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California Dairies, Inc. v. RSUI Indemnity Co.

August 11, 2009


The opinion of the court was delivered by: Oliver W. Wanger United States District Judge



This case concerns a directors and officers liability insurance policy ("the Policy") issued to Plaintiff, California Dairies, Inc. ("CDI"), by RSUI Indemnity Company ("RSUI"). RSUI denied coverage for claims asserted against CDI in a class action filed in Tulare County Superior Court, Gonzalez v. CDI, Case No. 08-226450 ("Gonzalez" or the "Underlying Action"), in which employees and former employees of CDI allege CDI violated various provisions of the California Labor Code ("CLC") concerning wages, hours, and related matters.

RSUI initially denied coverage based on three different exclusionary provisions. Upon the insured's request for reconsideration, RSUI based the denial solely on Exclusion 4 of the Policy, which excludes coverage for "violation of any of the responsibilities, obligations or duties imposed by ... the Fair Labor Standards Act ... or any similar provision of federal, state or local statutory law or common law...." CDI then filed this action seeking declaratory relief regarding coverage under the Policy. The initial complaint was dismissed with leave to amend. Doc. 24, filed Mar. 20, 2009. Plaintiffs filed a First Amended Complaint ("FAC"), adding some new allegations, particularly pertaining to the issues of waiver and the applicability of Exclusion 7. Doc. 25, filed Apr. 9, 2009. Defendant again moves to dismiss. Doc. 26.


A. The Underlying Gonzalez Lawsuit

On January 4, 2008, Walter Gonzalez filed a class action complaint against CDI in Tulare County Superior Court. FAC ¶7. The Gonzalez Complaint alleges causes of action for:

1) failure to pay minimum wage; 2) failure to pay regular and overtime wages; 3) failure to provide mandated meal periods or pay an additional hour of wages; 4) failure to provide mandated rest periods or pay an additional hour of wages; 5) failure to reimburse employees for costs incurred to acquire and/or maintain company-required uniforms; 6) knowing and intentional failure to comply with itemized wage statement provisions; and 7) failure to timely pay wages due at termination. Id. The Gonzalez Complaint also alleges that CDI violated California's Unfair Competition Law, Cal. Bus. Prof. Code § 17200, et seq., as a result of CDI's alleged violations of the CLC. Id. No violation of the federal Fair Labor Standards Act ("FLSA") was alleged. See id.

B. The Relevant Terms and Conditions of the Policy

CDI is the named Insured, as the "Insured Organization" under the Policy. FAC ¶5. Under the Policy's Insuring Agreement set forth at Section I(C), RSUI agrees:

With the Insured Organization that if a Claim for a Organization during the Policy Period and reported in Wrongful Act is first made against the Insured accordance with SECTION V. -- CONDITIONS, C. Notice of Insured Organization is legally obligated to pay. pay on behalf of the Insured Organization all Loss the Claim and Circumstance of this policy, the Insurer will See Defendant's Request to Submit Evidence, Doc. 11, at p. 32 of 44 (underlined text is bold in original).*fn1

The Policy does not contain a duty to defend, but instead contains a duty to reimburse defense costs. Id. at p. 11 of 44 (Advancement of Defense Expenses; Insurer Has No Duty to Defend).

"Insured" is defined at Section III(G) of the Policy as "any Insured Organization and/or any Insured Person." Id. at p. 34 of 44. "Insured Organization" is defined as "the organization named in Item 1 of the Declarations Page...." Id. (Section III(H)). "Insured Person" is "any past, present or future director, officer, trustee, Employee, volunteer, or any committee member of a duly constituted committee of the Insured Organization." Id. (Section III(I)). "Employee" is defined as "any past, present or future employee of the Insured Organization...." Id. (Section II(D)). "Employment Practices Claim" is "any Claim alleging an Employment Practices Wrongful Act." Id. at p. 33 of 44 (Section II(E)).

An "Employment Practices Wrongful Act" is defined at Section II(F) of the Policy as any actual or alleged:

1. (either actual or constructive) of employment,

Wrongful dismissal, discharge or termination including breach of an implied employment contract;

Employment related harassment (including but not

2. limited to sexual harassment);

3. race, color, national origin, religion, sexual not limited to discrimination based on age, gender, Employment-related discrimination (including but orientation or preference, pregnancy or disability);

4. Employment-related retaliation; Employment-related misrepresentation to an organization;

5. Employee or applicant for employment with the Insured Libel, slander, humiliation, defamation or

6. invasion of privacy (solely when employment related);

7. Wrongful failure to promote;

8. Wrongful deprivation of career opportunity, wrongful demotion or negligent Employee evaluation, with an Employee reference; including giving defamatory statements in connection

