The typical employment practices liability insurance policy will contain an exclusion precluding coverage for loss arising from claims brought under wage and hour laws. The question that arises from time to time is whether a particular claim was in brought under the laws for which coverage is precluded. A recent federal court case in California examined whether the wage and hour exclusion in an employer’s EPL policy precluded coverage for the claimants’ claims alleging the employer had failed to reimburse reasonable business expenses, in violation of a California statutory provision. In a November 14, 2016 decision, Southern District of California Judge Ted Moskowitz, applying California law, held that the policy’s wage and hour exclusion did not preclude coverage for the claimants’ unreimbursed business expenses claims, even though the exclusion did bar coverage for the claimants’ other claims. A copy of Judge Moskowitz’s exclusion can be found here.
Poway Academy of Hair Design and Beauty Boutique, Inc. operate beauty colleges in California. At these schools, students were sent to the “floor” of the schools to perform services for paying customers. The students were not compensated for providing these services. A class of current and former students filed a class action lawsuit the schools’ operating companies.
The students’ complaint contained six substantive counts, including a separate count in which the claimants alleged the defendants’ failure to reimburse reasonable business expenses under Section 2802 of the California Labor Code. The students alleged that they had been required to purchase a “kit” which included certain business products and tools as well as certain educational and instructional materials.
The defendants submitted the class action lawsuits to their EPL carrier, which denied coverage for the claims based on the EPL policy’s wage and hour exclusion. The wage and hour exclusion provides that the policy will not cover loss arising from any claim based upon or attributable to “any violation of any of the responsibilities, obligations or duties imposed by any federal, state or local statutory law or common law … that governs wage, hour and payroll policies and practices.”
The EPL carrier filed a federal court action seeking a judicial declaration that the coverage for the students’ class action claim was precluded. The parties agreed that the exclusion precluded coverage for five of the six claims in the students’ class action complaint. The EPL insurer filed a motion for summary judgment on the question of whether the policy’s wage and hour claim exclusion precluded coverage for the students’ unreimbursed expenses claim.
The November 14 Decision
In his November 14, 2016 opinion, Judge Moskowitz denied the insurer’s motion for summary judgment. Judge Moskowitz rejected the insurer’s argument that California Labor Code Section 2802 is a state law that governs “wage, hour and payroll policies and practices” for which coverage under the policy is precluded.
In reaching this conclusion, Judge Moskowitz examined the purpose of the law on which the claimants in the underlying claim sought to rely. He noted that while one of the purposes of Section 2802 is to prevent employers from offloading expenses onto their employees, that was not the only purpose of the provision. For example, he noted, Section 2802 provides for indemnification for third-party suits. Taking this separate purpose into account, Judge Moskowitz concluded that Section 2802 is not a wage and hour law and therefore that claims under that provision are not subject to the wage and hour claim exclusion.
He also noted that the compelled reimbursement to the student claimants of their cost of purchasing the instructional materials would not be considered compensation and therefore would fall outside the wage and hour claim exclusion. Because there is a potential for coverage as to the educational materials, the insurer is not relieved of its duty to defend as to the Section 2802 claim.
This case serves as an interesting reminder that it is not always self-evident whether or not a particular claim is asserted under the wage and hour laws of the type to which the standard EPL policy exclusion applies. As noted in a November 16, 2016 post on the Hunton Insurance Recovery & Reinsurance Blog (here), “the mere presence of a ‘wage-and-hour’ claim does not necessarily mean that the entire claim or lawsuit is excluded from coverage by a ‘wage-and-hour’ claim exclusion.” As was the case here, the blog post notes, “the presence of just one potentially covered claim required the insurer to defend the entire litigation (subject, of course, to an equitable allocation among covered and non-covered claims).”
By the same token, this case is also a reminder that while insurers may feel secure that they know what is precluded by the exclusions in their policies, the circumstances of particular claims may show that the operative exclusionary provisions may not preclude coverage in some circumstances. As I noted at the outset, the general reference in the policy exclusions to “wage and hour laws” is not a self-defining term; while the phrase more clearly applies to issues such as minimum wage, overtime, and more general time-clock issues, its applicable to other aspects of the employment relationship may be less self-evident.
The claim certainly is a reminder of the importance of continuing to look for coverage even in circumstances where a policy exclusion seems to apply to a claim. The specific circumstances of the particular claim will determine whether or not coverage is entirely precluded, or if coverage is preserved for even a part of the claim.