A recent California appellate court decision found that a wage and hour exclusion in an Employment Practices Liability Insurance (“EPLI”) policy did not bar coverage for claims under California Labor Code sections 2800 and 2802 alleging failure to reimburse expenses. S. Cal. Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy No. 11EPL-20208, Case No. G056243, 2019 WL 4572859 (Cal. Ct. App. Aug. 27, 2019), as modified on denial of reh’g (Sept. 20, 2019). This is a significant decision. It gives policyholders an argument that insurers must defend wage and hour suits that include covered allegations of failure to reimburse expenses, as the court in Southern California Pizza found.
The Lloyd’s of London policy granted coverage for “any failure to adopt, implement or enforce employment related policies or procedures…or…any other employment related workplace tort.” However, the policy also contained a wage and hour exclusion that eliminated coverage for any claim “based upon, arising out of, directly or indirectly connected or related to, or in any way alleging violation(s) of any foreign, federal, state, or local, wage and hour or overtime law(s).” The exclusion further contained an exception providing that the carrier would pay defense costs up to $250,000 for such claims, but without any liability to pay such sums that the insured becomes legally obligated to pay.
Lloyd’s initially acknowledged the defense under the exception to the wage and hour exclusion only and, when the $250,000 had been expended, denied any further coverage obligations. Southern California Pizza sued for breach of contract and bad faith. Lloyd’s demurred, asserting there was no coverage, and the trial court granted the demurrer on the ground that all the claims alleged in the underlying complaint fell within the wage and hour exclusion.
The panel found that the phrase “wage and hour laws” refers to laws concerning the duration of work or the remuneration received in exchange for work. Failure to reimburse plaintiffs for necessary business-related expenses (i.e., mileage, travel, and cell phone usage) were not payments made in exchange for labor or services. Nor did the expense reimbursement statutes (sections 2800 and 2802) mention wages or hours, or appear in sections of the labor code governing “compensation” or “working hours.”
The court further addressed the argument that the claims did not fall within the coverage grant, as they were statutory violations and not “employment related workplace tort[s].” The court rejected this reasoning, finding that a “violation of a statutory duty owed another may be a tort,” and the statutory language describing “losses caused by the employer’s want of ordinary care” was classic tort terminology.
The court held that the claims for section 2800 and 2802 violations, as well as the derivative 17200 and PAGA claims, were potentially within the scope of the policy and not excluded, and as a result the wage and hour exclusion had “no application” to this case.
Notably, however, the decision also found that Labor Code section 226, pertaining to accurate and itemized wage statement requirements, is a “quintessential wage law.” The panel reasoned that the statute was included in the chapter entitled “Payment of Wages,” and was “enacted ‘[a]s part of a comprehensive statutory scheme governing the payment of wages.’” In so holding, the court rejected the federal district court cases cited by the insured that had held otherwise.
Although the exclusionary language may vary slightly, similar wage and hour exclusions with limited defense-only coverage subject to a low cap are very common in EPLI policies. This decision is an important limitation on carriers’ attempts to broadly construe such exclusions to encompass all California Labor Code violations. As always, though, it is important to carefully analyze the specific policy language and negotiate the scope of the exclusion where possible.