Policy Issues Alert: Federal Court In California Requires Travelers To Cover Employee Reimbursement Claims Under EPLI Policy

Monday, October 15, 2012 - 16:46

September 4, 2012 - A federal district court judge in California has ruled that Travelers Casualty and Surety Co. must cover employee reimbursement claims under its employment practices liability insurance (EPLI) policy as covered “Loss.” Classic Distributing and Beverage Group Inc. v. Travelers Casualty and Surety Company of America, 2:11-cv-07075, August 30, 2012.

Granting partial summary judgment to Classic Distributing and Beverage Group Inc., U.S. District Judge Gary Allen Feess in California's Central District also ruled that Classic was entitled to independent counsel in defense of the underlying claim, since counsel appointed by Travelers had the ability to steer coverage away from potentially covered claims.

Ruling that Classic was entitled to a defense against all claims in the underlying suit, and to indemnity for some of those claims, Judge Feess also denied Travelers' motion for summary judgment, dismissing Classic's claim that Travelers acted in bad faith in denying coverage.

In the underlying suit, a former Classic employee filed a class action complaint in 2009 asserting that Classic failed to reimburse work-related expenses, violating California Labor Code Section 2802, and alleging unfair business practices, including unlawful deduction of incentive wages and failure to pay all wages upon termination, under various other code sections. The suit was amended in July 2010 to elaborate the alleged Labor Code violations. Classic settled the suit in 2011 for $225,000.

Travelers initially advised Classic that a duty to defend arose only for the Section 2802 claim, and that it was reserving rights to disclaim liability. Ultimately, Travelers claimed no duty to indemnify Classic for any of the claims, citing a wage and hour exclusion and claiming that the plaintiff sought restitution, not damages.

Judge Feess, however, disagreed.  He found that "Travelers' characterization of awards under that section as 'restitution' sweeps too broadly, and would apply even to standard breach of contract actions."

With respect to Classic's demand for independent counsel, Judge Feess agreed with Classic that "Travelers had the ability not only to steer coverage away from potentially covered claims, namely those arising under Cal. Labor Code [Section] 2802, but also to steer any settlement toward awards that would be excluded under the Policy's definition of "Loss." Finally, addressing Traveler's motion to dismiss the bad faith claim, the judge held that Traveler's ground for coverage denial, "a seemingly stretched analogy to restitution," could not be found reasonable as a matter of law and would have to be tried in court.

David A. Shaneyfelt of Anderson Kill, counsel to Classic, commented, "This decision effectively invalidates Travelers' EPLI exclusion as to a common class of nettlesome class action employment claims under section 2802 of the California Labor Code.  Equally important, it affirms the vital principle that a policyholder is entitled to independent counsel when the insurance company's reservation of rights gives defense counsel the ability to steer coverage away from covered claims."