In its recent decision in N.H. Ball Bearings, Inc. v. Nat'l Union Fire Ins. Co., 2014 U.S. Dist. LEXIS 31448 (C.D. Cal. Mar. 10, 2014), the United States District Court for the Central District of California had occasion to consider whether an underlying wage and hour class action claim triggered a duty to defend under an employment practices liability policy.

National Union’s insured, N.H. Ball Bearings (“NHBB”), was named as a defendant in a putative class action lawsuit alleging violations of various California Labor Codes, such as for failure to pay wages for hours worked, failure to pay overtime, failure to pay minimum wage, inaccurate wage statements, and failure to pay earned wages at discharge.  The suit also alleged violations of California’s Business and Professions Code § 17200, et seq.

NHBB’s employment practices liability policy was triggered by “employment practices violations,” a term defined to include:

employment-related misrepresentation(s) to an Employee or applicant for employment with the Company or an Outside Entity;

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(11) failure to provide or enforce adequate or consistent corporate policies and procedures relating to any Employment Practices Violation;

Additionally, the National Union policy contained an exclusion applicable to:

(j)   for violation(s) of the responsibilities, obligations or duties imposed by ... the Fair Labor Standards Act, ... any rules or regulation of the foregoing promulgated thereunder, and amendments thereto or any similar federal, state, local or foreign statutory law or common law.

 It is acknowledged that Claims for violation(s) of any of the responsibilities, obligations or duties imposed by "similar federal, state, local or foreign statutory law or common law," as such quoted language is used in the immediately-preceding paragraph, include, without limitation,  [*4] any and all Claims which in whole or in part allege, arise out of, are based upon, are attributable to, or are in any way related to any of the circumstances described in any of the following:

  1. the refusal, failure or inability of any Insured(s) to pay wages or overtime pay (or amounts representing such wages or overtime pay) for services rendered or time spent in connection with work related activities (as opposed to tort-based back pay or front pay damages for torts other than conversion);
  2. improper deductions from pay taken by any Insured(s) from any Employee(s) or purported Employee(s); or
  3. failure to provide or enforce legally required meal or rest break periods;

National Union denied coverage on the basis that the underlying lawsuit did not allege an employment practices violation.  NHBB, on the other hand, pointed to several allegations in the complaint concerning its alleged policies and procedures of failing to pay wages and other benefits earned.  Such allegations, argued NHBB, potentially came within paragraph (11) of the definition of employment practices violation, i.e., a failure to enforce consistent policies and procedures.  NHBB also argued that the allegations in the underlying complaint concerning alleged improper wage statements came within paragraph (5) of the definition of employment practices violation as an “employment-related misrepresentation.”

The court summarily rejected NHBB’s broad interpretation of paragraph (11) of the definition of employment practices violation, observing that the definition required that the “policies and procedures” referred to in the definition must relate to another employment practice violation.  Plaintiffs’ allegations concerning NHBB’s practices, explained the court, related to specific labor violations rather than employment practices, and thus did not qualify as a “failure to provide or enforce adequate or consistent corporate policies and procedures relating to any Employment Practices Violation.”

The court also rejected NHBB’s arguments concerning employment-related misrepresentation, concluding that even if NHBB’s interpretation of paragraph (5) were correct, and could encompass misrepresentations concerning wages owed and paid, exclusion (j) specifically excluded coverage for such claims.  As the court explained:

The [underlying lawsuit] claims for inaccurate wage statements and the failure to pay non-discretionary bonuses arise directly from a "failure to pay wages ... for ... time spent in connection with work related activities" and/or "improper deductions from pay."

As such, and because the underlying suit did not allege any other employment-related misrepresentations potentially escaping the exclusion, the court concluded that National Union had no duty to defend or to indemnify.