Pizza Hut Delivers a Win for Employers: Reimbursement Claims are Not Automatically Excluded from Coverage by a Policy’s “Wage-and-Hour” Exclusion

The California Court of Appeal recently ruled that a “wage-and-hour” exclusion in an employment practices liability insurance (“EPLI”) policy must be narrowly interpreted to extend coverage for reimbursement claims brought under California Labor Codes §§2800 and 2802. Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London, 2019 WL 4572859 (Cal. Ct. App. Aug. 27, 2019).

Southern California Pizza Co. (“SoCal Pizza”) owns and operates over 250 Pizza Hut and WingStreet restaurants, and was sued in a putative employee class action alleging violations of various California Labor Laws including: failure to provide overtime wages, accurate wage statements, proper meal and rest periods, and failing to reimburse employees for business-related expenses. SoCal Pizza tendered its defense to Lloyd’s, who denied coverage. Lloyd’s argued that the entire action fell within its wage-and-hour exclusion, which excludes coverage for: “any Loss resulting from any Claim based upon, arising out of, directly or indirectly connected or related to, or in any way alleging violation(s) of any … wage-and-hour or overtime law(s).”  

SoCal Pizza sued for breach of contract, bad faith, and declaratory relief. The trial court agreed with Lloyd’s and interpreted the wage-and-hour exclusion broadly to exclude coverage for the entire class action.

The appellate court reversed. Applying well-settled principles governing the interpretation of insurance policies in California, the court determined that the meaning of the phrase “wage-and-hour … law(s)” in Lloyd’s exclusion should be narrowly interpreted to apply only to laws “concerning duration worked and/or remuneration received in exchange for work.” Against this backdrop, the court determined that SoCal Pizza’s alleged failure to reimburse business expenses is not excluded from coverage because the reimbursement statutes (§§2800 and 2802) are not sufficiently related to California’s “wage-and-hour” statutes. Furthermore, the reimbursement statutes do not mention wages or hours, nor do they appear in the Labor Code’s “compensation” or “working hours” sections. Finally, since reimbursement payments are not payments made in exchange for labor or services, the class claims are not related to “remuneration received in exchange for work,” and are therefore not within Lloyd’s wage-and-hour exclusion.

TAKEAWAY

SoCal Pizza demonstrates that wage-and-hour exclusions in EPLI policies might not eliminate insurance coverage for every cause of action in what has traditionally been called a “wage-and-hour case.” This is especially true when an allegation does not involve remuneration received in exchange for work. Of course, coverage depends on the specific verbiage of the exclusion itself: Employers should always tender the claims to their EPLI insurers, and contact coverage counsel to review any denials which appear to be based on overly-broad applications of policy exclusions.