Despite finding that the syntax in its Employment Benefits Liability (EBL) endorsement was “not the best,” a California court of appeal held that Mid-Century Insurance Company did not owe a defense or indemnity to eight car dealerships for class action wage and hour claims brought by auto mechanics.  Mid-Century Insurance Company v. Robert Zamora et al., case no. C069644, California Court of Appeal, Third Appellate District (October 4, 2013).   In so ruling, the court refused to adopt an interpretation of a clause in the endorsement that would have expanded coverage beyond the scope of the endorsement as a whole.

The mechanics alleged multiple violations of federal and state laws based on underpayment of wages and resulting reductions in social security benefits.  The mechanics  claimed that they were paid on a piece-rate system, which left them unpaid for time when they are not working on a repair job, but still are required to be at work.  Their motion for class certification was supported by six declarations from putative class plaintiffs, all of whom averred that their claims were based solely on the dealerships’  failure to pay for all the hours they worked.

The dealerships’ insurance broker tendered the complaint to their Employment Practices Liability insurer, which denied coverage based on an exclusion for wage claims. The broker then informed the dealerships that he would submit the claim to Mid-Century, their general liability insurer, “to see if they can find anything in our policy language that would at least trigger defense.”

The EBL endorsement in Mid-Century’s policy extends coverage to “damages sustained by your [prospective, current, or] former employee . . . caused by your negligent act or omission, or … those damages caused by any other person for whose acts you are legally liable in the ‘administration’ of your ‘Employee Benefit Programs’ defined below.”   “Administration” includes counseling employees about benefit plans; interpreting the plans; maintaining plan records; and processing plan enrollments, terminations and cancellations.   “Benefit programs” are group life and health insurance, profit sharing, pension, stock subscription plans, workers’ compensation,  unemployment insurance, social security and disability, and travel, savings or vacation plans.  Mid-Century provided a defense under a reservation of rights and informed the dealerships that it intended to file a declaratory judgment action on the grounds that the alleged conduct was intentional, not negligent, and did not involve the administration of benefits.

The battle in the coverage action was centered on the wording of the EBL endorsement.  Mid-Century argued that the endorsement applies only where there is a negligent act or negligent omission by the insured that causes some kind of miscalculation of the employee benefits applicable to the employees at issue, and there was no allegation of miscalculation.  Mid-Century stated that the EBL endorsement provided narrow coverage for negligent acts and negligent omissions in the employee benefits area and the administration of the benefit plans.  The dealerships focused on the “or” between the two clauses in the EBL endorsement, arguing that the endorsement did not require a causal connection between the negligent acts or omissions and the benefit plans.

The trial court sided with Mid-Century for several reasons, including the facts that the underlying claims did not involve conduct with a nexus to the administration of employee benefit plans and the dealerships initially sought other insurance coverage before tending the claim to Mid-Century with the “hope” that coverage existed.  The appellate court affirmed.  It noted that the dealerships conceded on appeal that the alleged conduct had nothing to do with the benefit plans and stated:  “No matter how many times [the dealerships] insist that negligence with a nexus to benefit administration is unnecessary, they do not give any cogent basis for reading the first clause [of the endorsement] more broadly that the endorsement in which it appears.”   The court concluded that “it is not reasonable merely on the basis of an ‘or’ between the clauses to import negligence coverage utterly unrelated to the subject of the EBL endorsement, and we have a basis for agreeing with the trial court that wage decisions do not involve the administration of benefit plans for employees.”