Many traditional liability insurance policies contain provisions specifying that in the event of a claim the insurer has the duty to defend the insured. However, many management liability insurance policies do not impose a duty on the insurer to defend the insured; rather, these policies usually provide that insureds will defend themselves, with the obligation on the insurer to advance defense costs as they are incurred, subject to all of the policy’s terms and conditions. However, because defense obligations under the more traditional duty to defend arrangement are well established and more familiar to many courts, courts sometimes attempt to resolve issues arising under duty to advance policies by referring to principles established with regard to duty to defend policies.

In a recent decision, the Ninth Circuit declined to apply duty to defend principles to interpret a D&O insurer’s duty to advance, holding that the insurer’s duty to advance extended only to actually covered claim and not to potentially covered claims as would be the case under a duty to defend policy. The appellate court also affirmed the district court’s rulings with respect to the applicability of the policy’s wage and hour claims exclusion; the policy’s definition of “loss,” precluding coverage for amounts deemed “penalties” in the applicable statute; and the insured vs. insured exclusion. A copy of Ninth Circuit’s June 17, 2020 opinion can be found here.

Background

In 2012, U.S. TelePacific Corp. (TPx) was sued by two employees in separate lawsuits (later consolidated) in which the plaintiffs alleged a variety of wage and hour law violations and other related claims. TPx submitted the lawsuits to its D&O insurer, which denied coverage for the claims. TPx filed an action against the insurer alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The insurer filed a motion for judgment on the pleadings.

In a June 18, 2019 order (here), Central District of California Judge Dolly Gee granted the insurer’s motion for judgment on the pleadings. Among other things, Judge Gee ruled that the insurer’s duty to advance defense costs applied only to actually covered claims, rather than potentially covered claims. She also ruled that the policy’s wage and hour claim exclusion precluded coverage for several of the plaintiffs’ claims; that the policy’s definition of “loss” precluded coverage for the “penalties” the wages unpaid upon termination (as these amounts are deemed “penalties” under applicable California statutory provisions); and that the policy’s insured vs. insured exclusion precludes coverage for all of the plaintiffs’ claims. The insurer appealed the district court’s ruling.

The June 17, 2020 Opinion

In a June 17, 2020 per curiam order designated Not for Publication, a three-judge panel of the Ninth Circuit affirmed the district court’s ruling.

First, the Ninth Circuit said that the district court “did not err in concluding that [the insurer’s] duty to advance defense costs under the Policy extended only to actually covered claims.” The appellate court cited policy provisions stating that the insurer must advance defense costs for claims “for which the Policy provides coverage,” and that the insurer will pay only those amounts properly allocated as “covered matters.” These provisions, the court said are “impossible to square with TPx’s proposed interpretation of the Policy to obligate [the insurer] to advance defense costs for any potentially covered claim.”

Second, the Ninth Circuit also affirmed the district court’s ruling that the policy’s Wage & Hour claim exclusion precluded coverage for four of the claims of the plaintiffs in the underlying lawuit alleging the failure to pay overtime pay, minimum wage, and meal and rest break claims. The exclusion provides that the insurer is not liable to pay loss in connection with a claim for any actual or alleged violation of the Fair Labor Standards Act (FLSA) “or any other similar provisions of any federal, state or local statutory or common law.” TPx had argued that there were important differences between the FLSA and California Labor Code provisions on which the plaintiffs in the underlying case sought to rely. The appellate court said, that “just because there are differences between the California Labor Code and the FLSA provisions does not render them dissimilar” and concluded that the district court “rightly” applied the exclusion to preclude coverage for the state law claims.

Third, with respect to the claim in the underlying lawsuit that TPx wrongfully failed to pay wages upon termination, the appellate court noted that the relevant California Labor Code provision characterizes the relief available as “a penalty.” The policy’s definition of Loss, the appellate court said, “plainly excepts ‘penalties’ from coverage.”

Finally, the appellate court ruled that the district court “did not err” when it ruled that the policy’s Insured vs. Insured exclusion precluded coverage for all of the wage and hour claims asserted in the underlying lawsuit. TPx had tried to argue that the coverage for the claims was preserved under the exclusion’s provision carving back coverage for claims alleging an “Employment Practices Wrongful Act.” The appellate court said that the exclusion’s “plain language bars coverage for claims made by employees except when the underlying civil action asserts an enumerated cause of action that constitutes an Employment Practices Wrongful Act under the Policy. TPx cannot dispute that the underlying lawsuit alleges no such cause of action.”

Discussion

Despite its relative brevity, there are a number of things that are interesting to me in the Ninth Circuit’s opinion. The first is the court’s recognition that legal principles developed with respect to duty to defend insurance policies do not apply to a policy in which the insurer has a duty to advance defense costs rather than to provide a defense.

Back in the day, when I was an attorney in private practice representing insurers in insurance coverage litigation, I found it vexing when courts were insufficiently precise in their understanding of insurer’s policy obligations. I found it particularly confounding when courts would blur the lines and apply principles applicable to duty to defend policies in the determination of an insurer’s obligations under a duty to advance policy. In this case, the Ninth Circuit, as well as the district court, correctly understood the insurer’s defense obligation and correctly declined to apply principles derived from duty to defend cases to the determination of the insurer’s obligations.

Another interesting thing to me about this ruling has to do with the court’s interpretation of the policy’s Wage & Hour exclusion, and in particular the exclusion’s extension of its preclusive effect to claims asserted under provisions of any federal state or local statutory law “similar” to the FLSA. The courts determined that the California Labor Code provision on which the plaintiffs in the underlying claim sought to rely are sufficiently “similar” to the FLSA, even though there are differences between the two statutes. The court said the provisions are not dissimilar “just because there are differences.” In reaching this conclusion, the Ninth Circuit cited with approval from a U.S. Supreme Court opinion in which the Court explained that the “plain meaning” of the word “similar” is “like, though not identical to” or “sharing characteristics.”

The court’s determination that two legal provisions do not need to be identical to qualify as “similar” makes certain kind of sense. However, it does raise the question of what degree of difference would be sufficient to make two legal provisions dissimilar. I know it is a fight for another day, but for those inclined to worry about just how broadly exclusions might sweep there arguably is a troubling degree of imprecision that goes with the use of a term like “similar.”

There is one other thing other interesting thing to me about this case and that is the number of different substantive policy interpretation issues that a single coverage dispute can generate. Each one of the issues the court’s addressed involve significant concerns of policy interpretation and application; taken collectively, the various disputes underscore how complicated a D&O insurance policy can be to apply.

There may be a particular reason that this particular claim involved so many different issues and that is the fact that the underlying lawsuit involved Wage & Hour claims. Coverage for Wage & Hour claims typically is not found in D&O insurance policies. Wage & Hour claims are also typically excluded from Employment Practices Liability Insurance policies as well (although these days many policies will incorporate sublimited coverage for costs incurred defending Wage & Hour claims). Insurers contend that providing insurance for this type of liability would create a moral hazard, as it might encourage employers to withhold compensation or benefits from employees. There are standalone policies available in the global insurance marketplace providing both defense and indemnity coverage for Wage & Hour claims, but these policies are expensive and typically have very significant self-insured retentions; the significant SIR is thought to ameliorate the moral hazard concerns.

While the Ninth Circuit’s opinion is interesting, readers seeking a full understanding of the parties’ positions and of the issues involved will also want to review the district court opinion as well.