Wrongful Employment Practice Excluded

Commercial Liability	No Breach of Contract
Directors and Officers	No Duty to Defend

Jeff Tracy, Inc. (Tracy), a construction firm, was made the object of a complaint by its employees. The employees won damages due to the California Department of Industrial Relations levying assessments in light of their allegations that Tracy failed to pay prevailing wages during a major construction project under California law. During the effective date of the violations, Tracy was insured under a Directors and Officers policy issued by the U.S. Specialty Insurance Company (USSIC).

After the assessments for the pay violation were levied, Tracy filed requests that damages be paid under its D&O policy. 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 from 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. 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

The court also reviewed several policy exclusions. It 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. Still, it ruled that USSIC’s exclusion applied to 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 08-361 AHS (RNBx)