An Insurer Had No Duty to Defend or Indemnify Its Insureds in a Wage & Hour Class Action Under an Employee Benefit Liability Endorsement Found in a CGL Policy
Mid-Century Ins. Co. v. Zamora, 2013 Cal. App. Unpub. LEXIS 7173 (Cal. Ct. App. Oct. 4, 2013)
In Zamora, the California Third District Court of Appeal held that an Employee Benefit Liability (“EBL”) endorsement in a CGL policy that provided coverage for “damages sustained by your [prospective, current, or] former employee . . . caused by your negligent act or omission, or … those damages caused by any other person for whose acts you are legally liable in the ‘administration’ of your ‘Employee Benefit Programs’ . . . ” did not cover an underlying wage and hour class action. 2013 Cal. App. Unpub. LEXIS 7173, at *12-13.
In the underlying action, the claimants alleged that the insureds did not comply with multiple Labor Code sections, wage orders, and Department of Labor Standards and Enforcement regulations, which resulted in an underpayment of wages for all hours worked. The insureds' broker tendered the claim to the CGL carrier, who accepted coverage under a reservation of rights and immediately filed a declaratory relief action.
In the declaratory relief action, the insurer argued that there was no coverage under the EBL endorsement because the insureds’ alleged misconduct was intentional and the administration of benefits was not at issue in the underlying action. The insureds, on the other hand, focused on the “or” between the two clauses in the EBL endorsement and argued that this disjunctive created a distinction between “damages . . . caused by [the insureds’] negligent act or omission” and damages for which insureds are vicariously liable in the administration of employee benefits. 2013 Cal. App. Unpub. LEXIS 7173, at *12-13.
The trial court agreed with the insurer’s position and concluded that the underlying class action arose from the employment practices of defendants and not the administration of employee benefit plans that the endorsement covers. As a result, the trial court issued a declaration in favor of the carrier and against the insureds on the duty to defend and indemnify the underlying class action.
On appeal, the appellate court affirmed the trial court’s judgment and found that the trial court correctly held that the EBL endorsement covered only negligent acts that have a nexus to administering employee benefits. The appellate court noted that it was not reasonable merely on the basis of an “or” between the clauses to import coverage utterly unrelated to the subject of the EBL endorsement. The appellate court found that the employment practice of wage-setting, even if it had a proportionate effect on the preset calculation of benefits based on the rate of wages, was not negligent conduct having a nexus to the administration of employee benefit plans.
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