Insurance Coverage for Wage and Hour Litigation Claims

August 01, 2012

There has been a surge in wage and hour litigation recently, and it has been getting a lot of attention.  See, e.g., M. Huisman, Seyfarth Shaw Study Shows Increase in Wage and Hour Labor Suits, Corporate Counselor (July 27, 2012); J. Segal, The New Workplace Revolution: Wage and Hour Lawsuits, CNNMoney (May 29, 2012).  This surge is due, in large part, both to the Great Recession and to technological advances allowing work from remote locations.  See P. Davidson, Overworked and Underpaid, USA Today (Apr. 16, 2012).

An often overlooked component of a company’s protection from the financial consequences of this type of litigation is its insurance policies.

Most employers, for example, routinely purchase employment practices liability (EPL) coverage.  This coverage typically exists either in separately-purchased EPL policies or, particularly with private companies, in directors and officers (D&O) insurance policies that include an EPL coverage component.

Yet, there is a common misperception that these policies do not cover wage and hour lawsuits.  Insurance companies have created this misimpression by relying on two principal arguments.  First, they assert that amounts expended in wage and hour claims do not constitute “loss” within the meaning of these policies because the claims seek only uninsurable restitution, and second, they argue that coverage is barred by the Fair Labor Standards Act (FLSA) exclusion often found in these policies.

Companies, however, should not accept these contentions at face value.

First, as with all coverage issues, the specific language of the policy matters. Some definitions of “loss” are broader than others, and some FLSA exclusions are narrower than others.

Second, the allegations of the particular wage and hour claims are important.  Plaintiff lawyers usually assert multiple claims and allege various theories of liability.  If even a single claim or theory is within the scope of coverage, the employer may be entitled at least to partial coverage.

Third, consistent with the two points above, several recent court decisions have cast doubt on the insurance industry’s principal arguments.  For example, in SWH Corp. v. Select Insurance Co., 2006 WL 2786930 (Cal. Ct. App. Oct. 19, 2006), the court denied the insurers’ request for summary judgment on whether the amounts sought in a wage and hour suit were “restitution,” and thus not “loss,” under the policy.  The court also found that the underlying allegations did not come within the policy’s FLSA exclusion.  Similarly, in California Dairies Inc. v. RSUI Indemnity Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009), the court found that the policy’s FLSA exclusion applied to some, but not all, of the allegations against the company.

Fourth, an insurance company’s duty to pay for its insured’s defense is broader than its duty to cover judgments or settlements.  So, even if it is ultimately determined that an insurer is not obligated to cover an underlying wage and hour settlement or judgment, the insurer may still be obligated to cover defense costs in the interim.  This “litigation insurance” can be very valuable, because wage and hour suits often proceed as class actions, and the costs of defending such actions can be very substantial.

Employers also should be aware that some insurers do offer specialty policies designed to cover wage and hour claims.  These policies, however, frequently cover only defense costs and contain low limits of liability.  Furthermore, insurance companies often erroneously market such products on the premise that there is never wage and hour coverage under EPL policies.  Thus, although employers should consider whether such specialty coverage makes sense for their business, they should still preserve and, when necessary, exercise their right to pursue coverage under their EPL policies, which typically have higher limits.  The specialty policies also can differ materially from each other, so a careful review of any proposed policy language is warranted.

Regardless of whether an employer is currently facing wage and hour claims, there are steps that all companies can take now to put themselves in the best position to potentially secure insurance coverage should the need arise.

First, collect, organize and safeguard all of the company’s policies.  This includes an effort to identify and obtain policies issued to other pertinent companies, such as predecessors and current or former affiliates of your company.

Second, consider having an insurance professional audit the organization’s insurance portfolio to confirm that the company has the most complete and cost-effective coverage available.

Third, if the company becomes aware of the possibility of a wage and hour lawsuit, or is actually served with one, it should, with rare exceptions, promptly notify its insurers.

In sum, the coverage provided by insurance policies for wage and hour lawsuits can be an extremely valuable corporate asset.  Companies can maximize the benefits of this asset by acting proactively now, and by being willing to question coverage denials from their insurers.