On August 27th, a California Appellate Court held that an employment practices liability insurance policy’s “wage and hour” exclusion must be construed narrowly to bar coverage only for claims related to “laws concerning duration worked and/or remuneration received in exchange for work.” In doing so, the court made clear that “wage and hour” exclusions do not preclude coverage for claims that go beyond the employee’s actual remuneration received in exchange for work.

In Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Number 11EPL-20208, the plaintiff, the owner/operator of 250 Pizza Hut and Wing Street Restaurants, was insured under an employment practices liability policy issued by the defendant. The policy was designed to afford coverage for losses arising from employment-related claims brought against the plaintiff, subject to certain exclusions. After being named in a putative class action lawsuit alleging violations of various labor code provisions, the plaintiff sought coverage under the policy. The claims included violations of labor laws requiring Southern California Pizza to include certain information on wage statements and to reimburse employees for business related expenses. The insurer relied on the policy’s “wage and hour” exclusions and largely denied coverage for all claims (as required by the wage and hour exclusions, the insurer provided $250,000 in defenses costs), contending that all of the claims concerned the alleged “wage and hour” violations. Southern California Pizza disagreed and filed suit arguing that the exclusion should be construed narrowly and therefore did not reach all of the claims asserted.

Siding with the insurer, the trial court gave broad meaning to the exclusion. However, the appellate court disagreed, finding that some of the claims in the underlying complaint should not be barred. Specifically, the appellate court held that “using the ordinary meaning of the words, the phrase ‘wage and hour . . . law(s)’ refers to laws concerning duration working and/or remuneration received in exchange for work.” As such, claims alleging that Southern California Pizza failed to reimburse its employees for business related expenses did not come within the scope of the wage and hour exclusion because they are not sufficiently related to statutes that traditionally are considered to set out the state’s “wage and hour” protections. Further, the claims allege that the plaintiff violated a labor law within a chapter titled “Payment of Wages”, because it failed to include certain information on wage statements, that are within the scope of the exclusion because it is a violation of a “quintessential wage law.” The appellate court did not decide whether the reimbursement amounts are covered losses under the policy, but did hold that defendants, at a minimum, have a duty to defend plaintiffs.

This decision is important because it illustrates that, despite the popularity of so-called “wage and hour” exclusions, the exclusions do not bar all claims arising from the employer/employee relationship.  Nor do such exclusions bar coverage for all claims involving so-called “wage and hour” violations.  Rather, only where the claim involves the employee’s actual remuneration received in exchange for work should the exclusion apply to preclude coverage.  Finally, the decision is a reminder that insurers often apply policy exclusions too broadly based only on the exclusion’s label, rather than its actual terms.  Policyholder, therefore, should remain vigilant about reviewing the actual scope and language of any potentially applicable policy exclusion and contacting coverage counsel when it appears that their insurer is not giving the exclusion its reasonable and narrow application.