When we started our law firm 22 years ago, a colleague gave me some very sage advice (which I guess came from bad experience):  Get your accounting straight from day one, and keep it straight.  To this day, whenever a fellow professional asks me about going out on his or her own, I give the same advice. But, having handled more than my share of employment practices insurance claims, I now add the following: Get your payroll legally straight from day one, and keep it straight.

Wage-and-hour lawsuits are not fun for employers.  Statistics show that plaintiffs’ lawyers are filing federal Fair Labor Standards Act lawsuits at the rate of about 9000 per year in federal court.  Some states (like New Jersey and New York) even expand liability for wage-and-hour violations beyond the company itself, to shareholders, officers, or directors. Scary stuff.

Now let me brighten your day even further. If you think your liability insurance company will protect you from wage-and-hour suits, you may have to think again.  Talbots, the women’s clothing retailer, recently learned that the hard way in a lawsuit captioned The Talbots, Inc. v. AIG Specialty Insurance Company, Civil Action No. 17-11107-RGS (D. Mass. Sep. 29., 2017).

Here’s what happened. Two former Talbots employees sued under California Labor Law, contending, among other things, that Talbots had failed to pay proper overtime. Talbots submitted the claim to AIG, which had sold Talbots a “Management Liability for Private Policies Companies” policy. The policy included both Directors & Officers liability coverage and Employment Practices Liability coverage. AIG denied the claim, and a federal court has now upheld the denial.

The D & O coverage contained an exclusion for claims based upon employment practices.  The idea, of course, was to encourage the corporate policyholder to buy separate employment practices liability coverage for additional premium, which Talbots did.  But, unfortunately, the EPL coverage excluded claims for violations of the Fair Labor Standards Act, or “similar state law” relating to the failure to pay proper wages for overtime pay.

Talbots tried several different arguments to get around the exclusions, but none of them worked. Talbots argued, for instance, that if the claim was excluded from the D & O coverage because it was an “employment practice,” how could AIG legitimately deny the claim under the EPL coverage, because it was not an “employment practice”?

The court, in a footnote, wrote: “This argument is completely beside the point. The D & O Coverage Section contains a broad exclusion for any claims arising out of employment practices, presumably because there is a separate section of the policy (the EPL Section) which deals with employment practices violations and defines with specificity what forms of violations are covered under the policy.”  So, no coverage under the D & O section because it excludes all employment practices…but the EPL coverage only applies to some employment practices (and not wage-and-hour claims).

As the British pop singer Bat for Lashes (a/k/a Natasha Khan) asks, “What’s a girl to do?” Well, if you’re unfortunate enough to be sued under state labor law for violation of overtime rules, and you learn that your EPL policy contains a “violation of FLSA or similar state law” exclusion, all may not be lost. Read the provisions of the state law very carefully.  The carrier must prove that the specific section of the state statute under which the plaintiff is suing is “similar” to an analogous FLSA section, not simply that both laws generally address wage-and-hour issues.  Also, most EPL forms contain coverage for misrepresentations made to employees.  Check to see whether plaintiffs’ counsel has alleged (as is common) that employees were told that they were “exempt” from overtime requirements when they actually weren’t exempt.  That may be enough to trigger coverage.

Of course, an ounce of prevention is worth a pound of cure. Consult with your broker before claims happen.  You might be able to buy an endorsement that gives you at least some protection on the wage-and-hour front, for example.  My friend Rob Sobel, Senior Vice-President at the excellent insurance brokerage Cook Maran in Fair Lawn, NJ, says:  “Not all insurance companies offer wage and hour coverage. In those insurance markets that do, the limit of liability is generally $100,000. The limit can be found either memorialized in the standard policy language or can be added by endorsement.”

Clients often ask me why they bothered to buy insurance at all, since claims that they thought would be covered are swallowed up by a bewildering array of exclusions and limitations. Insurance companies (and some judges) love to say that policyholders have a duty to read their policies, but really, unless you have a lot of experience in deciphering insurance-speak, the policies might as well be written in Sanskrit. Talbots is a major, publicly-traded company, and I doubt whether it will have any trouble weathering the wage-and-hour suit discussed above, even without insurance. But for middle-market companies or smaller businesses, gaps in coverage can be catastrophic. And no, this is not where I say “You should have your entire coverage program reviewed by an experienced professional, i.e., me.” This is where I say that, when it comes to insurance, the best thing you can do is prevent claims from ever happening in the first place. With respect to employment and labor law, consult with a good employment attorney and make sure that you’re following all relevant payroll regulations, that your employment manual is up to date, and that your managers have been trained in how to prevent unnecessary employment lawsuits from happening.