399_C048

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D&O POLICY EXCLUDES LOSS INVOLVING
WRONGFUL EMPLOYMENT PRACTICE

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Jeff Tracy, Inc., (Tracy) a construction firm was made the object of a complaint by its employees. The employees won damages due to a the California Dept. of Industrial Relations levying assessments in light of their allegations that Tracy had failed under California law to pay prevailing wages for during a major construction project. During the effective date of the violations, Tracy was insured under a Directors and Officers policy issued by U.S. Specialty Ins. Co. (USSIC). After the assessments for the pay violation were levied, Tracy filed requests that they be paid under its D&O policy and USSIC denied coverage.

 

After exchanging correspondence debating the matter of USSIC’s declination, Tracy filed suit, requesting a motion for summary judgment. Tracy sought a court decision finding USSIC obligated to cover the assessments and to pay related settlement costs due to breach of contract. USSIC filed a countermotion, asking to be relieved of any obligation to respond to the loss.

 

USSIC reiterated its position that the loss involved an employment practice and was barred for coverage under its D&O policy by three, distinct exclusions. Tracy argued that USSIC breached its contract as it owed a duty to defend against the allegations made by its employees and that the assessments levied against it were eligible for coverage as, essentially, back payment of wages.

 

The court reviewed the D&O policy language, in particular its definitions of:

• Insured Organization
• Insured Person
• Employment Practices Wrongful Act

as well as several policy exclusions. The court found the policy’s exclusion F (3) to be of particular relevance. Per a separate endorsement, Tracy and USSIC agreed that (USSIC):

 

“will not be liable to make any payment of “Loss” in connection with any “Claim” for any “Employment Practices Wrongful Act.”

 

The court did not review the policy’s other exclusions. It ruled that USSIC’s exclusion was applicable to the Tracy’s loss and the insurer had no obligation to respond to the event. It therefore granted the insurer’s motion for summary judgment and denied Tracy’s motion.

 

Jeff Tracy, Inc., etc. plaintiffs, v. U.S. Specialty Ins. Co., etc, Defendants. USDISCT, Central District of Cal., Southern Division. No. SA CV 08-361AHS. Filed May 5, 2009. [downloaded, 01/20/10 http://www.wcsr.com/resources/pdfs/flsa051509.pdf]