Failure to Pay Wages Not a “Wrongful Act”

The United States District Court for the Northern District of California has found that an insurer was not obligated to cover an insured’s settlement in a wage and hour class action lawsuit because the failure to pay wages was not a “wrongful act” under the policy.  W.G. Hall, LLC v. Zurich Am. Ins. Co., 2017 WL 3782771 (N.D. Cal. Aug. 31, 2017).

The insured, a staffing services company, settled a wage and hour class action lawsuit alleging violations of state labor codes for failure to pay wages and other claims related to failure to compensate employees.  The insured sought coverage for the settlement under its professional liability insurance policy.  The insurer declined coverage, asserting that the failure to pay wages did not constitute a “wrongful act” as required under the policy.  The policy defined “wrongful act” in relevant part as an “error or omission” in the course of providing staffing services.  The insured sued the insurer for breach of contract, declaratory judgment, and related claims.

The court granted partial summary judgment to the insurer, concluding that the failure to pay wages was not a “wrongful act.”  The court cited California case law holding that an insured’s alleged refusal to make a payment under a contract does not give rise to a loss caused by a wrongful act.  The court reasoned that in this case, the insured was required to pay employee wages, never claimed that no employment contract existed between itself and the plaintiffs in the underlying litigation, and conceded that at least oral contracts existed with the plaintiffs.  The court further reasoned that the claims asserted under the labor code would not exist but for an employment contract.  Therefore, the court found that the alleged failure to pay wages was not insurable under the policy.

The court also granted summary judgment for the insurer based on the policy’s exclusion of coverage for any claim “based upon or arising out of, in whole or in part … [a]ny liability assumed by an insured under any contract or agreement, unless such liability would have attached to the insured by law in the absence of such contract or agreement.”  The court found the policy’s use of the word “any” distinguished this case from prior opinions holding that similar exclusions applied only to contracts or agreements under which the insured assumes the liability of another.

Finally, the court found that the settlement did not constitute “damages” as defined in the policy.  The policy provided that the term “damages” did not include “[p]ersonal profit or advantage to which the insured is not legally entitled; [and] 3. [c]riminal or civil fines, penalties (statutory or otherwise), fees or sanctions.”  The settlement was allocated to unpaid wages, statutory penalties, and interest due on the wages.  The court found that the portions of the settlement attributed to wages and penalties plainly were carved out of the definition of “damages,” and that the interest did not constitute damages because “[i]t would make very little sense for the Court to consider wages and civil penalties as excluded from the definition of ‘damages’ only to find that the interest incurred as a result of the unpaid wages was considered damages.”


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