(Source)

Reversing the Superior Court of Orange County, California, in decision published September 20, 2019, the appeals court concluded that many of the disputed underlying claims in Southern California Pizza Co., LLC, v. Certain Underwriters at Lloyd’s were potentially subject to coverage.

The appeals court noted that the plaintiff’s policy did not define “wage-and-hour law,” and neither have other state and federal courts that considered wage-and-hour claims. The appeals court found that the ordinary meaning of the phrase refers to “laws concerning duration worked and/or remuneration received in exchange for work.”

One of the claims at issue in the coverage lawsuit was whether the wage-and-hour exclusion, and a $250,000 sublimit on defense costs, applied to the plaintiff’s alleged failure to reimburse business-related expenses including work-related travel, mileage driven, cell phone usage and training. The appeals court found the exclusion did not apply because the labor code requires an employer to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge or his or her duties, or of his or her obedience to the directions of the employer.” The court added that “disbursements for losses and work-related expenditures are not payments made in exchange for labor or services.”

In the lawsuit, the plaintiff argued that its EPLI policy should cover such claims as an employment-related workplace tort. The defendant asserted the exclusion should apply because the claim was a statutory violation, not a tort. But the appeals court disagreed, writing that “a violation of a statutory duty owed to another may be a tort.” Under that interpretation, a claim for failure to reimburse business-related expenses is not subject to a sublimit for defense costs and could tap the EPLI policy’s total limits — a situation favorable for a policyholder but detrimental for its insurer.

Notably, employment litigation in California has been skyrocketing. The increased litigation is due in part to court rulings that have broadened the state’s Private Attorneys General Act (PAGA), which allows current or former employees to sue employers over a wide range of labor code violations (source). For example, these violations may include a lack of breaks for meals or rest, failure to provide itemized wage statements and unpaid overtime hours. The growth of PAGA filings and the recent appeals court ruling on the wage-and-hour exclusion are likely to put more pressure on EPLI insurers.

CRC Group foresees at least four significant consequences of this ruling:

• Other courts, at the state level, at least, will look at the definition of “wage-and-hour law” and how it may apply to insurance policies.
• Underwriters will revise EPLI policy wordings, and specifically the language of wage-and-hour exclusions, to account for the court’s decision.
• Claimants that have previously filed claims for wage-and-hour lawsuits and been denied coverage may revisit those in light of the court’s ruling.
• If coverage is found for prior EPLI claims that are not 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.

BOTTOM LINE

The California ruling is a strong illustration of how case law can shape risk and opportunity for employers and their liability insurers. Retail agents should monitor legal developments such as these and discuss them with their insureds. If insureds had prior EPLI claims denied that, in light of the court’s recent decision, might fall outside the wage-and-hour exclusion, they potentially could resubmit those claims and obtain coverage. Employment Practices Liability Insurance is a complex product. Partnering with an expert wholesale specialist is an important way to obtain the broadest and most appropriate coverage. For questions on EPLI exposures and coverage solutions, please contact your CRC representative.

Contributors

Jason White is a Managing Director in CRC’s Los Angeles office and ExecPro National Practice Leader.