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Admiral Ins. Co. v. Kay Auto. Distribs., Inc.

United States District Court, C.D. California

January 29, 2015

KAY AUTOMOTIVE DISTRIBUTORS, INC., a California corporation; ANNETTE KARDISH, a California resident; JONA KARDISH, a California resident; JESSICA KARDISH, a California resident ; CHRISTOPHER INGRAM, a California resident, Defendants

For Admiral Insurance Company, Plaintiff: Robert D Hoffman, LEAD ATTORNEY, Charlston Revich and Wollitz LLP, Los Angeles, CA.

For Christopher Ingram, a California Resident, Defendant: Barbara J Mandell, Mandell & Associates PC, Woodland Hills, CA; Kirk A Lauby, Donner Fernandez & Lauby, Riverside, CA.


[Dkt. Nos. 30, 36]

DEAN D. PREGERSON, United States District Judge.

Presently before the Court are cross motions for summary judgment, filed by Plaintiff and by Defendant Christopher Ingram (" Ingram" ), on the issue of the extent of coverage under an insurance contract purchased by Defendant Kay Automotive Distributors (" Kay" ). Having heard oral arguments and considered the parties' submissions, the Court adopts the following order.


Kay employed Ingram as a delivery-person from 2007 to 2011. (State Court First Amended Complaint[1] (" State FAC" ), ¶ 4.) Ingram alleges that Kay required workers to make deliveries off the clock, forced employees to accept paid time off in lieu of overtime pay, and required employees to skip meals and rest breaks. (Id. at ¶ ¶ 16-18.) He also alleges that he did not receive all the pay that was due to him at the end of his employment, including reimbursement for business expenses. (Id. at ¶ 20.)

Kay purchased an " Employment Practices Liability Insurance" contract from Plaintiff with an effective policy period of September 6, 2010 to September 6, 2011. (Decl. Barbara Mandell, Ex. A at 62.) The policy covered wrongful acts by Kay against its employees, but it excluded certain claims

based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any federal, state, local or foreign wage and hour laws, including, without limitation, the Fair Labor Standards Act; provided, however, the Insurer will pay Costs of Defense up to, but in no event greater than $100,000, for any such Claims, without any liability by the Insurer to pay such sums that any Insured shall become legally obligated to pay as Damages . . . .

(Id. at 66-67.)

Plaintiff brings this action seeking declaratory judgment that the above exclusion relieves it of any duty to indemnify Kay for Ingram's claims and limits its liability for costs of defense to $100,000. (Dkt. No. 1.) The parties have brought these motions for summary judgment to settle the legal questions of contract interpretation involved. (Dkt. Nos. 30, 36.)


Summary judgment is appropriate where the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show " that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and of identifying those portions of the pleadings and discovery responses that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). All reasonable inferences from the evidence must be drawn in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Once the moving party meets its burden, the burden shifts to the nonmoving party opposing the motion, who must " set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256. Summary judgment is warranted if a party " fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. A genuine issue exists if " the evidence is such that a reasonable jury could return a verdict for the nonmoving party," and material facts are those " that might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248. There is no genuine issue of fact " [w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).


A. Contractual Terms

The parties agree that the contract is governed by California law. (E.g., Ingram's Memo. P. & A. ISO Mot. Summ. J. at 2:4; Plaintiff's Memo. P. & A. ISO Mot. Summ. J. at 13:23.) Under California law, " [t]he language of a contract is to govern its interpretation, if the language is clear and explicit." Cal. Civ. Code § 1638. " The words of a contract are to be understood in their ordinary and popular sense . . . unless used by the parties in a technical sense, or unless a special meaning is given to them by usage . . . ." Cal. Civ. Code § 1644. " When a dispute arises over the meaning of contract language, the first question to be decided is whether the language is 'reasonably susceptible' to the interpretation urged by the party. If it is not, the case is over. If the court decides the language is reasonably susceptible to the interpretation urged, the court moves to the second question: what did the parties intend the language to mean." S. Cal. Edison Co. v. Superior Court, 37 Cal.App.4th 839, 847-48, 44 Cal.Rptr.2d 227 (1995) (citations omitted).

" When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible . . . ." Cal. Civ. Code § 1639. However, the written contract may be ambiguous if " on its face, it is capable of two different reasonable interpretations." United Teachers of Oakland v. Oakland Unified Sch. Dist., 75 Cal.App.3d 322, 330, 142 Cal.Rptr. 105, 110 (Ct.App. 1977). Ambiguities in a form contract that cannot otherwise be resolved are resolved against the drafter. Oceanside 84, Ltd. v. Fid. Fed. Bank, 56 Cal.App.4th 1441, 1448, 66 Cal.Rptr.2d 487 (1997). In the case of insurance contracts, especially, " coverage is interpreted broadly so as to afford the greatest possible protection to the insured, whereas exclusionary clauses are interpreted narrowly against the insurer." MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635, 648, 3 Cal.Rptr.3d 228, 73 P.3d 1205 (2003) (internal quotation marks, brackets, and ellipses omitted).

