Are Wage and Hour Lawsuits Covered by Insurance?
If you own a business in California, you likely have multiple insurance policies to help protect your business. If you have employees, then you have workers’ compensation insurance, which is required by law. If you have company vehicles, then there’s vehicle policies. You also likely have a general liability policy to cover physical damage to any places or equipment you own or lease. You may also have Errors and Omissions (E&O) coverage and/or Directors and Officers (D&O) policies depending on your line of business. Some businesses also elect to get polices or riders to cover such things as cyber security, earthquakes, and other hazards, and even terrorist attacks. And if you’ve ever been through an employment lawsuit before, your business may also have purchased something called Employment Practices Liability Insurance (also known as an EPLI policy).
These insurance policies probably give you a sense of security, knowing that if the unexpected happens, you’re protected. But, statistically speaking, the biggest legal risk to a California business is not a fire, theft, or even a lawsuit for wrongful termination or discrimination. It’s a wage and hour class action and/or PAGA action, which can be filed by one employee on behalf of all your hourly employees going back up to four years if there is even just one violation of the California Labor Code.
These are some of the fastest growing types of lawsuits in California, with the average cost to resolve them in the mid six figures for a small- to medium-sized business (and in the seven figures for larger employers). Find out more about wage and hour class and PAGA actions here.
So, are wage and hour class actions covered by your insurance? The answer: Probably not. At least not in the way you think they are.
Wage and hour cases are not covered by most EPLI policies. If there is some coverage, it is likely very limited coverage with a lot of strings attached. This is because insurance companies bear too much risk, since the frequency of these cases is increasing at an alarming rate and the value of these cases is astronomical because of California’s punishing penalty structure for wage and hour violations.
If you do have an EPLI policy and have been sued, one of your first tasks should be to evaluate whether you might have coverage for the claim and what that coverage entails.
Limited Coverage for Wage and Hour Actions
Many EPLI policies cover claims alleging wrongful termination, sexual harassment, retaliation, or discrimination. But given the high risk and potential exposure involved, EPLI policies often exclude wage and hour coverage, or severely limit the type and amount of coverage, especially for class or other representative actions (like federal collective actions or California PAGA cases). Chances are, if you didn’t pay a very high premium to add wage and hour coverage, there is an exclusion in your policy or at least a wage and hour “sublimit” or rider that has very minimal coverage with a high deductible.
It is extremely rare for EPLI policies that have wage and hour coverage to cover any actual liability (meaning paying the cost of a judgment or settlement). Instead, these policies usually just cover limited “costs of defense” to cover some of your legal fees. Any actual settlement or judgment would still be paid out of pocket.
It is not uncommon to see very high deductibles ($50,000, $75,000, or in some cases even $250,000) for wage and hour claims that must be met before the insurance company kicks in any money. After the deductible is met, the insurance company will cover a set amount for defense expenses (typically a range between $50,000 to $100,000).
Keep in mind that the deductible is calculated using the insurance company’s “panel” rates for attorneys, which are usually around half the market rate for qualified wage and hour defense counsel.
The insurance carriers also only count time entries and work done that the carrier deems “reasonable and necessary.” The insurance adjusters assigned to these cases are typically located outside of California and do not understand the complexity and nuance required to defend and resolve a wage and hour class action, and thus oftentimes deny payment for work that is both reasonable and necessary. So, someone in an office somewhere out of state not involved in the case at all and typically with little or no wage and hour class action experience looks at the bills and makes arbitrary cuts based on what they believe is a “reasonable” task, and then they take the remaining acceptable time entries and total them up using the reduced rates.
What this means is that the actual amount in legal fees spent out of pocket before any coverage kicks in is often significantly higher (sometimes double or even triple) than the stated deductible. This also means that once your deductible is hit, any costs of defense paid for by the insurer will also only be paid at the carrier’s reduced hourly rates for tasks they deem reasonable and necessary.
The legal team at Medina McKelvey has seen situations where companies have spent hundreds of thousands of dollars to meet a $50,000 deductible, only to then have the insurance company nickel and dime the money they contribute after that.
Inexperienced Panel Counsel
Given this dynamic, what often happens is the insurance company sends the case over to an insurance defense firm that is used to doing low-rate insurance defense work, which is mostly on the wrongful termination side of things (the low rates are advantageous to the insurance company because it takes longer for the deductible to be exhausted).
