EPLI Often Excludes Wage and Hour Claims

​Historically, employment practices liability insurance (EPLI) hasn't covered Fair Labor Standards Act (FLSA) and similar state law claims, so employers shouldn't mistakenly assume they'll be reimbursed by EPLI for their wage and hour claims. Nonetheless, employers may be able to recoup their attorney fees and defense costs, even for wage and hour claims, and perhaps more, depending on the terms of their EPLI policies.

"Often, insured businesses mistakenly believe that they are covered for all workplace litigation, regardless of the underlying claim," said Jeff Ruzal, an attorney with Epstein Becker Green in New York City. "This is often the case with wage and hour claims, which are typically not covered by insurance, unless businesses purchase a specific rider that covers such claims. Even in such cases, coverage is often limited to defense fees and costs but not judgments or settlements."

Claims That Aren't Similar to the FLSA

That said, many of the California wage and hour provisions have no parallel in the FLSA and, thus, are not similar to the FLSA, according to Shaun Crosner, an attorney with Pasich LLP in Manhattan Beach, Calif. Consequently, many exclusions in EPLI policies are not as broad as insurers contend, he said.

He said that several courts and arbitrators throughout the country have held that common exclusions in EPLI policies do not bar EPLI coverage for claims alleging failures to:

• Reimburse business expenses incurred by employees.
• Provide accurate wage statements.
• Pay wages timely.

Insurers are fighting against this trend by more clearly noting in their policies which claims—including specific state wage and hour claims—are excluded from EPLI coverage. Crosner nonetheless said that "when faced with claims alleging violations of the FLSA and state labor codes, insured employers should view any adverse coverage positions with scrutiny."

History of EPLI

Insurance coverage for employment-related claims—such as harassment, discrimination and wrongful termination—first became available in the 1990s, according to Brian McMillan, an attorney with Littler in San Jose, Calif.

Known as EPLI, this type of insurance provided broad protection for businesses facing costly litigation and potential liability for claims brought by employees, former employees and job applicants. These policies almost always excluded wage and hour claims—for example, claims for the failure to pay overtime, failure to pay minimum wage and failure to provide meal and rest breaks, he said.

Then some EPLI carriers began testing the waters with limited coverage for wage and hour claims, he noted. "More specifically, they began offering what is known as defense-only coverage," McMillan said. "The policy would provide coverage for the defense fees and costs incurred from a wage and hour claim but would not provide indemnity coverage." In other words, the insurance carrier wouldn't be on the hook for a settlement or an adverse award for a wage and hour claim.

Defense fees would include attorney fees and costs of defense, subject to a limit, noted Catherine Hazany, an attorney with Ogletree Deakins in Torrance, Calif. "Employers may have more potential defense coverage than they realize," she said. Depending on the language in the policy, some claims may not be subject to this limit.

Defense costs usually involve court filing fees, mediator's fees, court reporter fees, the cost of expert witnesses and document production costs, McMillan noted.

Defense-only coverage is still subject to the exhaustion of the policy deductible, said Raymond Mak, an attorney with Epstein Becker Green in New York City.

More recently, a handful of EPLI carriers have begun to offer indemnity and defense coverage for wage and hour claims, McMillan said. "These policies are often subject to very large deductibles" and are costly.

Selection of Counsel

"Many purchasers of EPLI insurance often do not realize—until it is too late—that they have given up the right to choose which experienced employment counsel they can call upon to defend their business against employment-related claims," McMillan said. It behooves employers to work with their insurance agents and brokers to find out if the law firm they have come to rely upon is preapproved and available should a claim arise. "This should be done at the time the policy is being purchased," he said.

Otherwise, insurance companies may require the use of their own law firms, even though to the employers, the attorneys are strangers, Ruzal noted.