Applying California law, a federal district court has held that an insurer was not obligated to cover a labor union’s defense costs and damages in a lawsuit brought by a former employee because the alleged wage and hour violations were not “wrongful employment practices” or “wrongful acts” under the policy. United Farm Workers of Am. v. Hudson Ins. Co., 2019 WL 1517568 (E.D. Cal. Apr. 8, 2019). The court also held that material misrepresentations in the labor union’s application for insurance voided the policy.
The insurer issued a labor professional liability policy to the labor union. Before the policy incepted, the labor union sued a former employee for breach of a collective bargaining agreement. One year later—during the policy period—the employee sued the labor union, alleging various wage and hour violations, as well as wrongful discharge. Concluding that most counts did not allege wrongful acts, the insurer agreed to advance defense costs only for the wrongful discharge claim, subject to an allocation and reservation of rights. The employee then amended his complaint to remove the wrongful discharge count after the trial court compelled the parties to arbitrate that claim. Following a plaintiff’s verdict on the remaining claims, the insurer denied coverage for the damages award and defense expenses incurred in connection with those claims.
In the ensuing coverage litigation, the court held that (1) the policy imposed a duty to advance, not a duty to defend; (2) the lawsuit did not allege wrongful employment practices or wrongful acts as required to trigger coverage; and (3) the labor union’s material misrepresentations in its application voided coverage.
The court initially held that the policy created a duty to advance, not a duty to defend. As a result, the proper standard was whether the expenses or damages stemmed from claims that actually—as opposed to potentially—fell within the scope of coverage. Applying that standard, the court held that the wage and hour claims did not fall within the scope of coverage because they did not allege wrongful employment practices or wrongful acts. First, the court observed that conclusory allegations of wrongful termination or retaliation could not be the basis for any liability because the employee—and effectively the court—had dismissed the wrongful discharge count. The court also rejected the labor union’s attempt to characterize certain wage and hour claims as “employment-related misrepresentations” that would fall under the definition of wrongful employment practices. The court held that those allegations “relate to wage and hour violations under California labor laws” and “misrepresentation and deceit were not elements” of those causes of action. Second, the court held that the broad interpretation of “wrongful act” offered by the labor union would render other provisions of the policy meaningless. Thus, the wage and hour claims did not fall within the scope of coverage.
Next, the court held that the labor union’s material misrepresentations in its application voided the policy. The labor union marked “No” when asked whether it had “been involved in any civil or criminal action or litigation” and whether it was involved in any “inquiry, investigation, complain[t] or notice” from any state or federal authority. Because the labor union had sued the former employee before it completed the application, the court concluded that the labor union was plainly “involved in [a] civil or criminal action or litigation.” Four complaints had been filed with the National Labor Relations Board as well, contradicting the labor union’s response to the latter question. Based on these misrepresentations, the court held that the policy was void.
Finally, the court held that the labor union’s bad faith cause of action failed because the insurer had not breached the contract and because the policy was void.