The United States Court of Appeals for the Ninth Circuit, applying California law, has held that two exclusions in a D&O policy applicable to claims by employees and for Fair Labor Standards Act violations barred coverage for a wage-and-hour class action lawsuit.  U.S. Telepacific Corp. v. U.S. Specialty Ins. Co., 2020 WL 3265238 (9th Cir. June 17, 2020).

Two former employees filed wage-and-hour class action lawsuits against the insured company.  The company tendered the complaints to its D&O insurer, which denied coverage.  After the lawsuits were consolidated, the company sued the insurer, alleging breach of contract and  tortious breach of the implied covenant of good faith and fair dealing.  The insurer moved for judgment on the pleadings, which the district court granted.  This appeal followed.

The Ninth Circuit affirmed the district court decision, concluding that two EPL exclusions in the policy barred coverage.  First, an exclusion barring coverage for claims made by employees against the company, except where a claim is for an actual or alleged “Employment Practices Wrongful Act,” applied to all wage-and-hour causes of action in the underlying lawsuit because none of them fell within the specified causes of action identified in the policy’s definition of “Employment Practices Wrongful Act.”  Second, an exclusion barring coverage for any actual or alleged violation of the Fair Labor Standards Act (FLSA) or similar provisions of other laws applied to claims in the underlying lawsuit for violations of California Labor Code provisions similar to FLSA provisions and regulations.  The court also agreed that the policy’s definition of “loss,” which did not encompass statutory or civil penalties, precluded coverage for the insured’s failure to pay in a timely manner wages upon termination because the relief available under the relevant state statute was characterized as “a penalty.”

The court then considered the insured’s argument that, even if penalties were not covered, claims for penalties should nonetheless trigger a defense obligation.  The policy provided that: (i) the insurer must advance defense costs for claims “for which [the] Policy provides coverage”; (ii) the insurer will pay only those amounts properly allocated as “covered matters”; and (iii) in case of a dispute over whether a claim is actually covered, the insurer will advance defense costs only for the portion “which the parties agree is not in dispute.”  Accordingly, the court held that the language of the policy limited the insurer’s advancement obligation only to covered claims and did not extend to potentially covered claims.