Some Wage and Hour Claims May Be Insurance Covered -- California Daries, Inc. v. SRUI Indemnity Co.

One of the reasons employers purchase Directors and Officers (D&O) or Employment Practices Liability (EPL) coverage is to protect against employee lawsuits.  And the most important source of exposure for California employers is the seemingly ubiquitous class action lawsuits for Labor Code violations.  Once they have been sued, however, employers are sorely disappointed when their carrier contends that the policy contains a blanket exclusion for all wage and hour claims.

The standard verbiage excludes coverage for any alleged violation of the federal "Fair Labor Standards Act . . . or any similar provision of federal, state or local statutory law or common law." 

According to the Eastern District decisions in California Dairies, Inc. v.  RSUI Indemnity Co., however, this exclusion does not apply to all California wage and hour laws.  Rather, under the terms of the exclusion, the issue is whether a particular Labor Code provisions has a sufficiently "similar" analog within the FLSA to trigger the exclusion.  

Applying this analysis to the claims plead in the underlying lawsuit, the Court (unsurprisingly) held that claims for unpaid minimum wage and overtime under California law, which closely track federal law are within the scope of the exclusion.  In a much closer question, the Court further 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.  

But the Court 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 201-201 (requiring timely payment of wages at termination and imposing "waiting time" penalties.  The carrier was therefore required to cover defense and indemnity costs for these claims notwithstanding the so-called "wage and hour" exclusion.

The lesson for employers is (i) always tender employment related claims even if they involve wage and hour issues and (ii) you don't necessarily have to take "No" for an answer when the carrier denies coverage.      

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