New CA Court of Appeal Decision Provides a Basis for Finding Insurance Coverage of Wage and Hour Lawsuits under Employment Practices Liability Insurance Policies

Liability insurance policies typically provide two forms of coverage:  (1) coverage for the defense of lawsuits alleging claims covered by the policy in question, and (2) coverage for the settlement of claims covered by the policy in question that the insurer and the insured agree to for payment of a judgment against the insured when a judgment is the result of a covered claim against the insured.

Employment Practices Liability Insurance policies, frequently referred to as EPLI policies, provide coverage for a wide variety of employment related lawsuits, such as, and typically, lawsuits alleging wrongful termination, discrimination, and harassment.  However, EPLI policies, as written, very, very seldom provide coverage for claims alleging violations of California’s numerous wage and hour laws, which for some time now have been the most frequently filed class action lawsuits in California.  There are two reasons for this: (1) claims for alleged wage and hour violations are typically outside of the scope of the insuring agreement of EPLI policies, and (2) EPLI policies typically contain, also, exclusions for claims of alleged wage and hour violations, although some EPLI policies do, in exchange for an additional premium, provide limited defense only coverage for claims of alleged wage and hour violations that does not cover any adverse judgment or settlement of a claim for alleged wage and hour violations.

On September 20, 2019, the California Court of Appeal certified for publication its decision in Southern California Pizza Company, LLC v. Certain Underwriters at Lloyd's, London Subscribing to Policy Number 11EPL-20208, holding that the claims in the underlying lawsuit against Southern California Pizza Company alleging failure to reimburse employees for reimbursable expenses allegedly in violation of California Labor Code section 2802 are not claims for alleged wage and hour violations and were not barred from coverage by the policy’s exclusion for claims for alleged wage and hour violations.  

In the underlying putative class action lawsuit against Southern California Pizza Company alleging a variety of alleged violations of Labor Code violations, the EPLI insurer provided limited defense only coverage for the alleged wage and hour violations but otherwise denied any obligation to cover any of the damages sought on behalf of the putative class.  

Southern California Pizza Company sued its insurer in a separate action alleging that its insurer had a duty not only to defend Southern California Pizza Company against the underlying lawsuit but also to indemnify Southern California Pizza Company for certain of the alleged claims, specifically the claims for alleged violations of Labor Code section 226 for allegedly non-compliant wage statements and for alleged violations of Labor Code section 2802 based on alleged failures to reimburse employees for work related expenditures, such as “travel for required training, mileage for deliveries, and cell phone usage.”  The trial court sustained the insurer’s demurrer to Southern California Pizza Company’s complaint and dismissed the lawsuit on the stated ground that Southern California Pizza Company’s complaint failed to state a valid claim against the insurer because, according to the trial court, there was no coverage for any of the claims under Southern California Pizza Company’s EPLI policy because the claims were barred by the policy’s exclusion for claims of alleged wage and hour violations.  

On appeal, the Court of Appeal agreed with the trial court that coverage for the claims for alleged violations of Labor Code section 226 for alleged wage statement violations was barred by the policy’s exclusion for claims of alleged wage and hour violations.  However, the Court of Appeal separately overruled the trial court and held that coverage for the claims for alleged violations of Labor Code section 2802 for alleged failure to reimburse employees for work related expenditures were not barred by the policy’s exclusion for claims for alleged wage and hour violations.  The Court of Appeal reasoned that those claims did not allege violation of California’s numerous wage and hour laws because reimbursement of employees for employment related expenses is not compensation for hours worked and therefore not wages.

The Court of Appeal’s decision in this case is a very significant decision for California employers that carry EPLI insurance.  It is well settled under California law that if a lawsuit alleges at least one claim or cause of action that is covered by a liability insurance policy, the insurer has an obligation to defend the entire lawsuit, even if the lawsuit includes claims that are not covered either because they are outside the scope of the policy’s insuring agreement or because coverage is barred by one or more policy exclusions.  

Increasingly, employment related lawsuits, whether brought on an individual basis or on a class action basis, allege failures to reimburse for employment related expenses in alleged violation of Labor Code section 2802.  Based on the Court of Appeal’s holding in this case, the presence of such an allegation can be a way to find coverage under an EPLI policy for the defense of an entire lawsuit alleging wage and hour violations despite EPLI policy exclusions barring coverage for claims for alleged wage and hour violations. Although liability insurers are entitled under California law to reserve their rights to seek reimbursement of moneys spent to defend non-covered claims, that is as a practical matter often easier said than done.

Based on this decision, California employers that maintain EPLI insurance faced with a lawsuit alleging wage and violations that includes claims for alleged violations of Labor Code section 2802 for alleged failure to reimburse employment related expenses should promptly contact their EPLI insurance broker and/or competent counsel for guidance to maximize any available liability insurance benefits.

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