In the current litigation environment, employers face an ongoing threat of claims brought by employees alleging violations of wage and hour laws, often filed as class actions. These kinds of lawsuits can be expensive to defend and to resolve. In general, management liability insurers try to avoid providing coverage for these kinds of claims, except for very limited amounts of defense cost coverage. A recent district court decision holding that the management liability insurance policy of the women’s clothing retailer Talbots did not cover a wage and hour class action lawsuit pending against the company illustrates the barriers policyholders face in attempting to secure coverage for these kinds of claims. Both the policy language at issue and the outcome of the Talbots insurance coverage dispute arguably are unremarkable. However, the outcome does raise questions about whether there might be ways for policyholders at least to obtain effective defense cost coverage for these kinds of claims.
In September 2015, two former Talbots employees filed a putative class action lawsuit in California Superior Court alleging violations of the California Labor Code. There were ten counts in the plaintiffs’ complaint: Count 1 alleged unpaid overtime; Count 2 alleged unpaid meal period premiums; Count 3 alleged unpaid rest period premiums; Count 4 alleged unpaid minimum wages; Count 5 alleged final wages not timely paid; Count 6 alleged wages not timely paid during employment; Count 7 alleged non-compliant wage statements; Count 8 alleged failure to keep requisite payroll records; Count 9 alleged unreimbursed business expenses; and Count 10 alleged that the company engaged in unfair business practices in violation of the California Business and Professions Code because the alleged employment law violations allowed Talbots to unlawfully gain an unfair advantage over other businesses.
Talbots submitted the lawsuit to its management liability insurer, which denied coverage for the claim. Talbots filed a coverage lawsuit against its insurer, alleging breach of contract and breach of the covenant of good faith and fair dealing. The insurer moved to dismiss the coverage complaint.
The company’s management liability insurance policy contained two coverage sections of relevance here. The first, providing directors’ and officers’ (D&O) liability coverage, contains an exclusion, which the court noted, “sweeps broadly,” precluding coverage for “Loss in connection with any Claim made against any Insured … alleging, arising out of, based upon, or attributable to the employment of any individual or any employment practice, including but not limited to, wrongful dismissal, discharge or termination, discrimination, retaliation or other employment-related claim.”
The policy also provides employment practices liability (EPL) insurance. The EPL coverage section by its terms applied only to what the Court described as “only enumerated species of actual Employment Practices Violations,” including wrongful discharge; harassment; discrimination; retaliation; employment-related misrepresentations; employment related libel or slander; wrongful failure to employ or promote; wrongful deprivation of career opportunity; wrongful discipline; failure to grant tenure; or negligent hiring, supervision, training or supervision.
The EPL Coverage section was also subject to Endorsement No. 1 which specified that the insurer is not liable for Loss in connection with any Claim for violation of the Fair Labor Standards Act or any similar federal, state, local or foreign statutory or common law, including, without limitation, any Claims based upon, attributable to, the refusal or failure to pay wages or overtime pay; improper deductions from pay; or the failure to enforce legally required meal or rest break period.
The September 29, 2017 Opinion
In a September 29, 2017 opinion applying Massachusetts law (here), District of Massachusetts Judge Richard G. Stearns granted the defendant insurer’s motion to dismiss. In reaching this conclusion, Judge Stearns ruled that there was no coverage under either the insurance policy’s D&O coverage part or its EPL coverage part for any of the ten claims asserted in the underlying complaint.
Judge Stearns had “little difficulty concluding” that Counts 1 through 4 of the plaintiffs’ complaint are “textbook examples” of claims “attributable to employment” and therefore precluded from coverage under the D&O coverage part, and also of the refusal or failure to pay wages or overtime pay and the failure to provide or enforce legally required meal or rest breaks, and therefore precluded from coverage by Endorsement 1 to the EPL coverage part.
Counts 5-9, Judge Stearns said, allege violations of state labor regulations that govern how employers must disburse wages, maintain records, or reimburse employees. These allegations also arise out of or are attributable to employment of any individual or an employment practice, and therefore are precluded from coverage under the D&O coverage part. The kinds of claims advanced in Counts 5-9, Judge Stearns also said, are not included in the definition of Employment Practice Violation, and therefore are not covered by the EPL coverage part.
Judge Stearns separately considered Count 10. Talbots argued that this claim cannot be considered an employment-related claim but rather represents a statutory unfair practices claim. Judge Stearns said that “Talbots makes no compelling argument for why this distinction matters when interpreting the scope of the exclusionary clause in the insurance policy.” Count 10 of the underlying complaint, Judge Stearns noted alleges that Talbots gained an unfair advantage over other businesses “solely because of the employment-related violations enumerated in Counts 1-9,” and therefore merely represents “an alternative theory of recover for the same alleged injuries to Talbots’ employees” – injuries that arose out of the company’s employment and labor practices.
Judge Stearns concluded that “all of the claims made against Talbots … are either directly tied to, or a natural outgrowth of, the company’s employment and labor practices,” for which the insurance policy “specifically excluded coverage.”
Judge Stearns’s analysis and the outcome of this case arguably are both unremarkable. The policy language at issue is also unremarkable, as many policies these days contain similar language. Most management liability insurance policies contain exclusionary provisions of the kind that came into play here.
