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Publications
No Duty to Pay Defense Costs Because Wages and Penalties Are Not 'Loss'
Insurance Law Update
June 2009
In Jeff Tracy, Inc. v. U.S. Specialty Ins. Co., Case. No. 08-cv-361, 2009 (May 5, 2009), the U.S. District Court for the Central District of California held that wrongfully withheld wages and California Labor Code penalties were not a “loss” as defined in a directors and officers’ (D&O) policy and, because there was no duty to pay defense costs other than as indemnifiable “loss,” there was no coverage.
The alleged failure to pay the prevailing wage on certain public works projects led to an employee class action lawsuit and civil wage assessments by the California Department of Industrial Relations, Division of Labor Standards Enforcement (DSLE) against Jeff Tracy, Inc. (Tracy), in an action entitled Osorio v. Jeff Tracy, Inc.,.) The Osorio plaintiffs sought unpaid wages, California Labor Code penalties and restitution under California Business & Professions Code sections 17200 et seq. The DSLE assessments charged Tracy with “wages and penalties.” When Tracy’s D&O insurer, U.S. Specialty Insurance Company, denied coverage for related defense costs, Tracy sued for breach of contract and bad faith. The district court granted Specialty Insurance’s motion for judgment on the pleadings because the relief sought in the underlying Osorio action did not fall within the policy definition of “loss,” which excluded wages and penalties, and Specialty Insurance had no independent duty to pay defense costs under a “potential for coverage” standard. The court also held that an “insured versus insured” exclusion applied because, by endorsement, it extended to claims for “employment practices wrongful acts.” Osorio was excluded from coverage because it was filed by former Tracy employees, and since the DSLE assessments constituted a single claim based on common facts and circumstances, they were also excluded.
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