Insurance coverage

Assessing Wage and Hour Insurance Coverage Following Proposed Changes to the RSA

An article on our blog on the outlook for employment and work discussed recently how House Democrats sought to amend the Federal Labor Standards Act (FLSA) as part of a new bill called the “Wage Theft Prevention and Wage Recovery Act.” We concluded that the legislation, if enacted, would increase both the frequency and severity of not only class action by the FLSA, but also investigation and enforcement action by the Department’s Wage and Hour Division. work.

Many companies evaluating potential new or increasing FLSA and regulatory exposures may wonder whether their liability insurance policies will respond to protect the company and its officers and directors against wage and hour claims. The short answer is, it depends.

Although many policies specifically limit or exclude FLSA-related wage claims, or provide only a low cost of defense, coverage may be available, and companies should carefully review all potentially applicable policies for sources of coverage. . Below we discuss several key issues to consider when evaluating salary and hourly insurance.

1. Most EPL policies limit or exclude coverage for wage and hour claims, but do not assume that the exclusions apply to all wage-related claims.

Many companies assume that all workplace disputes will be covered by insurance, but are surprised to find that most Employment Practices Liability (EPL) policies exclude claims under the FLSA and statutes. similar national and local salaries. This exclusion from EPL policies may be important – the Department of Labor (DOL) reports only for the 2021 financial year this single federal agency helped over 190,000 workers, recovered over $230 million in back wages, and initiated nearly 25,000 compliance actions. Common wage and hour grievances include, but are not limited to, “put on and take off” claims, non-payment of overtime, misclassification of employees, and non-reimbursement of business expenses. In addition to the DOL, many states have their own wage and hour departments, often within their respective attorneys general’s offices, and that’s not even taking into account the incredible activity of state and federal private litigation firms in the area of ​​wages and hours.

The increased risk and exposure of wages and hours has led insurers to limit the coverage of EPL policies by excluding such claims outright or limiting coverage to defense costs only, sometimes subject to small sub -limits. However, not all “wage and hour” exclusions are created equal, and companies should not assume that a salary-related exclusion will always apply to all forms of alleged labor code violations.

Take for example Southern California Pizza Co. v Lloyd’s, London, 40 Cal. App. 5th 140 (Ct. App. 2019), in which a company sought coverage for a lawsuit alleging, among other things, that it violated California labor code sections governing the reimbursement of work-related expenses. The company’s EPL insurer denied the claim under the policy’s FLSA exclusion, except for limited coverage under a wage and hour endorsement providing $250,000 in medical expenses. defense. The company challenged the insurer’s interpretation of the FLSA’s exclusion, which applied to claims that arise from, are directly or indirectly related or related to, or in any way allege violations of ” state wage and hour or overtime laws.

The court accepted the company’s narrow interpretation of “wage and hour” to exclude only claims alleging a violation of the Wage, Hour or Overtime Act and seeking wages as compensation. repair. Since the underlying claims alleging non-reimbursement of business-related expenses were “non-wage” tort claims under California law, they did not fall within the scope of the exclusion. and triggered the insurer’s obligation to defend outside of the limited coverage under the wage and hour endorsement.

Like all insurance claims, the labor code violations at issue in the Southern California Pizza were judged based on the actual political language and facts alleged in the underlying lawsuit. Because exclusionary language should be interpreted narrowly against the insurer and in favor of coverage, policyholders should not assume that the preferred (i.e. broad) interpretation of wage and salary exclusions hours by the insurer is correct without fully evaluating the specific facts, law and policy language at issue in a particular claim.

2. Additional or stand-alone wage and hour coverage may be available.

Even though recovery may be possible under EPL policies that include a wage and hour exclusion, companies may still be able to purchase express coverage for FLSA claims. The first example is a salary and hour addendum or an addendum to an existing EPL policy. But these endorsements are generally “for defense only” and will not indemnify the company for any settlements or judgments. Additionally, wage and hour riders that provide defense coverage may be subject to a relatively small sub-limit (such as the $250,000 defense coverage in Southern California Pizza).

Second, some carriers may be willing to purchase wage and hour coverage that includes both indemnity and defense coverage as part of a stand-alone policy. Wage and hourly policies, typically applied in the Bermuda market, typically result in higher self-insured retentions and target a specific class of small and medium-sized businesses based on loss history, number of exempt and non-exempt employees. exempt and other factors.

In addition to assessing the availability of wage and hour coverage, companies should carefully review the policy wording to understand how a covered EPL claim would play out in practice. One of the biggest issues outside of the sublimits or scope of exclusion language applicable to FLSA claims may be defense control, as most EPL policies allow the insurer to control the defense, including the selection of a defense attorney approved by the insurer. Attorneys and brokers experienced in coverage can often negotiate around these provisions to protect the company’s choice of preferred attorney by approving the policy with a pre-approved attorney and, if necessary, applicable rates, at the time of placement. or renewal. Given the significant reputational damage that can accompany the loss of wages and working hours, control over the selection of lawyers should not be overlooked.

3. Consider all potentially applicable policies.

Many companies purchase standalone EPL policies to protect against workplace risks, but this is not the only possible source of recovery. Although professional liability or workers’ compensation policies are unlikely to respond to wage and hour claims, endorsements can be added to general liability policies to provide coverage for certain wrongful acts related to to work.

Directors and Officers (D&O) and similar management liability policies may also include EPL coverage, either through stand-alone coverage sections or by endorsement, and may be triggered by ERISA-type claims, investigations governmental or DOL enforcement actions related to professional misconduct. In addition, D&O policies may also respond when individual officers or directors are targeted in FLSA lawsuits attempting to hold them personally liable for causing wage and hour violations. See, for example, Foday v Air Check, Inc., No. 15-CV-10205, 2018 WL 3970142, at *4 (ND Ill. Aug. 20, 2018) (the president who wrote the company manual, performed daily quality assurance inspections, and was aware of the contested practices of rounding up scorecards could be held personally liable for FLSA violations). This is especially true under D&O Side-A-only policies which provide broader coverage for uncompensated claims for people who may not qualify for employment-related exclusions.

Finally, in addition to identifying all potential sources of wage and hour coverage, these policies should be reviewed in conjunction with internal and external risk professionals to ensure there are no coverage gaps. , including coordination of employment-related definitions, coverage subsidies and exclusions, between D&O and EPL policies. The time to fill any gaps, change or supplement coverage, or negotiate different terms is at the time of policy purchase or renewal, which will avoid surprises or unintended consequences in the event of a wage and salary claim. ‘hours.