1. Meaning of " Wage and Hour Laws"

The parties dispute the meaning of the phrase " any federal, state, local or foreign wage and hour laws, including, without limitation, the Fair Labor Standards Act" in the contract. Ingram argues that this phrase " could only have been intended to refer to wage and hour laws that are similar to the FLSA [Fair Labor Standards Act]." (Ingram's Opp'n at 6:10-11.) Ingram argues that if it were interpreted otherwise, the reference to the FLSA would be superfluous. (Id. at 6:13-16.) Additionally, Ingram points to the interpretive canon of " ejusdem generis," which requires that " where specific words follow general words in a contract, the general words are construed to embrace only things similar in nature to those enumerated by the specific words." Pfeifer v. Countrywide Home Loans, Inc., 211 Cal.App.4th 1250, 1275, 150 Cal.Rptr.3d 673, (2012) (internal quotation marks omitted).

The first inquiry is whether the contract language is reasonably susceptible to Ingram's interpretation. The Court finds that it is not. There is little ambiguity in the phrase " any federal, state, local or foreign wage and hour laws." [2] It describes four possible sources of law dealing with laborers' wages and hours worked, and it excludes claims based on any such law. That the sentence also specifies that those laws " includ[e], without limitation, the Fair Labor Standards Act" does not neutralize the word " any," nor does it change the meaning of the phrase " wage and hour laws." By way of analogy, if an insurance contract excluded claims based on damages caused by " any natural disaster, including hurricanes," it would be unreasonable to read the exclusion as not encompassing earthquakes or volcanoes, just because earthquakes and volcanoes are not composed of wind and rain.

Ingram cites to California Dairies Inc. v. RSUI Indem. Co., which held that " it would not be reasonable to find that" California statutory provisions regarding reimbursement of business expenses " are 'similar'" to the FLSA, because the FLSA contains no such provision. 617 F.Supp.2d 1023, 1045 (E.D. Cal. 2009). But California Dairies only underscores the flaw in Ingram's interpretation of the contract. In that case, the contract excluded claims " [f]or 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 . . . ." Id. at 1029 (emphasis added). California Dairies shows, then, that when parties want to limit the exclusion to provisions of state law similar to FLSA, they can do so in plain language.[3] Here, the contractual language is different, and unambiguously so.

The Court finds that the contract's language regarding " wage and hour laws" is not susceptible to Ingram's interpretation. Rather, the phrase refers to, in relevant part, sections of the California Labor Code dealing with the pay and hours of workers, whether or not it is " similar" to FLSA.

B. Meaning of " Based Upon," " Arising Out Of," and Other Relational Language

The interpretive inquiry is not at an end, however. The contract excludes not just claims directly authorized by wage and hour laws themselves, but claims " based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving" such laws. Plaintiff argues that " arising out of," in particular, is " consistently given a broad interpretation . . . in various insurance provisions," that it requires " only a minimal causal connection or incidental relationship" to the thing or things listed, and that it means " a claim need only be 'slightly connected to one of the types of injury that is specifically identified for exclusion.'" (Pl.'s Opp'n at 16 (quoting Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal.App.4th 321, 328, 81 Cal.Rptr.2d 557 (1999) and Continental Cas. Co. v. City of Richmond, 763 F.2d 1076, 1081 (9th Cir. 1985)).)

Ingram, on the other hand, argues that such a broad interpretation would exclude far more claims than the parties could possibly have intended, including " a sexual harassment claim based on a request for sexual favors in exchange for proper payment of overtime wages" and " a claim by an employee who was wrongfully terminated because he refused to work overtime unless he was paid at an overtime rate." (Ingram's Reply at 8.)

The Court agrees with Ingram that such results cannot be the intended effect of the exclusion. Rather, the exclusion must be read in light of its presumed purpose. The purpose of wage and hour exclusions, as the Seventh Circuit has noted,

is to avoid moral hazard, which, in its most extreme form, is the temptation of an insured to precipitate the event insured against if the insurance goes beyond merely replacing a loss . . . . Insurance against a violation of an overtime law, whether federal or state, would enable the employer to refuse to pay overtime and then invoke coverage so that the cost of the overtime would come to rest on to the insurance company. The employer would have violated the overtime law with impunity, unjustly enriching itself by the difference between the overtime wage for the hours in question and the straight wage. No insurance company would knowingly write a policy that would enable the insured to trigger coverage any time it wanted a windfall.

Farmers Auto. Ins. Ass'n v. St. Paul Mercury Ins. Co., 482 F.3d 976, 978-79 (7th Cir. 2007).

With that purpose in mind, it would seem that a wage and hour law exclusion of the kind at hand (absent very clear language to the contrary) serves only to exclude wrongdoing where the wrongful act has the effect of offloading labor costs to the insurer, and only to the degree that the claim rests on or involves violations of the wage and hour statutory scheme.[4] Other claims as to wrongdoing by the employer or its agents would not be excluded, even if they affected wages; to hold otherwise would render this type of insurance policy (for " employment practices liability" ) largely illusory.

