Blog-Image---Wage-and-HourDon’t be too surprised if you see a “wage and hour” exclusion in your employment practices liability insurance policy, especially if you have employees in California. While these exclusions purport to bar coverage for claims brought under laws that govern “wage and hour” practices, lawsuits involving “wage and hour” violations often include alleged violations of other labor-related statutes. This was the scenario presented recently in Hanover Ins. Co. v. Poway Academy of Hair Design, Inc. in which a federal court was asked to decide whether a “wage and hour” exclusion applied to a claim that the insured had failed to reimburse reasonable business expenses in violation of California Labor Code section 2802.

The insured in Hanover ran beauty colleges in California and was sued by students in a class action. The students’ claims fell into two categories. First, the students complained that they were required to provide services to paying customers but were not compensated and also were not provided meal and rest periods in connection with this work. Second, the students sought reimbursement for a “kit” containing products, tools, and educational and instructional materials the employer required them to buy for use in their work.

The insured submitted the lawsuit to its insurer, which denied coverage for the entire suit based on a “wage and hour” exclusion. That exclusion barred coverage for claims 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 insurer then filed a lawsuit seeking a judicial declaration that there was no coverage for the students’ claims under its policy. The parties agreed that the exclusion applied to the first set of claims, but the insured argued it did not apply to the reimbursement of the “kit” claim. The court agreed with the insured, holding that the exclusion did not apply to the failure to reimburse claim. In reaching that conclusion, the court closely examined the purpose of California Labor Code section 2802, which provides that “an employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” While one purpose of that statute was to stop employers from shifting their expenses to their employees, a second purpose was to provide for indemnification of employees for third-party suits. Taking that second purpose into account, the court concluded that section 2802 was not merely a “wage and hour” law and thus the exclusion did not apply to that claim. The court also noted that reimbursement for the costs of purchasing educational and instructional materials could not be considered “compensation” or “wages” and thus the exclusion could not apply to that particular allegation.

Because this one claim fell outside the exclusion, the court found that the insurer had a duty to defend the entire lawsuit under Buss v. Superior Court and could only seek to recover – at the conclusion of the underlying suit – defense fees that the insurer could show were solely allocable to the excluded claims. While the Hanover case answers a specific question about the scope of the “wage and hour” exclusion, it is also a good reminder of the need to read every complaint carefully and analyze coverage for each cause of action separately as one covered claim can result in a complete, or at least partial, defense of a costly lawsuit for an insured.