Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Arbitration victory in coverage dispute gives buyers hope

EPL cover sought for overtime lawsuits

Reprints

Some employers and their attorneys are hopeful that a recent arbitration outcome favorable to employers signals improved chances of obtaining coverage for a growing form of class-action litigation brought by employees.

Employers are seeking coverage under employment practices liability policies for lawsuits that allege employers illegally denied workers overtime pay by misclassifying them as "exempt" employees.

California, where virtually all of these disputes have occurred, sets strict guidelines for how an employer defines an exempt worker, though other states may have similar statutes. As a result, employers operating nationwide are closely watching these cases.

The recent decision by a Los Angeles arbitrator, who held that an employer was entitled to insurance coverage of its costs of defending misclassification claims, is one of the first of its kind and has yet to be addressed in published court decisions, say attorneys.

Insurers, though, maintain that their EPL policies are intended to cover discrimination issues and contain specific exemptions for wage-related disputes, brokers, insurers and attorneys say.

In misclassification lawsuits, employees typically claim that they have been wrongly classified as exempt employees so the employer can avoid paying them for overtime work. Several employers have paid out tens of millions of dollars to settle such claims (BI, July 30, 2001).

Many employers have assumed that their EPL policies would not cover the claims, because that is what they were told, said Kirk A. Pasich, a commercial insurance recovery specialist at Howrey Simon Arnold & White in Los Angeles. Some policyholders have not even filed a claim for coverage, believing that policy exemptions preclude it, he added.

But several arguments can be made as to why EPL policies should provide coverage, said Mr. Pasich. He represented Sherman Oaks, Calif.-based Earl Scheib Inc., a paint and autobody company, in the recent arbitration of a claim with EPL insurer National Union Fire Insurance Co. of Pittsburgh, Pa., a unit of American International Group Inc.

Shop managers and assistant managers in March 2000 sued Scheib, alleging the employer misclassified their status to avoid overtime payments.

David I. Sunkin, vp and general counsel for Scheib, said he assumed at first that the company did not have coverage under its EPL policy because it exempts claims related to violations of Federal Labor Standards Act and any similar provisions under state laws. The FLSA requires overtime pay for hours worked beyond a certain threshold, usually 40 hours per week.

Most EPL policies contain exclusions for claims stemming from FLSA-related provisions and similar provisions in state laws, said Tom Hams, an EPL product leader for Aon Corp. in Chicago. Insurers are adamant that those exclusions apply to the wave of employee misclassification claims, he said. He generally advises clients that EPL coverage is not available for so-called wage-and-hour disputes.

On closer inspection of Scheib's EPL policy and the relevant federal and state statutes, however, Mr. Sunkin said he discovered that federal law allows employers with worksites in several states to appoint one employee at each location as a manager and to exempt that person's overtime pay. That applies regardless of the tasks the employee performs, he said.

"They could sweep all day long, but somebody has to be in charge, and the federal law understands that," said Mr. Sunkin, who oversees risk management for Scheib.

California law, though, does not allow that same exemption from overtime pay for employees not classified as managers, he said.

As a result, the suit alleging that Scheib violated California's employment law should be covered, he argued, because the state law is not similar to the FLSA law, as required in his EPL policy's exclusion.

Mr. Sunkin presented that argument when seeking coverage of Scheib's defense costs to National Union, which eventually offered to settle the claim for $150,000. But He believed it would cost Scheib more than $150,000 to defend itself, and the company has $3 million in coverage limits.

He sought arbitration, as the policy required, and the arbitrator last month ruled for Scheib. Mr. Sunkin sought only defense costs, not indemnification, because he believes Scheib can win the ongoing case.

National Union declined to comment.

Although most EPL policies require arbitration of coverage disputes, Mr. Pasich, Scheib's attorney, said several Fortune 500 companies are seeking coverage, and one currently is in court because its policy does not have an arbitration clause.

The dissimilarity between provisions in the FLSA and provisions in state law is just one potential argument for obtaining EPL coverage for these claims, Mr. Pasich said.

Many EPL policies, for example, cover "misrepresentations" made by employers. If employees are told they are exempt and they are not, that is a misrepresentation, he said.

Many policies also cover issues such as "deprivation of career opportunities," which Mr. Pasich interprets in part to mean the opportunity to receive overtime pay.

But other factors besides the FLSA exclusion demonstrate that insurers did not intend to cover these claims, another attorney says.

Another reason that employee misclassification claims are not covered is that they are not listed among the named perils found in EPL policies, said Julianna Ryan, a partner at Kaufman Borgeest & Ryan in New York.

To underwrite this risk, insurers would have to examine employer payroll records, but they do not, said Ms. Ryan, who represents insurers and defends employers in discrimination cases.

"That is one issue we point to in demonstrating it wasn't an intended coverage," Ms. Ryan said. "Underwriters do not look for that."

Contract language and discussions with policyholders make clear that insurers do not intend to cover wage-and-hour claims, said Michael J. Maloney, vp-employment practices liability product manager for Chubb Specialty Insurance in Simsbury, Conn. It is disappointing, he said, when policyholders try to find coverage on technicalities.

Employers face a growing number of wage-and-hour claims.

Tim Bartl, assistant general counsel for the Labor Policy Assn. in Washington, said an increasing number of employers are facing employee misclassification lawsuits, though the association does not track the specific number of cases. The association represents human resource professionals.

The majority of lawsuits are filed in California because of the differences between the FLSA and California's wage-hour laws, Mr. Bartl said. But because the lawsuits target national companies, a growing number of LPA members nationwide are asking for training on how to prevent the lawsuits, he said.