The defense firms the insurance company choses are often law firms that handle small single-plaintiff cases with relatively low exposure and no class action, PAGA, or wage and hour complexity. As a result, these firms are often not equipped with the expertise, personnel, or approach to handle or successfully resolve a wage and hour class action (particularly not against the top serial filers in California we routinely defend against). In addition, these defense firms tend to bill junior and/or inexperienced lawyers not specialized in wage and hour or class action cases at a high volume to make up for the submarket insurance reimbursement rates. The insurance defense lawyers usually run off an insurance defense playbook designed for cases that aren’t class actions or wage and hour actions. This in turn has the tendency to drive the costs up, including attorneys’ fees for both the defendant and the plaintiff.
With this dynamic in play, the risks here include (1) the case getting over-litigated/mismanaged; (2) the insurance defense firm eating through the deductible and the limited coverage, and (3) the insured/defendant ending up stranded in the case without adequate counsel, coverage, or an exit strategy, with all available coverage exhausted.
Once the limited coverage is exhausted, neither the insurance company nor the defense firm of their choice has any real skin in the game. What’s worse is that the insurance defense playbook often favors the traditional defense approach of filing motions and fighting discovery instead of the nuanced, collaborative approach required to efficiently resolve a wage and hour case.
A traditional litigation approach can cause the plaintiffs’ lawyers to invest significant time and expense in the case (and perhaps uncover more issues or claims in the process) that drive up the settlement value. Plus, employers pay the other side’s legal fees if even one violation is proved in the case, so even if an aggressive defense knocks out 99% of the liability, the employer will be on the hook for 100% of the other side’s attorneys’ fees, which have been driven up through litigation. Thus, the client can be left with a case that has been mismanaged that will only settle for a premium, but there is no insurance coverage to cover the cost of settlement, not to mention the other side’s attorneys’ fees.
You might be tempted to say that you’ll just reject the insurance company’s choice of counsel and pick your own experienced wage and hour lawyers to handle the case. Not so fast. Many EPLI policies have exclusions prohibiting this. These policies often give the insurance company the sole right to select counsel on your behalf and won’t let you pick your own counsel. Or the policies give you a limited right to select from a list of approved panel counsel, most of whom are the low-cost, inexperienced wage and hour lawyers described above. Some insurance companies will let you choose your own counsel, but they will require you to pay the difference between their low panel rates and the rates of your chosen counsel. And again, the deductible will only be calculated using the lower panel rates for time entries the insurance company approves.
Your Options
The main takeaway here is that an EPLI policy that doesn’t exclude wage and hour cases outright may end up costing more than it’s worth. If you do have limited EPLI coverage with cost of defense coverage, then you have three options:
Decline coverage so you can defend your claim as you see fit.
Accept coverage and accept the pitfalls addressed above.
Accept coverage and ask your insurance company to allow you to use your counsel of choice as defense counsel.
Given everything discussed above, some clients with policies like this who are forced to use insurance defense counsel will opt to forgo coverage and stick with their chosen counsel. Before you consider something like that, you should always at least submit (“tender”) a claim to your insurance company, even if it appears you have no coverage. You want a written record of their rejection in case there might be grounds to dispute at least part of their decision. Most policies have strict time limits on claims submission, so you should tender a claim as soon as possible if you have been sued and haven’t tendered a claim yet.
Protecting Your Business from Wage and Hour Lawsuits Shouldn’t be This Hard
At Cal Comply, our hearts go out to California employers. Protecting your business from wage and hour lawsuits is costly and time-consuming. It shouldn’t be this hard.
We’re on a mission to provide employers with the resources they need to improve compliance with employment laws and reduce the threat of these frivolous lawsuits.
In preparing for a wage and hour lawsuit, your first step should be to consult with a competent employment law firm that specializes in wage and hour class and PAGA actions. If you are searching for counsel, the lawyers at Medina McKelvey (the founders of Cal Comply) are experienced in navigating these issues with insurance companies and can help you decide on your next steps, depending on what your insurance company tells you.
The second step in protecting your California business against wage and hour lawsuits is to train your employees and managers on your wage and hour policies. Effective wage and hour training can help California employers stay informed, compliant, and proactive in addressing potential issues, reducing the risk of costly wage and hour lawsuits and the associated legal, financial, and reputational consequences. Our wage and hour training is easy-to-use, affordable, and effective. Click here to learn more.
Questions? Contact us.
