Defense counsel often assume that an insurer has a “duty” to fund any settlement opportunity their client wants to accept. The legal requirements under California law for triggering an insurer’s duty to settle are far more nuanced.  For non-insurance practitioners, this is often a confounding and confusing topic!  The fact is, an insurer doesn’t have a “duty to settle” a case simply because the defendant wants to do so, or because defense counsel recommends it.  And while a demand within the policy limits is essential, that isn’t the only required element.

I will moderate a Bar Association of San Francisco program on this subject on September 19. The panel will cover all the required elements necessary to trigger an insurer’s duty to settle, and provide helpful practice pointers for satisfying those elements.  We’ll also talk about consequences of the breach of the duty to settle.  The panelists will provide the defense counsel perspective, as well as perspectives from both sides of the insurance coverage bar. For program details and to register to attend, visit the BASF event page, here.

Blog-Image---attorney-clientOn October 6, the California Supreme Court heard oral argument in Los Angeles Board of Supervisors v. Superior Court, a case that we have blogged about twice in the past because of its possible impact on policyholders (see posts Submitting Your Defense Bills to Insurers Could Mean Waiving Privilege and California Supreme Court Will Review Appellate Decision Holding That Attorney Bills Are Privileged). On appeal, the Court will decide whether to affirm the California Court of Appeal’s decision that legal invoices sent to the County of Los Angeles by outside counsel are within the scope of attorney-client privilege and thus exempt from disclosure under the California Public Records Act. As this issue could have a major impact on policyholders’ ability to share defense bills with insurers, we attended the oral argument. Continue Reading California Supreme Court Leans in Favor of Treating Defense Bills as Privileged Communications

shutterstock_226730068_Insurance ChecklistErica Villanueva and Tyler Gerking will be presenting to the Association of Corporate Counsel (ACC) on September 14 (in San Francisco) and 15 (in Palo Alto) about private company D&O liability insurance, also known as management liability insurance. Below is a description of the program, which will touch on hot issues that many companies are dealing with right now. Use the links to view the event details and register online.

Private D&O Insurance:  Things You Should Know

September 14 – San Francisco

September 15 – Palo Alto

Companies are staying private longer and purchasing private company directors’ and officers’ liability (D&O) insurance, sometimes known as “Management Liability” insurance. When it comes to D&O coverage, most private companies focus on two things: obtaining it, and keeping the premium low. When a company faces a claim, however, it discovers there is much more complexity to private D&O insurance, and often broader coverage than a public company D&O policy. Accessing and maximizing the available coverage may require a concerted, strategic effort on the part of  the company,  its insurance broker, and  insurance coverage counsel. This program will cover:

  • Key features of management liability policies
  • Common exclusions and limitations
  • The practical impact of certain clauses – and widely-available coverage enhancements that can mitigate these impacts
  • Implications of common pitfalls and mistakes in reporting and managing claims’”

When a venture capital or private equity firm invests in a portfolio company (PC) and places a general partner on the PC’s board, they typically require that the PC agree to defend and indemnify the board member in any litigation arising out of their board service, and to purchase directors’ and officers’ liability insurance. However, the D&O insurance requirements are typically quite vague, and some firms may be surprised to learn of key gaps in the PC’s coverage. These gaps are usually discovered when the VC/PE firm needs the coverage most – i.e., after a lawsuit has been filed, naming their board member as a defendant. Here are two examples I’ve come across in representing venture capital and private equity firms: Continue Reading Do You Know What’s In Your Portfolio Company’s D&O Insurance?

Employment Practices Liability (“EPL”) insurers have been aggressive in denying coverage for “wage and hour” class actions filed in California and elsewhere.  Indeed, insureds now frequently assume that their policies afford no coverage for such claims.  Depending on the particular statutory violations alleged, however, such class actions often fall within the scope of EPL coverage.  Depending on the policy language, an EPL insurer may have a duty to both defend and indemnify an insured against a “wage and hour” class action.

The “FLSA Exclusion” Does Not Apply to Many Alleged Violations of California Statutes.
EPL policies often contain an exclusion which bars coverage for “alleged violations of the Fair Labor Standards Act…or any similar federal, state or local statute.”  The Fair Labor Standards Act (“FLSA”) is a federal statutory scheme whose central components are: 1) establishment of a federal minimum wage; 2) prohibition of employment for more than 40 hours per week, unless a premium is paid for excess hours worked (i.e., “overtime”); and 3) prohibition of child labor.

