Applying Illinois law, an Illinois federal district court has granted an insurer’s motion to dismiss a coverage action where unambiguous unpaid compensation and breach of contract exclusions precluded coverage for allegations that the policyholder wrongfully withheld compensation owed to an independent contractor. Altom Transp., Inc. v. Westchester Fire Ins. Co., 2015 WL 2399126 (N.D. Ill. May 18, 2015).

The insurer issued a private company management liability policy to the policyholder, a company that hauled liquid commodities in tanker trailers. The policy contained a D&O coverage part, which excluded from coverage any claim “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving . . . (1) improper payroll deductions, unpaid wages or other compensation . . . or any violation of any law, rule or regulation, or amendments thereto, that governs the same topic or subject” (Unpaid Compensation Exclusion); or (2) “the actual or alleged breach of any contract or agreement; except and to the extent the Company would have been liable in the absence of such contract or agreement” (Contract Exclusion).

An independent contractor truck driver provided driving services to the policyholder pursuant to a lease agreement. The driver brought a lawsuit against the company, alleging that he should have been paid additional compensation under the lease agreements. The suit alleged that the lease agreement violated a federal regulation by failing to specify certain aspects of the compensation calculation; the company breached the agreement by failing to pay agreed compensation; and the company was wrongfully enriched by its failure to pay the contractor amounts owed.

The company tendered the claim to the insurer, seeking defense and indemnity coverage under the D&O coverage part of the policy. The insurer denied coverage pursuant to the Unpaid Compensation Exclusion and the Contract Exclusion. After the insurer denied coverage, the company tendered to the insurer a settlement demand from the driver that was within the policy’s limits. The insurer did not respond to the demand or to the company’s tender of a subsequent settlement demand. The policyholder then brought the present coverage action, alleging wrongful breach of the duty to defend. The insurer moved to dismiss, asserting that it properly denied coverage.

The court agreed with the insurer and granted its motion. Tracking the language of the Unpaid Compensation Exclusion, the court first concluded that the insurer had no duty to defend because the underlying allegations are based on or arise from “improper payroll deductions, unpaid wages, or other compensation, misclassification or employee status, or any violation of any law, rule or regulation, or amendments thereto, that governs the same topic or subject.” The court rejected the argument that the exclusion applies only to claims brought by employees and does not extend to claims of independent contractors. In addition, the court reasoned that to conclude otherwise would permit the company to refuse payment to its independent contractors “and pass the liability for unpaid compensation onto its insurer.”

Separately, the court concluded that the underlying allegation of breach of the lease agreement fit “squarely” within the Contract Exclusion because it expressly alleged “breach of any contract or agreement.” In applying the exclusion’s unambiguous language, the court rejected the company’s argument that the exclusion should not apply because the independent contractors were not entitled to the fees that the company allegedly withheld under the lease agreement. The court explained that this contention, which addressed the merits of the contractor’s claim, was irrelevant to the coverage analysis because the proper inquiry is whether the facts, as alleged, triggered the Contract Exclusion.