Indeed, most insurers intend to try to preclude coverage for wage and hour claims from coverage. For most policyholders, the only exception to the general preclusion is that some policies provide for sub-limited defense cost coverage for wage and hour claims. These sub-limits, when available, generally are limited to relatively low levels, in the $100,000 to $250,000 range. Otherwise, the insurers take the position that their policies do not coverage wage and hour claims, and they have tried to structure their policies so that there is no coverage for these kinds of claims. (It isn’t clear whether or not the policy at issue here had any sub-limit available for wage and hour claims defense expenses, but the absence of any mention of this kind of sublimit suggests that the policy did not provide for sub-limited defense cost coverage.)
Given this uniform approach among the insurers, it arguably should come as no surprise that any particular carrier would take the position that its policy provides no coverage for wage and hour claims.
There is a certain extent to which this position arguably is justifiable in order to avoid a possible moral hazard. From a public policy standpoint, we wouldn’t want employers to think that they could get away with not paying their employees statutorily mandated wages or other compensation in an expectation that they could pass the bill to their insurer. The availability of insurance for the unpaid wages or other compensation could encourage bad behavior.
But from the employers’ perspective there is another important consideration beyond the amounts of the unpaid wages or other compensation. The fact is that these kinds of cases can be expensive to defend, particularly when they arise as class action lawsuits. To be sure, some policies do provide sub-limited defense cost coverage. This sub-limited coverage is potentially valuable when individual claims are involved. But the low levels of coverage available under these kinds of sub-limits means that they proved relatively limited defense expense protection in the event of a group claim or a class action claim.
Many readers are aware that there are solutions available in Bermuda or London that arguably address these concerns, at least for certain kinds of insurance buyers. There are policies available in these offshore markets that provide significant defense cost and even indemnity protection for wage and hour claims, subject to all of the applicable policy terms and condition. In some cases, these kinds of policies can be appropriate and valuable solutions to address some of the problems I have identified above.
For many companies, particularly smaller employers, these offshore wage and hour products are not a viable solution. For starters, the carriers offering these products often offer them only to larger employers, often only to those with several thousand employees. These kinds of policies often are costly, and beyond the insurance budgets of many smaller companies. In addition, these products often carry very large self-insured retentions, as high as $1 million or more, which would be prohibitive for most smaller companies. So while these offshore wage and hour products may be a viable solution in certain instances for some buyers, they do not solve the issue for many other insurance buyers.
The problem with the current state of play in the insurance marketplace is that there is not a practicable solution available for the many insurance buyers. These buyers are not candidates for the offshore product due to the insurers’ underwriting guidelines and due to cost considerations. The availability of the sub-limited defense cost coverage helps some buyers, at least for those eligible for the sub-limit. But the sub-limit does not provide an effective risk transfer solution for the most significant concern, which is the cost of defending a more serious claim or class action lawsuit.
Most readers probably know this is not a new issue. It has been around for years. Given the insurance buyers’ interest in addressing this defense expense exposure, I have often wondered why the marketplace has not devised a defense cost solution that would help address this concern. Over the years, I have heard a variety of alternative explanations: I have heard it said that the insurers don’t know for sure how to price the product; I have also heard it said that the product would be prohibitively expensive (with the cost of the offshore produce described above as proof of the cost). A variation of this latter point is the suggestion that the policyholders may well want to have the coverage but they don’t want to pay for it.
At one level, I understand these concerns. The premiums for management liability insurance have been under pressure for these years, and at current levels few carriers would be willing to take on what is undeniably a significant additional exposure. However, what I am suggesting is perhaps an enterprising insurer that came up with a policy or modification of existing policy to provide defense cost protection for these exposures could be able to charge an actuarially appropriate amount to provide the coverage.
The suggestion that carriers don’t know how to price it is unpersuasive; insurers have managed to price products with a far more uncertain cost exposure (for example, with respect to privacy liability and network security insurance). The argument that a wage and hour defense cost policy would be expensive made in reliance on the high cost of the current offshore products is not entirely persuasive; the cost of the offshore products is necessarily higher because of the size of the employers involved and because of the increased risk of the policyholder’s involvement in class action litigation.
The question of whether buyers would pay for the coverage is an interesting one, but one that in my view is entirely untested. I know for sure there would be a great deal of interest in a wage and hour defense cost product. I believe that policyholders would be willing to pay for the protection. Whether the product could in fact be priced a premium that would attract a sufficient number of buyers to offset anticipated loss costs and to allow for an underwriting profit is, I concede, uncertain. But again, as I said, it is an untested hypothesis. I will say that whether or not insurance buyers know at the front end that they would want this coverage is one question; I know for sure that policyholders who find themselves in claims situations like the one Talbots faced here want coverage for this kind of exposure.
Because this issue has been around for so long, I am realistic in understanding that if the insurers have not yet offered this product, they probably have already concluded that they can’t do it and make money. Just the same, I wonder if in the current competitive market there might not be a carrier or carriers willing to explore the possibilities for this kind of product.
One final note. I know for sure that even if a carrier were willing to offer a wage and hour claim defense cost product, one area that would be very tightly underwritten would be prospective policyholders’ exposure to wage and hour claims in California, of the kind the plaintiffs’ in the underlying claim asserted here. I recognize that it may well be that even if this kind of product were available, it might not be available for the claims asserted against the policyholder here.
I suspect some readers will have strong reactions to my comments. I invite readers to add their thoughts to this post using the blog’s comment feature.