language contained in the policy. Specific wording in several provisions of the policy, including the offenses listed in the policy’s definition of “Employment Practices Wrongful Act” (or equivalent) and the scope of the policy’s FLSA exclusion, can dictate what arguments are available to carriers responding to lawsuits involving wage and hour claims.

Originally published in California Insurance Law Review - 2015

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