• Ninth Circuit Finds Wage & Hour Claim Does Not Involve “Employment Practices Wrongful Acts”
  • December 28, 2011 | Authors: Jennifer Mathis; Terrence R. McInnis; Binh Duong Pham; Cathy A. Simon
  • Law Firms: Troutman Sanders LLP - Irvine Office ; Troutman Sanders LLP - Washington Office
  • On December 21, 2011, the U.S. Court of Appeals for the Ninth Circuit, in California Dairies, Inc. v. RSUI Indemnity Co., found that coverage for a wage & hour claim was not afforded under a D&O insurance policy. The court found that because the complaint’s wage & hour allegations did not fall within the policy’s definition of “Employment Practices Wrongful Acts,” the policy’s Insured v. Insured exclusion barred coverage for the claim. The court also rejected the argument that the insurer waived this coverage defense by failing to assert it in its original denial letters. This advisory discusses the bases for the court’s opinion.

    The Ninth Circuit’s decision upheld the district court’s dismissal of a coverage suit in California Dairies, Inc. v. RSUI Indemnity Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009), based on the policy’s Insured v. Insured exclusion.  The Ninth Circuit held that the exclusion barred coverage for the wage & hour claim, rejecting the insured’s argument that an exception to that exclusion for “Employment Practices Wrongful Acts” applied.  The insured argued that the wage & hour class action alleged “employment-related misrepresentation to an Employee” and “failure to provide or enforce adequate or consistent organization policies or procedures relating to employment,” and so met the policy’s definition of “Employment Practices Wrongful Acts.”

    However, the Ninth Circuit held that the insured’s broad interpretation of those provisions “would strain the policy language by rendering superfluous the [Employment Practices Wrongful Acts] provisions that give coverage for actions arising out of claims, such as ‘wrongful dismissal,’ ‘discrimination,’ ‘harassment,’ and ‘failure to grant tenure or practice privileges.’”  The Ninth Circuit rejected the insured’s argument that coverage would be illusory unless the exception was interpreted as a “blanket exception” to all claims brought by employees.  The court countered that “[Employment Practices Wrongful Acts] coverage is not illusory, but is limited to specific claims not asserted here.”

    The insured also argued that the insurer waived its right to deny coverage based on the Insured v. Insured exclusion because the insurer did not rely on that exclusion in its denial letters. However, citing the California Supreme Court’s decision in Waller v. Truck Insurance Exchange, 11 Cal. 4th 1, 33 (1995), the Ninth Circuit noted that “California rejects an automatic waiver rule. An insurer does not waive policy provisions merely by failing to rely on them in denial of coverage letters.” The Ninth Circuit also rejected the insured’s argument that, by not raising the Insured v. Insured exclusion in the earlier denial letters, the insurer violated California’s Fair Claim Practice Regulations. The court noted that to accept the insured’s argument “would reinstate the automatic waiver rule rejected by Waller.”

    In the district court’s 2009 decision, the court had held that, in addition to the Insured v. Insured exclusion, the policy’s FLSA exclusion barred coverage for some, but not all, of the suit. Specifically, the district court had held that the FLSA exclusion barred coverage for violations of the California Labor Code’s minimum wage, overtime, and meal and rest provisions, but did not bar coverage for the failure to reimburse employees for costs related to uniforms, failure to comply with itemized wage statement requirements, and failure to pay wages due at termination, because, according to the district court, these California Labor Code provisions had no “similar” corollary in the FLSA. The Ninth Circuit did not reach the question of whether the district court properly applied policy’s FLSA exclusion since the court found that the policy’s Insured v. Insured exclusion barred coverage for the claim in its entirety.