Wage and Hour Insurance Coverage: Beyond What Your Employer Says

Employers typically rely on Employment Practices Liability Insurance ("EPLI") policies for coverage against traditional employment-related claims, such as sexual harassment, discrimination and wrongful termination. And while many EPLI policies offer coverage that may capture wage and hour type claims, often they don't. But keep looking. The employer may carry other liability policies that could open the door to coverage—such as Directors' & Officers' Liability (D&O") policies. And for employees harmed by wage and hour law violations, don't accept an employers' claim that it has no coverage at face value without reading and analyzing the policies.

Something happened in one recent wage and hour case that Markson Pico LLP handled that illustrates the importance of independent coverage analysis. After a year or so of litigation, the employer's insurance defense lawyer announced that the insurance carrier revoked coverage because the limits were "exhausted." The lawyer explained that the policy was limited to $100,000 in defense costs and nothing more. Having seen the insurance declarations page showing $1,000,000 in coverage, we had suspicions. So we read the policy.

Turns out the carrier was playing fast and loose with coverage. The employer had a D&O policy. The policy contained standard language excluding coverage for any alleged violation of the "Fair Labor Standards Act . . . or any similar provision of federal, state or local statutory law or common law." Also, the policy had a $100,000 "defense only" limitation, under an endorsement entitled "Sublimit-Defense Expenses – Fair Labor Standards Act", which tracked the language of the FLSA exclusion. The carrier was relying on this exclusion to justify its revocation in coverage.

But under California law, the carrier's reliance on the wage and hour exclusion was misplaced and its revocation of coverage was erroneous. Under California Dairies, Inc. v. RSUI Indemnity Co. (E.D. Cal. 2009) 617 F.Supp.2d 1023, the exclusion does not apply to all California wage and hour laws. Rather, under the express terms of the exclusion, the issue turned on whether a particular Labor Code provisions has a sufficiently "similar" analog within the FLSA to trigger the exclusion. The California Dairies court made several findings in that regard. The Court held that claims for unpaid minimum wage and overtime under California law, which closely track federal law (FLSA) are indeed within the scope of the exclusion. Likewise, the Court held that claims for meal period penalties under Labor Code section 226.7 were within the scope of the exclusion because federal implementing regulations require payment of minimum wages during rest breaks.

However, not all wage and hour claims fall within the scope of the exclusion. The Court specifically found that federal law contained no analog to California Labor Code sections 226 (requiring accurate itemized wage statements), section 2802 (requiring reimbursement of employee expenses), and section 201-203 (requiring timely payment of wages at termination and imposing "waiting time" penalties). Because our complaint included the additional statutory wage claims, the carrier was still required to cover defense and indemnity costs for such claims notwithstanding the so-called "wage and hour" exclusion. And because the carrier had erroneously revoked coverage, the carrier faced extra-contractual exposure for bad faith insurance practices.

We pointed the coverage issues out to the employer's counsel. As a result, the insurance carrier (without admitting its blunder) agreed to participate in the upcoming mediation which led to a successful settlement. Thus, while the conventional wisdom seems to be that wage and hour claims aren't covered under insurance policies, successful results are more likely realized by helping former employers navigate the insurance coverage maze—that holds true even when relations with the former employer may seem otherwise hostile.

Markson Pico LLP is committed to helping employees who have suffered harms as a result of employers' failure to comply with California's wage and hour laws. Click here to contact a lawyer from Markson Pico LLP.

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