9. Employment related wrongful discipline;

10. Failure to grant tenure or practice privileges;

11. to employment; consistent organization policies or procedures relating Failure to provide or enforce adequate and

12. thereunder: a. Family and Medical leave Act of 1993; b. amended) including all regulations promulgated Violations of the following federal laws (as Americans with Disabilities Act of 1992 (ADA); c. Civil Rights Act of 1991; d. Age Discrimination in Employment Act of 1967 (ADEA), including the Older Workers Benefit Protection Act of 1990; or e. Title VII of the Civil 1983, as well as the Pregnancy Discrimination Act of Rights Law of 1964 (as amended) and 42 U.S.C. Section 1978;

13. Violation of an Insured Person's civil rights relating to any of the above; or

14. supervision, infliction of emotional distress, failure Negligent hiring, retention, training or organizational polices and procedures, or violation of to provide or enforce adequate or consistent an individual's civil rights, when alleged in conjunction with respect to any of the foregoing items 1 through 13.


C. The Relevant Exclusions of the Policy

The Policy also contains a number of specific exclusions, two of which are at issue in this case. The Policy provides that the Insurer shall not be liable to make any payment for "Loss" in connection with any "Claim" made against the "Insured":

4. For violation of any of the responsibilities, Retirement Income Security Act of 1974, obligations or duties imposed by the Employees the Fair Labor

Standards Act (except the Equal Pay Act), the National Retraining Notification Act, the Consolidated Omnibus Labor Relations Act, the Worker Adjustment and Budget Reconciliation Act, the Occupational Safety & Health Act, any rules or regulations of any of the thereto foregoing promulgated thereunder, and amendments or any similar provision of federal, state or local statutory law or common law EXCLUSION shall not apply to Loss arising from a Claim

; provided this for employment related retaliation.


7. Brought by or on behalf of any Insured, an Insured Person..." except:...(b) an Employment Practices Claim brought by

Id. at p. 35 of 44 (underlined words bolded in original; italic emphasis added). The Policy defines "Loss" at Section II(K) as follows:

settlement, judgments (including pre- and post-judgment Loss means damages (including back pay and front pay),

Loss (other than Defense Expenses) shall not interest on a covered judgment) and Defense Expenses. include:... 5. Any amounts owed as wages to any Employee, other than front pay or back pay; 6. Civil or criminal fines or penalties.

Id. at p. 34 of 44 (underlined words bolded in original).

D. Tender of Claim and Response Thereto.

On February 15, 2008, CDI tendered the Gonzalez action to RSUI pursuant to the Policy. FAC ¶13. On March 3, 2008, RSUI denied coverage, asserting three specific exclusionary provisions. FAC ¶14. RSUI did not assert Exclusion 7 as a basis to deny coverage. Id. On May 5, 2008, CDI requested that RSUI reconsider its denial of the claim. Id. at ¶15. On May 14, 2008, RSUI conceded that two of the previously asserted exclusionary provisions (grounds) would not apply, absent a final and specific adjudication of certain conduct as against CDI. FAC ¶17. The only exclusionary provision RSUI relied on to deny coverage outright for the claim was Exclusion 4. Id.

E. March 20, 2009 Dismissal With Leave to Amend

In response to Defendant's initial motion to dismiss, Doc. 10, the decision examined whether RSUI lawfully relied upon Exclusion 4 to deny coverage, reasoning that Exclusion 4 bars any claim based upon a CLC provision similar to those of the FLSA. Doc. 24 at 11-24. RSUI's motion to dismiss was granted without leave to amend as to the first (failure to pay plaintiffs a minimum wage as required under CLC §§ 1197, 1194 and 1194.2), second (failure to pay regular and overtime wages in violation of CLC §§ 200, 204, 500, 510, 512, and 1194, and section 3 of Industrial Welfare Commission ("IWC") Wage Order 8), third and fourth (failure to provide meal and rest periods or pay an additional hour of wages based on CLC §§ 226.7 and 512, and Section 11 of IWC Wage Order 8) causes of action in the Gonzalez complaint. Id. at 25-35. RSUI's motion to dismiss was denied as to the applicability of Exclusion 4 to the fifth (failure to reimburse employees for costs incurred to acquire and/or maintain company-required uniforms in violation of CLC § 2802 and Section 9 of Wage Order 8), sixth (failure to comply with the itemized wage statement provisions contained in CLC §§ 226, 1174(d), and 1174.5, as well as Section 7 of Wage Order 8), and seventh (failure to pay wages due at termination, a claim founded upon CLC §§ 201, 202, and 203) causes of action in the Gonzalez complaint. Id. at 35-39.

As to the applicability of Exclusion 7, CDI's argument was rejected that RSUI should be estopped from asserting Exclusion 7 to deny coverage, because Exclusion 7 was not mentioned in the insurer's final ...

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