Summary of a Recent
Judicial Development in
Labor

State Labor Law Violations Excluded from Insurance Coverage

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In California Dairies Inc. v. RSUI Indemnity Co., --- F. Supp. 2d ---, 2009 WL 747919 (E.D. Cal. 2009), the United States District Court for the Eastern District of California held that certain California Labor Code (CLC) violation claims brought against an employer were excluded from coverage under its directors and officers liability insurance policy because certain of the CLC provisions were "similar" or analogous to federal Fair Labor Standards Act (FLSA) provisions, and FLSA and "similar" labor law violations were excluded from coverage under the policy.

Background

California Dairies, Inc. (CDI) brought this action against its insurer, RSUI Indemnity Company, after RSUI denied coverage for claims asserted against CDI in a class action in which employees and former employees of CDI alleged that CDI violated various provisions of the CLC. Id. at *1. RSUI based the denial on Exclusion 4 of the directors and officers liability insurance policy, which excludes coverage for "violation of any of the responsibilities, obligations or duties imposed by . . . the [FLSA] . . . or any similar provision of federal, state or local statutory law or common law." Id.

Arguments

CDI argued that the term "similar" in the policy should be interpreted to mean "identical" or "alike," and therefore would not extend to exclude claims for CLC violations. Id. at *6.

RSUI, citing the Merriam-Webster Dictionary, argued that the term "similar" should be interpreted as "having characteristics in common," and thus CLC violations should be excluded under the provision as being "similar" to FLSA violations. Id.

Analysis and Holdings

The court held that the term "similar" was not ambiguous and should therefore be given its plain meaning, stating that "if the CLC contains a provision that has provisions analogous to those of the FLSA, Exclusion 4 applies." Id. at *13. The court further found that the minimum wage and overtime provisions and the meal and rest requirements in the CLC were similar to those of the FLSA, so Exclusion 4 applied to those CLC claims brought by the former employees. Id. at *14-18. The court then determined that the employees' CLC claims for failure to reimburse employees for costs related to uniforms was not covered by Exclusion 4, because the FLSA required reimbursement only if not doing so would reduce wages below the minimum wage. Id. at *19. The court likewise held that the CLC claims for failure to comply with itemized wage statement requirements were not covered by Exclusion 4, because there was no federal requirement concerning the provision of wage statements. Id. at *20. Finally, the court held that Exclusion 4 did not apply to CLC claims for failure to pay wages due at termination, because "where neither the FLSA nor its implementing regulations address the type of violation alleged in the Underlying Action, it is not reasonable to find that the relevant CLC provision is 'similar' to any provision in the FLSA." Id. at *21. However, the court found that all the CLC claims were excluded by Exclusion 7, which barred coverage for claims between insureds, and both CDI and its employees were insureds. Id. at *24. The court did grant CDI leave to amend its complaint to assert an estoppel defense to Exclusion 7 because it was not proffered as a basis for exclusion in RSUI's most recent denial of coverage letter. Id. at *22.

The case was decided on March 20, 2009.