Wage and Hour Violation Exclusion Applies to Allegations of Untimely Payments in Connection with Scheme to Underpay Employees

A Pennsylvania federal court, applying Pennsylvania law, held that a policy’s Wage and Hour Violation exclusion applied to the entirety of underlying class actions that alleged the insured employer schemed to underpay its prevailing wage workers. Twin City Fire Ins. Co. v. Glenn O. Hawbaker, Inc., 2023 WL 8791175 (M.D. Pa. Dec. 19, 2023). Rejecting the insured’s argument that coverage should still exist for its alleged liability to class members who were not underpaid but only untimely paid, the Court concluded that all the allegations were related to claims involving Wage and Hour Violations and were thus excluded from the policy’s fiduciary liability coverage.

In two parallel class actions, the insured’s prevailing wage workers alleged that their employer failed to make timely wage payments, misappropriated retirement account funds, violated Pennsylvania and federal wage payment and collection laws, failed to make timely contributions to retirement accounts as required by ERISA, and breached fiduciary duties. Both class actions alleged that the insured employer schemed to underpay its wage workers by overstating the value of fringe benefits.

The employer sought coverage pursuant to its insurance policy that covered losses incurred by the insured for claims arising from actual or alleged violations of fiduciary duties imposed by ERISA or any similar law. However, the policy excluded coverage for “any Claim based upon, arising from, or in any way related to any Wage and Hour Violation” and made the insured responsible for defending claims that “involve allegations, in whole or in part, of a Wage and Hour Violation.” The policy defined Wage and Hour Violation to mean any actual or alleged violation of the insured’s obligations under any law “which govern[s] wage, hour, and payroll practices.” The insurer sought a declaratory judgment that the policy did not afford coverage for the underlying class actions based on the application of the Wage and Hour Violation exclusion.

In the coverage litigation, the insured employer argued that coverage should at least be provided for the part of the underlying actions involving class members who did not allege that they were underpaid, but claimed merely that they were untimely paid. Some of these class members, according to the insured employer, were in fact overpaid rather than underpaid. The insured employer asserted that the untimely payment allegations should be covered because they were “independent” and “completely separate” from the underpayment allegations.

The court disagreed. Finding that the underlying class actions alleged one scheme of underpayments which included making untimely payments, the court held that the Wage and Hour Exclusion barred coverage for the entirety of the underlying class actions. Further, the court noted that the manner in which the alleged scheme impacted certain individuals was irrelevant to whether the exclusion applied, reasoning that, even for class members who purportedly benefitted by being overpaid, their allegations were related to claims involving Wage and Hour Violations that were excluded from coverage.

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