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EPLI Policy Does Not Cover Back Wage Class Action Claim

  • November 20, 2009

Many employers purchase Employment Practices Liability Insurance (EPLI) in order to provide coverage against lawsuits and related claims from employees.  EPLI policies routinely exclude a number of employment-related actions from coverage, including Workers' Compensation claims, ERISA actions, and employment wage disputes.  In a new decision, the Tenth Circuit Court of Appeals refused to read a grammatical error in an EPLI policy to cover a multimillion dollar wage payment settlement.

In Payless Shoesource, Inc. v. The Travelers Companies, Inc., Travelers issued an EPLI policy to Payless.  The policy specifically excluded FLSA claims, but due to a misplaced modifying phrase, was ambiguous as to its coverage of related state law wage and hour actions.  Payless argued for reimbursement of settlement amounts from a California state law wage class action claim, contending that the ambiguity in the policy should be interpreted against the drafting party - Travelers in this case.

The Tenth Circuit rejected this argument, affirming summary judgment for Travelers.  In its opinion, the court found that the EPLI policy unambiguously excluded FLSA and related wage claims from coverage.  The Tenth Circuit refused to tortuously read the policy to find an opposite result.  It engaged in a detailed grammatical analysis concluding that while the policy may have used improper English, its meaning was still clear.

Wage and hour lawsuits are especially dangerous for employers because they cannot manage these risks through insurance.  In the absence of such coverage, proper employee classification and pay practices are the only reliable ways to avoid liability.