Southern Cal. Pizza Co., LLC v. Certain Underwriters, etc.

Citation: Not availableDocket: G056243

Court: California Court of Appeal; September 20, 2019; California; State Appellate Court

Original Court Document: View Document

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In the case between Southern California Pizza Company, LLC (plaintiff/appellant) and Certain Underwriters at Lloyd’s, London (defendant/respondent), the Court of Appeal of California addressed an appeal regarding the interpretation of an employment practices liability insurance policy's exclusion related to wage and hour laws. The trial court had broadly interpreted this exclusion to encompass all provisions of the Labor Code, leading to the sustaining of the defendant's demurrer and dismissal of the plaintiff's claims in an underlying employment lawsuit.

Upon review, the appellate court determined that the trial court's interpretation was overly expansive. The court clarified that the wage and hour law exclusion should be understood as specifically concerning laws related to the duration of work and remuneration for work performed. Consequently, the appellate court concluded that many claims from the underlying lawsuit could potentially fall within the policy's coverage, thus finding that the trial court erred in its decision.

The plaintiff operates over 250 Pizza Hut and Wing Street restaurants and sought coverage under their policy after being named in a class action lawsuit alleging multiple Labor Code violations. The defendant denied coverage, asserting that the allegations were covered by the wage and hour exclusion. The appellate court reversed the trial court's judgment and remanded the case with instructions, emphasizing the need for a more precise interpretation of the policy's terms.

The plaintiff received $250,000 in defense cost coverage under a policy but sought additional coverage, alleging breach of contract and tortious breach of the implied covenant of good faith and fair dealing. The plaintiff claimed compensatory and punitive damages, along with declaratory relief. The defendant demurred, arguing that the claims were not covered as 'Employment Event' claims and fell under the policy's wage and hour exclusion. Although the plaintiff acknowledged some claims were excluded, it contended that others were covered based on a narrower interpretation of the exclusion.

The trial court agreed with the defendant's interpretation and sustained the demurrer without leave to amend, leading to a judgment against the plaintiff, who subsequently appealed. On appeal, the plaintiff argued that the trial court erred in its interpretation, presenting two specific claims: failure to reimburse delivery drivers for mileage and travel-related costs, and failure to include required information on wage statements. The appellate court agreed that the wage and hour exclusion should be interpreted more narrowly, concluding that some claims might be covered by the policy.

The document outlined principles of insurance contract interpretation, emphasizing the insurer's broad duty to defend against claims with potential indemnity, which is broader than the duty to indemnify. In mixed actions, where some claims are covered and others are not, the insurer must defend the potentially covered claims. The determination of the duty to defend typically involves comparing the complaint's allegations with the policy terms, and extrinsic facts may also indicate potential coverage. The overarching goal in interpreting insurance contracts is to reflect the mutual intentions of the parties involved.

Clear and explicit contractual language governs the interpretation of agreements. In cases where terms are ambiguous, the interpretation aims to safeguard the objectively reasonable expectations of the insured. If ambiguity remains unresolved, it is generally construed against the insurer, reflecting the insurer's role in drafting the policy and collecting premiums for coverage. 

To align coverage with reasonable expectations, basic coverage provisions are interpreted broadly in favor of the insured, while specific exclusions are interpreted narrowly against the insurer. The insured must demonstrate that a claim falls within basic coverage unless explicitly excluded, whereas the insurer must prove the applicability of any specific exclusion.

The determination of a material ambiguity in an insurance policy must consider the policy in its entirety and context, interpreting provisions in their ordinary and popular sense, as a layperson would understand them, unless terms are used in a technical manner. 

In the context of wage and hour laws, the primary inquiry is whether the allegations in the underlying lawsuit relate to violations of such laws, which the policy does not define. Both parties agree that ‘overtime’ laws are not relevant, prompting the use of the ordinary definition of "wage," which is typically a payment for labor or services. Courts may reference dictionaries to ascertain the ordinary meanings of policy terms. The Labor Code defines "wages" broadly to encompass all payments for labor performed by employees, regardless of calculation methods.

The document outlines the definition and implications of "wage and hour laws," which encompass employees' rights to compensation, vacation, sick pay, and deferred benefits like pensions. It clarifies that the term "hour" simply refers to a duration of time. The plaintiff argues for a narrow interpretation of claims excluded from coverage under the policy, suggesting that only those directly seeking wages for violations of wage, hour, or overtime laws should be excluded. However, the document counters this by stating that the policy's endorsement explicitly allows for defense costs up to $250,000 for such claims, provided they seek wages earned after a specified retroactive date and were made during the policy period.

The document then addresses a specific claim from an underlying lawsuit, which alleges that the plaintiff failed to provide required information on wage statements as mandated by section 226. This section specifies nine items employers must include in wage statements, such as total hours worked and the employer's name and address. The statute is part of a broader legislative framework governing wage payments and allows employees recourse if their employer fails to comply. Despite the plaintiff's assertion that section 226 does not allow for wage awards, the document concludes that this does not negate the classification of the statute as a wage law. Consequently, the violation alleged in the lawsuit falls under the policy's wage and hour exclusion.

