Hospitality Industry Risk Management: Hotel Owner Must Review “Employment Practices Liability Insurance” Coverage Language To Determine If It Covers “Wage And Hour” Lawsuits

 In Professional Security Consultants, Inc. v. United States Fire Insurance Co., Case No. CV 10-04588 SJO (SSx), Judge James Otero recently denied an EPL insurer’s motion to dismiss a complaint seeking coverage for costs incurred to defend and settle an underlying wage and hour class action.    

The exclusionary language at issue was typical of such exclusions, barring coverage “for violations of the responsibilities, obligations or duties imposed by…the Fair Labor Standard Act…or similar provisions of any federal, state or local or foreign statutory or common law.”

The underlying litigation alleged that employer Professional Security Consultants (“PSC”) violated various provisions of the California Labor Code, including wrongfully withholding overtime compensation. PSC was insured under an EPL policy issued by United States Fire (“US Fire”). US Fire moved to dismiss the coverage action on the basis of its “FLSA” (Fair Labor Standards Act) Exclusion. Citing California law regarding the breadth and scope of an insurer’s duty to defend, the court denied US Fire’s motion.

The court noted that the policy’s definition of an “Employment Practices Wrongful Act” included “employment-related misrepresentations.” Comparing this policy language to the allegations of the complaint, the court emphasized the underlying plaintiffs’ allegation that PSC “[d]isseminated false information throughout [PSC’s] facilities and amongst [PSCs] employees, reciting that, under [PSC’s] labor policies and practices and under California law, the members of the Illegal Wages Class were not entitled to overtime compensation.” The complaint therefore alleged “employment-related misrepresentations,” triggering the potential for coverage under the policy.

The court also rejected US Fire’s argument that there was no potential indemnity coverage because any amounts allegedly owed to the underlying Plaintiffs were not covered “Loss” under the policy. The court observed that the policy’s definition of covered Loss included “damages,” and that the underlying complaint expressly sought to recover damages.

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