United States: Southern California Pizza Company, LLC v. Certain Underwriters At Lloyd's, London Subscribing To Policy Number 11epl-20208

In Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd's, London Subscribing to Policy Number 11EPL-20208, 40 Cal.App.5th 140 (September 24, 2019), the Fourth District Court of Appeal reversed the trial court's dismissal of a declaratory relief action filed by Southern California Pizza Company, LLC (SCP or Plaintiff) arguing that a duty to defend SCP for a "wage and hour" class action was triggered under an Employment Practices Liability Insurance Policy ("policy") issued by Certain Underwriters at Lloyd's, London Subscribing to Policy Number 11EPL-20208 ("Underwriters").

The parties' dispute arose out of SCP's tender of defense of a wage and hour class action lawsuit alleging causes of action based on the violation of certain California Labor Code statutes, including sections 226 (failure to include information on wage statements), 2800 and 2802 (failure to fully reimburse for business-related expenses), 201 (failure to timely pay earned wages) and 202 (failure to timely pay wages upon resignation) under the policy. SCP contended that the some of the causes of action alleged in the class action complaint came within the insuring agreement of the policy and were not otherwise excluded by such policy. The Underwriters agreed to defend SCP against the action pursuant to a "wage and hour exclusion" endorsement which provided for defense costs up to $250,000. Upon exhaustion of the $250,000 limit, the Underwriters ceased defending SCP and took the position that coverage under the policy was excluded by the endorsement and/or otherwise did not come within the insuring agreement of the policy.

Thereafter, SCP filed a complaint for declaratory relief and bad faith against the Underwriters. In response, Underwriters filed a demurrer in the declaratory relief action arguing that the underlying class action did not allege facts coming within the insuring agreement of the policy and such action was otherwise excluded by a wage and hour exclusion endorsement in the policy. The trial court sustained Underwriters' demurrer and dismissed the action.

In reversing the trial court's decision, the Court of Appeal focused on the plain language of the insuring agreement and wage and hour exclusion. The insuring agreement and exclusion in the policy stated as follows:

The Policy's basic liability coverage states as follows: "We will pay Loss amounts that the Insured is legally obligated to pay on account of a Claim for an Employment Event first made by a Claimant during the Policy Period or any applicable Reporting Period ... ." "Loss" is defined to include, inter alia, defense costs. "Employment Event" is defined to mean "actual or alleged acts of Discrimination, Harassment, and/or Inappropriate Employment Conduct by an Insured against an Employee, former Employee or applicant for employment."

The last of the specified types of acts, "Inappropriate Employment Conduct," is expressed as including, in relevant part: (1) "any actual or alleged employment related misrepresentation to an Employee or applicant for employment"; (2) "any failure to adopt, implement or enforce employment related policies or procedures"; or (3) "any other employment related workplace tort."

An endorsement to the Policy adds an additional provision to its liability "Exclusions" section, which the parties refer to as the wage and hour exclusion. It reads as follows: "This Policy does not cover 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 foreign, federal, state, or local, wage and hour or overtime law(s), including, without limitation, the Fair Labor Standards Act; however, we will pay Defense Costs up to, but in no event greater than $250,000 for any such Claim(s), without any liability to us to pay such sums that any Insured shall become legally obligated to pay. ... The wage, hour and overtime coverage provided by this endorsement applies only to Claims which seek wages earned solely and exclusively after the retroactive date listed in the Schedule of this endorsement; but where the wage, hour or overtime Claim was first made against you during the Policy Period."

In reaching its decision, the Court of Appeal interpreted the language of the wage and hour exclusion according to its plain meaning as follows:

Because neither party contends the language at issue has a special or technical meaning, we begin with the ordinary definition of the word "wage." One dictionary defines it as "a payment usually of money for labor or services usually according to contract and on an hourly, daily, or piecework basis." (Merriam-Webster's Dict. Online (2019) <http://www.rnerriam-webstercom/dictionary> [as of Aug. 27, 2019] "wage," definition No. 1; Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206, 1216 [11 Cal. Rptr. 3d 169] ["It is well settled that in order to construe words in an insurance policy in their `ordinary and popular sense,' a court may resort to a dictionary"].) Another defines it as "[a] payment to a person for service rendered." (Oxford English Dict. Online (2019) <http://www.oed.com> [as of Aug. 27, 2019].) Synonyms of the word include "payment," "salary," and "stipend." (Merriam-Webster's Dict. Online (2019) <http://www.rnerriam- webstercorn/dictionary> Aug. 27, 2019] ["wage"].)

Common among these definitions is the notion that wages are paid in exchange for services rendered. This ordinary meaning is consistent with that ascribed to the term in the legal context. For example, the Labor Code defines "wages" as "all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other methods of calculation." (§ 200, subd. (a), italics added.) It includes all "benefits to which employees are entitled as a part of compensation, vacation and sick pay, and deferred compensation such as pension and retirement benefits." (Pacific Caisson & Shoring. Inc. v. Bernard Bros. Inc. (2015) 236 Cal.App.4th 1246, 1254 [187 Cal.Rptr.3d 337].)

Turning to the term "hour," it is a plain reference to a duration of time. This the parties do not debate.

Thus, using the ordinary meanings of the words, the phrase "wage and hour ... law(s)" refers to laws concerning duration worked and/or remuneration received in exchange for work.