C. Application to Ingram's Claims

Ingram brings claims for the following: (1) misrepresentation; (2) failure to pay minimum, regular, and overtime wages; (3) failure to provide mandated meal periods; (4) failure to provide mandated rest periods; (5) failure to make payments within the required time; (6) failure to provide itemized wage statements; (7) failure to maintain adequate records as to wages and hours worked; (8) failure to reimburse business expenses; (9) violation of California's unfair competition statute; and (10) a claim under the Private Attorneys General Act (" PAGA" ), alleging multiple violations of the California Labor Code. (FAC generally.)

1. Violations of Labor Code Provisions Regarding Wages and Hours

Claims (2)-(7) above are predicated directly on violations of sections of the California Labor Code dealing explicitly with wages and hours: to wit, § § 204 & 1197 (minimum wage); § § 510 & 1198 (maximum hours and overtime pay); § § 226.7 & 512 (meal and rest periods); § § 201, 202, 203 (timing of payment of wages); and § § 226 & 1174 (record-keeping). These are all, without dispute, " wage and hour laws" under the exclusion provision.[5]

2. Violation of the Labor Code Provision Regarding Reimbursement of Business Expenses

Claim (8) is predicated on Kay's alleged violations of Cal. Labor Code § 2802, which requires that " [a]n employer . . . indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . . ."

There are nontrivial arguments that § 2802 does not fall within the meaning of " wage and hour laws." The section's plain language does not directly touch on wages paid or hours worked. Moreover, it does not fall under Division 2 of the Labor Code, which contains the minimum wage, overtime, rest period, payment timing, and record-keeping provisions listed above. Rather it falls under Division 3, " Employment Relations," which governs more general obligations of employers and employees to each other.[6] Codification under Division 3 is not necessarily dispositive of whether a section deals with wages -- for example, § 2928 deals with wage deductions for tardiness -- but it might indicate that the section is somewhat isolated from the wage and hour statutory scheme. Finally, to the degree that the wage and hour law exclusion is ambiguous as to § 2802, interpretive canons favor resolving the ambiguity against the insurer and in favor of coverage.

On the other hand, § 2802 is frequently paired with the Division 2 sections listed above in actions against employers who allegedly underpay their employees; often such actions are described as " wage and hour" actions by the courts, without distinguishing the business expense claim.[7] And this makes sense. The function of § 2802 parallels the function of the minimum wage and other wage and hour laws -- they all prevent employers from offloading expenses onto their employees, whether by wage theft or by failing to reimburse them for business costs. And similarly, the logic of the wage and hour exclusion applies to § 2802 -- employers should not be able to obtain a windfall by forcing their insurers to reimburse their employees for the employer's expenses.

The Court therefore finds that § 2802 is also a wage and hour law and subject to the exclusion.

3. Misrepresentation Claim

Ingram's first claim, for misrepresentation, is a common law claim, and so it is not a wage and hour claim per se. Moreover, as discussed above in Part III.B, it is possible to frame a misrepresentation claim that touches on wages but that is not " based on" or " arising out of" or otherwise rooted in the wage and hour laws. If, for example, an employee alleged that her employee promised her a $100,000 salary, and in reliance on that promise she moved to her detriment, only to find that the actual salary was $75,000, that would not be a claim " based on, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving any federal, state, local or foreign wage and hour laws," even though the claim involved wages.

Here, however, Ingram's FAC alleges only that Kay made false statements " regarding the law pertaining to wages and working conditions and/or its compliance with the law." [8] (FAC, ¶ 32.) The FAC specifically states that Ingram and other employees relied on false " wage and hour representations." (Id. at ¶ 36.) The damages Ingram seeks are not damages resulting from some independent falsehood and reliance, but merely damages for " earned but unpaid minimum, regular, overtime and premium wages." (Id. at P 37.)

This misrepresentation claim arises directly out of the wage and hour laws and is subject to the exclusion.

4. Unfair Competition Law Violations

Claim (9), for violations of California's Unfair Competition Law (" UCL" ), is also not a wage and hour claim per se. The UCL is a law barring unfair business practices, usually in the context of gaining an unfair edge against competitors. Cal. Bus. & Prof. Code § 17200 et seq. But, as with the misrepresentation claim, there is no substantive harm alleged outside of failure to abide by the Labor Code provisions: " Defendants engaged in conduct that violated California's wage and hour laws . . . ." (FAC, ¶ ¶ 113-116.) Thus, this claim, too, arises out of wage and hour laws and is subject to the exclusion.

5. PAGA Claim.

Similarly, Ingram's action as a " private attorney general" under Cal. Labor Code § 2699 is specifically predicated on the violations of the wage and hour laws. (FAC, ¶ 120.) It, too, arises out of the wage and hour laws and is subject to the exclusion.

C. Plaintiff's Duties

Because all of the claims in the FAC either involve direct allegations of violations of California's wage and hour laws or arise out of such alleged violations, the exclusion from coverage applies to all the claims, and Plaintiff has no duty to indemnify Kay as to any of the claims. Additionally, Plaintiff's liability for the cost of defending the claims is limited to $100,000.


Plaintiff's motion for summary judgment is hereby GRANTED. Defendant Ingram's motion for summary judgment is hereby DENIED.


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