Wage and hour lawsuits continue to rise and it is clear that they are here to stay. See, e.g., Andrew Ramonas, US Chamber Warns: Wage-and-Hour Litigation on the Rise, Corporate Counsel (October 23, 2013) (noting that settlements of wage and hour claims totaled $467 million during the past year).
In our prior blog entries of August 1, 2012, November 7, 2012, and May 23, 2013, we discussed: (1) the potential of insurance coverage for wage and hour lawsuits under various lines of insurance, including employment practices liability (“EPL”) and directors and officers (“D&O”) insurance policies; and (2) the importance of involving coverage counsel when an organization is first faced with a wage and hour claim in order to ensure that insurance claims are submitted to carriers appropriately and that coverage is pursued in a strategic manner. A recent coverage decision in the wage and hour context from a California Court of Appeals demonstrates both of these points.
On October 4, 2013, in Mid-Century Insurance Company v. Zamora, C069644 (Cal. Ct. App.), a California appeals court determined that Mid-Century Insurance Company (“Mid-Century”) had no duty to defend eight defendant car dealerships and their principal in an underlying class action for wage and hour violations of state and federal law under a commercial general liability policy (“CGL”), in particular its Employee Benefit Liability (“EBL”) Endorsement.
In the underlying lawsuit, mechanics alleged violations of federal and state law based on underpayment of wages for all hours worked, resulting in reduced social security benefits. The plaintiffs in the underlying lawsuit claimed that mechanics were paid on a piece-rate system that left them unpaid for time when they were not working on a repair job, but were required to be at work.
The insureds initially provided the underlying complaint to their insurance broker with a request that it be “submitted to insurance companies for the company.” The broker submitted a claim to the insureds’ EPL carrier. The EPL carrier denied coverage on the ground that wage issues were excluded by the coverage provided under the policy. The broker then informed the insureds that it would submit a claim to their CGL carrier, Mid-Century, “to see if they can find anything in our policy language that would at least trigger defense.” Mid-Century accepted defense of the underlying class action under a reservation of rights and informed its insureds that it would promptly file a declaratory judgment action against them because it did not believe the underlying action involved any conduct covered under the policy or the EBL endorsement, and claiming, more specifically, that the alleged conduct was intentional, not negligent, and did not involve the administration of benefits.
The trial court agreed with Mid-Century, finding indicia supporting this restrictive interpretation of the EBL endorsement in the small amount of premium allocated to general liability coverage carrying the EBL endorsement, the availability of other insurance covering employment practices, and the conduct of the parties in looking initially to other insurance before tendering the claim to Mid-Century with the hope that coverage existed. The trial court found that the underlying action did not involve any conduct with a nexus to the administration of employee benefit plans and ruled in favor of Mid-Century on the duties to defend and indemnify, and found that defendants were not entitled to independent counsel. The appellate court affirmed the trial court’s holding based solely on the language of the EBL endorsement, without addressing arguments aimed at inferring this result based on the small amount of premium attributable to coverage or the conduct of the parties in seeking coverage under the CGL policy only as a last resort.
While the broker’s conduct in submitting a claim to the insured’s CGL carrier as a last resort with the hope that coverage existed was not outcome determinative at the trial or appellate levels, it was a basis for the trial court’s decision and an additional argument against coverage with which the insureds were forced to contend. This case demonstrates the importance of engaging coverage counsel in advance of claim submission. When engaged early, coverage counsel will assist the insured in identifying and reviewing all potentially responsive insurance policies and will work with the insured and its broker to reserve the insured’s rights under all relevant policies to ensure that additional, potentially responsive policies are not identified later in the process and pursued only as a “last resort.” Finally, coverage counsel will work with the insured’s insurance brokers to ensure that, during the claim submission process, improper characterizations of a claim are avoided.
While early engagement of coverage counsel cannot ensure that the language of the policies will ultimately provide coverage, involving coverage counsel to oversee the above-described actions could reduce the number of obstacles that an insurer can place in the insured’s path to coverage.