Based on the above interpretation, the Court of Appeal reasoned that causes of action alleged against SCP based on the following Labor Code sections were excluded by the wage and hour exclusion endorsement:

  • Section 226 (a wage and hour law);
  • Section 201 (wage and hour law); and
  • Section 202 (wage and hour law).

However, the Court of Appeal held that the causes of action based on violation of sections 2800 and 2802 (failure to reimburse for business expenses) did not fall within the scope of the wage and hour exclusion. The Court of Appeal reasoned as follows:

We begin with the wage and hour exclusion. Both sections 2800 and 2802 require an employer to indemnify its employee for certain losses or expenditures under specified circumstances. Section 2800 states: "An employer shall in all cases indemnify his employee for losses caused by the employer's want of ordinary care." Section 2802 provides, in relevant part: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful." (§ 2802, subd. (a).)

Neither statute mentions wages or hours, nor do they appear in the parts of the Labor Code titled "compensation" or "working hours." (See div. 2, pts. 1 & 2 (§§ 200-8901.) While not determinative of the question before us, this observation supports the notion that one would not expect them to be considered wage or hour laws in the absence of an express indication otherwise.

Lending further credence is the function of, and the purpose underlying, each statute. Disbursements for losses and work-related expenditures are not payments made in exchange for labor or services. (Gattuso v. Harte-Hanks Shoppers, Inc. (2007) 42 Ca1.4th 554, 572 [67 Cal. 13ptr. 3d 468, 169 P.3d 889] (Gattuso) [explaining there is "a valid and important distinction between wages (as payment for labor performed) and business expense reimbursement"].)

The former protects employees from an employer's lack of reasonable care and diligence (Devens v. Goldberg (1948) 33 Cal.2d 173, 177 [199 P.2d 943]), as well as ensures employers are "bear[ing] all of the costs inherent in conducting [their] business[es]" (In re Acknowledgment Cases (2015) 239 Cal.App.4th 1498. 1506 [192 Cal.Rptr.3d 337]. And the latter "prevent[s] employers from passing their operating expenses on to their employees.'" (Gattuso, at p. 562; see also Grissom v. Vons Companies. Inc. (1991) 1 Cal.App.4th 52. 59 [1 Cal. Rptr. 2d 808].)

Given section 2802's language, function and purpose, it is unsurprising our Supreme Court previously characterized claims seeking reimbursement of business expenses as "nonwage" claims. (Smith v. Rae-Venter Law Group (2002) 29 Cal.4th 345. 353 [127 Cal. Rptr. 2d 516, 58 P.3d 367], superseded by statute on other grounds as stated in Sampson v. Parking Service 2000 Com., Inc. (2004) 117 Cal.App.4th 212, 220 [11 Cal. Rptr. 3d 595].)

. . .

For these reasons, we hold the claim in the underlying lawsuit brought pursuant to sections 2800 and 2802 falls outside the scope of the wage and hour exclusion.

Thereafter, the Court of Appeal found that the causes of action alleging violation of sections 2800 and 2802 potentially came within the insuring agreement of the policy, such that a duty to defend SCP against the class action lawsuit was triggered under the policy. In finding that a duty to defend SCP was triggered, the Court of Appeal reasoned as follows:

Our inquiry does not end there. That the business expense reimbursement claim is not subject to the exclusion begs the question of whether the claim potentially falls within the Policy's coverage in the first instance. On this point the parties also disagree.

The business expense cause of action in the underlying lawsuit alleged the plaintiff was not reimbursed, or at least not adequately reimbursed, for expenses related to mileage driven, cell phone usage and training. Specifically, the complaint stated: (1) "defendant[] had, and continue[s] to have, a policy of not reimbursing employees for actual mileage expenses necessarily incurred for the performance of their job duties"; (2) "[d]efendant[] failed to reimburse [the employees] for their cell phone expenses"; and (3) "[d]efendant[] failed to reimburse [the employees for] work related travel and mileage expenses they incurred traveling to [plaintiff's] mandatory training sessions."

Plaintiff contends the claim is covered because it alleges conduct which the Policy covers as "Inappropriate Employment Conduct." The two categories of conduct listed in the Policy to which it directs our attention are the following: (1) "any failure to adopt, implement, or enforce employment related policies or procedures"; and (2) "any other employment related workplace tort."

Taking the latter first, as we find it determinative of the issue, we agree the claim at issue likely qualifies as an employment-related workplace tort. In the ordinary sense, "[a] tort is defined to be 'any wrong, not consisting in mere breach of contract, for which the law undertakes to give to the injured party some appropriate remedy against the wrongdoer." (Denning v. State [1899 123 Cal. 316. 323 [55 P. 1000].) Here, the wrong alleged (failure to reimburse business expenses) is not grounded in the breach of a contract, and the Legislature enacted a statute which gives the injured party (an employee) a remedy against the wrongdoer (an employer).

Our conclusion is supported by the fundamental aim of the relevant statutes. "'"[T]ort law is primarily designed to vindicate 'social policy.' [Citation.]""' (Erlich v. Menezes[199]) 21 Cal.4th 543, 551 (87 Cal. Rptr. 2d 886.981 P,2d 978].) Sections 2800 and 2802 are so designed—they vindicate the social policy that employees should not be bearing the financial burden of an employer's operating expenses, costs of doing business or failure to exercise due care. (Gattuso, supra. 42 Ca1.4th at p. 562; Devens v. Goldberg, supra, 33 Cal.2d at p. 177; In re Acknowledgment Cases. supra. 239 Cal.App.4th at p. 1506.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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