Wednesday, May 13, 2009, 9:42 AM

Got a Wage Claim? Don't Expect Insurance to Cover It Automatically. Read the Fine Print.

Employers who haven't checked the terms of their D&O policies may find themselves very sorry when it comes to coverage of wage claims. Recently, employer Jeff Tracy, Inc., found itself unable to prove that a wage class action was a "loss" under the terms of its D&O Policy issued by U.S. Specialty Insurance Co. according to a federal district court judge in California.

The D&O policy at issue in the Jeff Tracy case did not have any special endorsements to cover employee claims, such as the wage class action that cost Jeff Tracy over $400,000 in state assessments for various alleged misconduct including failing to pay the prevailing wage on public works projects, failing to inform employees of their classification under California state law, and making misstatements about how the employees would be paid. Not only did the policy not have a special endorsement, the policy contained an exclusion that the judge determined excluded the claims, namely that the policy did not cover any "claim" "for an actual or alleged employment practices wrongful act" or "for any actual or alleged violation of any provision of the Fair Labor Standards Act other than the Equal Pay Act, the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, the Consolidated Omnibus Budget Reconciliation Act of 1985, the Occupational Safety and Health Act, ... or any other similar provisions of any federal, state or local statutory or common law or any rules and regulations promulgated under any of the foregoing." The insurer consistently denied coverage of the wage claims as not within the definition of "Loss" under the policy and as specifically excluded by the policy, in response to multiple notices of the wage assessment by the employer.

The opinion acknowledges that insurance policies are subject to special rules of construction. First, the law favors broad coverage to provide insured with the greatest possible protections and disfavors exclusions through narrow interpretation. Second, while the insured has the burden to establish coverage, the insurer has the burden to establish that the claim is specifically excluded. Furthermore, D&O policies generally favor requiring an insurer to reimburse the insured for the costs of a defense, rather than providing the insured with a defense.

This decision should serve as motivation for employers to review their various insurance policies and confirm what their policies cover and what what they do not cover. This is particularly important given the increase in wage claims over the past few years.

To read the decision of the Jeff Tracy, Inc. v. U.S. Specialty Insurance Company, etc., SA CV 08-361 AHS (RNBx) (May 5, 2009), click here.


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May 27, 2009 at 5:47 AM  

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