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An appellate court in California, reversing a trial court's decision, has ruled that a "wage and hour" exclusion in an employment practices liability insurance ("EPLI") policy should be narrowly interpreted.

The Case

After Southern California Pizza Company, LLC, the owner and operator of more than 250 Pizza Hut and Wing Street restaurants, was sued in a putative class action lawsuit alleging violations of a variety of California Labor Code provisions (the "underlying lawsuit"), it sought coverage under the EPLI policy that it had obtained from Certain Underwriters at Lloyd's, London.

Lloyd's largely denied coverage, stating that the alleged violations fell within the wage and hour exclusion. It, however, provided $250,000 in defense cost coverage as specified in the exclusion.

Believing it was entitled to more coverage, Southern sued, alleging breach of contract and tortious breach of the implied covenant of good faith and fair dealing.

Lloyd's demurred to the complaint, asserting that the causes of action in the underlying lawsuit all fell within the policy's wage and hour exclusion.

The trial court interpreted the exclusion to encompass all provisions of the Labor Code. It then sustained the demurrer, concluding that all causes of action in the underlying lawsuit fell within the scope of the exclusion.

Southern appealed.

The Lloyd's Policy

The Lloyd's policy excluded coverage for:

any Loss resulting from 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), including, without limitation, the Fair Labor Standards Act; however, we will pay Defense Costs up to, but in no event greater than $250,000 for any such Claim(s), without any liability to us to pay such sums that any Insured shall become legally obligated to pay.… The wage, hour and overtime coverage provided by this endorsement applies only to Claims which seek wages earned solely and exclusively after the retroactive date listed in the Schedule of this endorsement; but where the wage, hour or overtime Claim was first made against you during the Policy Period.

The Appellate Court's Decision

The appellate court reversed, holding that the exclusion was more narrow in scope than as applied by the trial court.

In its decision, the appellate court ruled that the phrase "wage and hour … law(s)" in the exclusion referred to laws "concerning duration worked and/or remuneration received in exchange for work."

The appellate court then considered whether the exclusion precluded coverage for the claims asserted in the underlying lawsuit against Southern.

First, it explained that the underlying lawsuit alleged that Southern, in violation of Labor Code Section 226, failed to include all required information on wage statements provided to its employees. The underlying lawsuit asserted that wage statements did not "accurately list the total hours worked," failed to include Southern's "complete name and address," did not "state the inclusive dates of the period for which the employee [was] being paid," and failed "to state all applicable hourly rates in effect during pay periods."

The appellate court noted that Section 226 falls within a chapter titled "Payment of Wages" and that it lists nine items that employers generally must provide in writing to employees on a semimonthly basis or each time wages are paid, including the gross wages earned, total hours worked, all deductions, any applicable hourly rates, inclusive dates for which the employee is being paid, and the name and address of the legal entity that is the employer.

These characteristics, the appellate court ruled, pointed toward the statute being a "quintessential wage law." Thus, it decided, because Section 226 was a "wage and hour law," the cause of action in the underlying lawsuit alleging a violation of Section 226 fell within the scope of the policy's wage and hour exclusion.

Next, the appellate court noted that the underlying lawsuit also alleged that Southern failed to fully reimburse its delivery drivers for necessary business-related expenses that they incurred while doing their job, including travel for required training, mileage driven for deliveries, and cell phone usage. Among the relief requested was reimbursement due on those expenses, plus interest, pursuant to Labor Code Sections 2800 and 2802.

The appellate court decided that the trial court erred in concluding that this claim fell within the scope of the wage and hour exclusion. The appellate court observed that neither Section 2800 nor Section 2802 mentioned wages or hours or appeared in the parts of the Labor Code entitled "compensation" or "working hours." The appellate court added that disbursements for losses and work-related expenditures were not "payments made in exchange for labor or services."

Next, the appellate court ruled that claims against Southern for unfair business practices (Labor Code Section 17200) and recovery of civil penalties under a private attorney general theory (Labor Code Section 2698 et seq.) also were not excluded as they were derivative claims based, in part, on Southern's alleged failure to reimburse business-related expenses.

By contrast, the appellate court decided that claims for failure to timely pay earned wages upon discharge (Labor Code Section 201) and failure to timely pay earned wages upon resignation (Labor Code Section 202) were wage and hour laws and, therefore, that the wage and hour exclusion applied to them.

The appellate court concluded that, in light of its holding that the business expense reimbursement aspect of the underlying lawsuit and the Section 17200 and the private attorney general claims were potentially subject to coverage, the trial court erred in sustaining the Lloyd's demurrer.

The case is Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd's, London, No. G056243 (Cal. Ct. App. Aug. 27, 2019; as modified Sept. 20, 2019). Attorneys involved include: Pasich, Shaun H. Crosner and Michael S. Gehrt for Plaintiff and Appellant. Troutman Sanders, Terrence R. McInnis and Ross Smith for Defendant and Respondent.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.