Employee lawsuits—and class actions in particular—are one of the biggest risks facing California employers today. And among those lawsuits, perhaps the variety that keep risk managers and in-house counsel up at night most are the dreaded “wage and hour” class actions, especially due to the elusive nature of insurance coverage for such claims under employment practices liability insurance (EPLI) policies. But what, exactly, is a “wage and hour” claim? The California Court of Appeal recently addressed this very question in a recent decision that significantly broadens coverage available to policyholders with EPLI policies that purport to exclude “wage and hour” claims. Any employer that has, in the last few years, had an EPLI carrier deny coverage for a “wage and hour” claim, or subject the claim to a very low sublimit, should have a coverage attorney immediately review the carrier’s position based on this new decision.
While many consumers think of insurance policies as being made up entirely of standardized forms providing more-or-less uniform coverage across the market, certain lines of coverage, including EPLI, see substantially more variation in policy language. For many years, the most common exclusion relied upon by carriers to deny coverage for “wage and hour” claims was commonly referred to as the “FLSA exclusion,” which barred coverage for claims arising under the Fair Labor Standards Act (a federal law addressing various employment standards such as minimum wage and overtime) and “any similar provisions of federal, state or local statutory or common law.” Carriers argued that all manner of labor code claims, including meal and rest breaks, inaccurate wage statements, and failure to reimburse workplace expenses, were “similar” to the FLSA and were therefore excluded. Policyholders argued that various claims were not similar to anything in FLSA and should have been covered. Coverage litigation ensued, with policyholders finding success on certain claims.
Over time, carriers did not appreciate policyholders arguing that these labor code violations were covered under EPLI policies, and especially did not appreciate courts sometimes agreeing with the policyholders. In response, they revised the language in an attempt to keep coverage for these kinds of claims out of their policies. One way some carriers did this was by crafting an exclusion that simply barred coverage for claims arising under any “wage and hour” laws. Based on this new exclusion, carriers continued excluding coverage for any claim that in any way resembled a “wage and hour” claim, without ever actually defining “wage and hour” law. Some carriers also subjected such claims to very low sublimits and/or provided defense coverage only (refusing to indemnify their policyholders against such claims).
But plaintiffs’ attorneys representing disgruntled employees have countless claims they can assert, begging the question of what really constitutes a “wage and hour” claim so as to be subject to the exclusion. Is a claim for failing to provide meal and rest breaks really a “wage and hour” claim, or is it a claim about the failure to provide breaks, which involves a matter of employee health and welfare? What about a claim alleging an employer’s failure to reimburse the employee’s workplace expenses, such as mileage and uniforms? Despite this uncertainty, insurance companies continued to deny coverage for these and other claims, which they claimed were routinely and commonly understood to fall within the term of art “wage and hour.” But again, what exactly is a “wage and hour” law?
The California Court of Appeal recently answered this question in a recent decision called Southern California Pizza Company, LLC v. Certain Underwriters at Lloyd’s, London. The policyholder, a company operating hundreds of pizza franchises across Southern California, had been sued in a putative class action alleging a number of labor code violations, including failure to reimburse workplace expenses and the failure to provide statutorily required itemized wage statements. The claim was reported to the insurer, which asserted that such claims were excluded from coverage under the EPLI policy based on an exclusion that barred coverage for claims arising under “any foreign, federal, state, or local, wage and hour or overtime law.” The policyholder challenged the denial, arguing that claims for workplace expense reimbursement and itemized wage statements were not “wage and hour” claims, but were simply workplace torts for which coverage was afforded under the policy.
A lawsuit was filed and, even though the trial court initially agreed with the carrier, the appellate court overturned the decision and found there to be coverage under the policy notwithstanding the “wage and hour” exclusion. The court first considered the ordinary definition of “wage” and “hour,” and found that the exclusion applied to “laws concerning duration worked and/or remuneration received in exchange for work.” Applying that definition to the claims alleged against the insured the court found that, although the claim alleging a failure to provide itemized wage statements was a “wage and hour” claim since it dealt primarily with the issue of wages, the claim for reimbursement of workplace expenses was not a “wage and hour” claim since it did not address compensation for labor or services performed by the employee. Thus, the court found, the exclusion did not apply and the lawsuit triggered a duty to defend.
The potential import of this decision cannot be understated. In most states, insurance carriers typically owe a duty to defend an entire lawsuit if at least one of the claims is potentially covered. Because plaintiff attorneys typically include every conceivable claim they can allege in good faith (and then some), many denials based on broad “wage and hour” exclusions may have been improper if the claim alleged labor code violations that do not strictly address “laws concerning duration worked and/or remuneration received in exchanged for work.” When a carrier denies coverage for a claim for which a duty to defend was owed, the carrier can be found liable for all of the insured’s defense costs and any resulting judgments or settlements. Defense costs for these kinds of class action lawsuits can easily run into the hundreds of thousands of dollars, with settlements just as expensive. Although this recent decision only examined a handful of claims, courts will continue to be asked to reexamine other claims, such as meal and rest break claims, under the guidance of this new decision.
Any employer who has had an employee “wage and hour” claim denied in the last few years should consult with a coverage attorney to see if this new decision provides authority for arguing that the carrier denied the claim in error. If a carrier denied a defense for a claim when a duty to defend was owed, coverage litigation should be considered to recoup both the defense costs and the cost of any settlement or judgment. Because the statute of limitations on such potential claims against the carrier may be running, policyholders should urgently review their claim history to ensure no valid claims are lost.