As discussed in the first installment of our three-part series on insurance protection against wage-and-hour claims, policyholders have looked to two types of traditional insurance for protection against employment liabilities:  employment practices liability (EPL) and directors’ and officers’ (D&O) insurance.  Both require careful scrutiny today to ensure that a company, and its directors, officers and others, are protected from the significant defense and liability costs posed by such claims.  Policyholders should review all terms, conditions and exclusions of their policies to determine whether they have sufficient coverage.

Both EPL and D&O policies cover claims made within the policy period, or extended reporting period, and include payment of defense costs within the policy limits, when applicable.  Both EPL and D&O policies can be written on a duty to defend or duty to reimburse or advance defense costs basis.  However, it is most common for such policies to have a duty to pay defense costs but not an affirmative duty to defend.  It is important that EPL and D&O policies at least include the promise to advance defense costs. 

EPL Coverage

EPL policies may be written as either standalone policies or as part of a package policy.  They cover liability for wrongful acts arising from the employment process, usually including, but not limited to, wrongful termination, discrimination, sexual harassment and retaliation.  The specific wrongful acts covered are often specifically enumerated in the policy.  Policyholders should consider whether a proposed EPL policy covers wage-and-hour claims and ask the following questions:

• Is the definition of acts covered written broadly enough to include wage-and-hour legal and/or statutory violations? 
• How is “insured” defined?  Is that definition broad enough to include all individuals who may have personal liability, including directors and officers, management and key or other employees?  

Policyholders should be sure these questions are properly answered in their current policy to ensure adequate protection. 

D&O Coverage

D&O policies cover all “insureds” for claims made during the policy period alleging that the insured(s) committed “wrongful acts” (breaches of duty).  D&O policies define “insured” to include at least the company’s directors and officers.  Again, in today’s environment, it is crucial that the definition also include employees and others who face personal liability. 

Common Obstacles to Coverage 

EPL and D&O policies may contain other provisions or exclusions that an insurer may try to use to limit coverage for claims brought in a wage-and-hour lawsuit.  For example, policyholders should review the definitions of “loss” and “damages” to determine what they cover.  Wage-and-hour lawsuits often result in “fines,” “penalties” and awards of “unpaid wages.”  Definitions of “loss” or “damages” in these policies may not include such awards or may specifically exclude them from the ambit of the definition.  For example, D&O policies may not consider wages to be a covered “loss.”  

D&O policies also typically contain exclusions that seek to preclude coverage for any claims brought by one insured against another.  These exclusions often include “carve-outs” that preserve coverage for claims related to employment practices.  Policyholders should review such exclusions to determine the extent of coverage under the policy under facts arising in a typical wage-and-hour claim. 

Is There Coverage Under My Policy? 

Even if an EPL or D&O policy excludes or sublimits the coverage for wage-and-hour claims, coverage may still apply.  Complaints seeking recovery for alleged wage-and-hour violations typically include a wide variety of allegations, at least some of which may fall outside the category of “wage-and-hour claims.”  Such claims thus may be covered even if the policy excludes coverage for pure “wage-and-hour claims.” 

For example, wage-and-hour complaints typically include claims for employment-related misrepresentation, discrimination, failure to implement and enforce corporate policies, breaches of implied contract and other “wrongful acts.”  Such causes of action may fall outside the scope of a wage-and-hour exclusion and thus remain covered. 

The policyholder should compare the allegations and causes of action in the wage-and-hour complaint to the coverage grant and specific wrongful acts covered under the policy to determine whether coverage potentially applies.  This may require a broad reading of the wage-and-hour complaint but can result in coverage.  At a minimum, defense costs may be recoverable.  Coverage counsel can provide an opinion about the potential applicability of coverage. 

Next installment:  How to assess new wage-and-hour insurance products.  

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