The trial court correctly concluded that the plaintiff's claim for failure to reimburse delivery drivers for business-related expenses does not fall under the Policy’s general coverage or the wage and hour exclusion. The lawsuit alleged that the plaintiff failed to reimburse necessary expenses incurred by drivers, including training travel, delivery mileage, and cell phone usage, seeking reimbursement plus interest under sections 2800 and 2802. Section 2800 mandates that employers indemnify employees for losses due to the employer's lack of ordinary care, while section 2802 requires reimbursement for necessary expenditures incurred in the course of employment, regardless of legality, unless the employee believed the employer's directions to be unlawful. Neither statute explicitly addresses wages or hours, suggesting they should not be categorized as wage or hour laws. The distinction between business expense reimbursement and wages is significant, as reimbursement is meant to prevent employers from passing operational costs onto employees. Previous California Supreme Court rulings have also characterized such reimbursement claims as nonwage claims. The excerpt references federal district court cases that have interpreted section 2802 in the context of insurance policy exclusions, with conflicting conclusions, but emphasizes that the court is not bound by these decisions and finds them unpersuasive.

Admiral determined that section 2802 qualifies as a "wage and hour law" based on its frequent association with minimum wage and overtime claims, the common judicial characterization of such claims, and its role in preventing employers from shifting costs to employees. However, Admiral did not consider the term's ordinary meaning, a critical aspect of insurance policy interpretation. Similarly, Phase II's analysis overlooked this initial step and misapplied language from In re Work Uniform Cases, which addressed a different issue related to uniform expenses rather than the classification of section 2802 as a wage and hour law. Hanover reached a similar conclusion regarding section 2802 but failed to analyze the insurance exclusion's intended meaning and recognized the ambiguity due to the lack of relevant California case law.

Consequently, the claim under sections 2800 and 2802 is ruled to be outside the wage and hour exclusion of the policy. Further, the underlying lawsuit's business expense reimbursement claim alleges insufficient reimbursement for mileage, cell phone usage, and training-related travel. Specifically, it states that the defendant had a policy of not reimbursing actual mileage, failed to reimburse cell phone expenses, and did not cover travel costs for mandatory training. The plaintiff argues that this claim falls under the policy's coverage for "Inappropriate Employment Conduct." The claim is likely to qualify as an employment-related workplace tort since it does not stem from a contract breach; the Legislative framework provides employees a remedy against employers for such wrongs, specifically in cases of unpaid business expenses.

The fundamental aim of tort law is to support social policy, specifically ensuring that employees do not bear the financial burdens associated with their employer's operational costs or negligence. Statutory sections 2800 and 2802 are designed to uphold this principle by establishing a statutory duty for employers. While the defendant argues that the claim is based solely on a statutory violation rather than a tort, the Legislature has broad authority to create tort causes of action. Section 2800 references "losses caused by the employer’s want of ordinary care," which aligns with negligence—a classic tort. Section 2802 establishes a statutory duty for employers, and a breach of this duty can be deemed a tort. 

The defendant further contends that business expense reimbursements are not covered "losses" under the policy, claiming these expenses arise from statutory obligations rather than claims. However, the key focus is on the defendant's duty to defend, which is broader than the duty to indemnify. The defense costs in question are included in the policy’s definition of "loss" and are considered amounts paid "on account of a Claim." The defendant's argument regarding a $250,000 cap on defense costs applies only to excluded wage and hour claims, which are not relevant to the business expense reimbursement claim in this case. 

The conclusion is that the defendant's demurrer should have been overruled, as it must dispose of an entire cause of action to be sustained. Additionally, the plaintiff identifies other causes of action in the underlying lawsuit—such as failure to pay earned wages and unfair business practices—that may be covered by the policy and not subject to wage and hour exclusions. The plaintiff also notes allegations resembling misrepresentation, which they argue trigger policy coverage, despite the absence of a formal misrepresentation claim in the complaint.

The claims for relief under section 17200 and the Private Attorneys General Act are derivative and possibly covered by the Policy due to the defendant's alleged failure to reimburse business-related expenses. In contrast, claims under sections 201 and 202, which pertain to wage and hour laws, fall under the wage and hour exclusion and are not covered. The unpled misrepresentation claim also falls under this exclusion, as it relates to violations of state wage and hour laws, including false representations of wage denial. The trial court's demurrer to this claim was sustained based on a lack of potential coverage; however, since some claims related to business expense reimbursement are potentially covered, sustaining the demurrer regarding the bad faith claim was incorrect. The judgment is reversed, and on remand, the trial court is instructed to vacate the order sustaining the demurrer and to issue a new order overruling it. The plaintiff is entitled to costs on appeal. The opinion has been certified for publication, and the petition for rehearing has been denied. The modification made does not alter the judgment.