In a California wage and hour class action, many of the statutes typically invoked are not at all “similar” to the FLSA.  For example, such lawsuits frequently allege that the employer:
(1) failed to reimburse its employees for uniforms or other required business expenses (California Labor Code Section 2802);

(2) failed to promptly pay employees, at regular bi-monthly intervals, all wages earned during the preceding pay period (Section 204);

(3) failed to provide accurate wage statements (Section 226(a));

(4) failed to pay employees all wages due immediately upon the employee’s discharge or within 72 hours of the employee’s voluntary resignation (Sections 201 and 202);

(5) failed to pay a split-shift premium wage (IWC Wage Orders); and/or

(6) improperly retained a portion of employees’ tips (Section 351). 

None of these statutory provisions have any FLSA counterpart.

Moreover, while EPL insurers have made much of the Tenth Circuit’s recent decision in Payless Shoesource, Inc. v. Travelers, 585 F.3d 1366 (2009), no California court has ever held that any California Labor Code provision is “similar” to the FLSA.  The three published California district court decisions are split on this issue.  See Big 5 Corp. v. Gulf Underwriters Ins. Co., 2003 WL22127029 (C.D. Cal.); SWH Corp. v. Select Ins. Co., 2006 WL 2786930 (C.D. Cal. Sept. 28, 2006); California Dairies, Inc. v. RSUI Indemnity Co. 617 F.Supp.2d 1023, 1048-1050 (E.D. Cal. 2009).

SWH Corp. ruled that a FLSA Exclusion was ambiguous.  In Big 5, the underlying litigation only involved allegations that the employer violated California overtime laws.  The FLSA clearly regulates overtime.  Finally, California Dairies held that Sections 201, 202, 226(a), and 2802 are not “similar” to the FLSA, and therefore alleged violations of those statutes do not trigger the FLSA Exclusion.

Wage and Hour Class Actions Often Seek To Recover Insurable Damages.

Even if the EPL insurer concedes that its FLSA Exclusion does not completely bar coverage, and it therefore has a duty to defend the case, the insurer will often resist funding settlement of a wage and hour class action on the ground that such lawsuits do not seek to recover “insurable damages.”  Insurers argue that the only remedies for such alleged statutory violations are restitutionary payments (uninsurable as a matter of law) and/or penalties (usually excluded from coverage under the policy).  Therefore, EPL insurers insist, any settlement constitutes liability that is either uninsurable or excluded.  Once again, insureds should not simply accept the insurers’ representations on this point.

Several of the statutes frequently invoked by plaintiffs in wage and hour class actions entitle them to recover damages.  For example, California Labor Code Section 226.7 entitles an employee to recover one additional hour of pay for every missed meal or rest period.  See Cal. Lab. Code sec. 226.7(b).  Such amounts do not represent unpaid compensation for hours worked, as the required rest period is only ten minutes long, and the required meal period is 30 minutes in length.  Rather, the remedy is in the nature of liquidated damages.  See Murphy v. Kenneth Cole Productions, 40 Cal. 4th 1094, 1112-13 (2007) (holding that Section 226.7 compensates employees for “the noneconomic injuries employees suffer from being forced to work through rest and meal periods.”)  Similarly, Section 226 provides that an aggrieved employee is entitled to recover his “actual damages” suffered as a result of his employer’s failure to provide accurate wage statements.  See Cal. Lab. Code § 226(e).

Finally, it is important to note that the typical EPL policy definition of covered “Loss” is not strictly limited to “damages.”  “Loss” is often defined to include “other amounts…that the Insured becomes obligated to pay.”  Such “Loss” definitions are broad enough to encompass claims for statutory attorneys’ fees.  (Indeed, some policies expressly define “Loss” to include “statutory attorneys’ fees.”)  Recovery of statutory attorneys’ fees is authorized under numerous sections of California Labor Code, including Sections 218.5, 226, 1194 and 2699.  Of course, such statutory fees frequently make up a large proportion of plaintiffs’ demands.

As the foregoing discussion demonstrates, the law governing insurance coverage wage and hour class actions is far from settled.  California insureds should reject the “conventional wisdom” that EPL insurance simply does not cover such lawsuits.  The insured should closely examine its own policy language and the specific allegations of the underlying complaint to determine whether the potential for coverage exists.