Insurance Coverage for Wage and Hour Litigation Claims

By Barry Buchman, Kami Quinn, and Jason Rubinstein

There has been a surge in wage and hour litigation recently, and it has been getting a lot of attention.  See, e.g., M. Huisman, Seyfarth Shaw Study Shows Increase in Wage and Hour Labor Suits, Corporate Counselor (July 27, 2012); J. Segal, The New Workplace Revolution: Wage and Hour Lawsuits, CNNMoney (May 29, 2012).  This surge is due, in large part, both to the Great Recession and to technological advances allowing work from remote locations.  See P. Davidson, Overworked and Underpaid, USA Today (Apr. 16, 2012).

An often overlooked component of a company’s protection from the financial consequences of this type of litigation is its insurance policies.

Most employers, for example, routinely purchase employment practices liability (EPL) coverage.  This coverage typically exists either in separately-purchased EPL policies or, particularly with private companies, in directors and officers (D&O) insurance policies that include an EPL coverage component.

Yet, there is a common misperception that these policies do not cover wage and hour lawsuits.  Insurance companies have created this misimpression by relying on two principal arguments.  First, they assert that amounts expended in wage and hour claims do not constitute “loss” within the meaning of these policies because the claims seek only uninsurable restitution, and second, they argue that coverage is barred by the Fair Labor Standards Act (FLSA) exclusion often found in these policies.

Companies, however, should not accept these contentions at face value.

First, as with all coverage issues, the specific language of the policy matters. Some definitions of “loss” are broader than others, and some FLSA exclusions are narrower than others.

Second, the allegations of the particular wage and hour claims are important.  Plaintiff lawyers usually assert multiple claims and allege various theories of liability.  If even a single claim or theory is within the scope of coverage, the employer may be entitled at least to partial coverage.

Third, consistent with the two points above, several recent court decisions have cast doubt on the insurance industry’s principal arguments.  For example, in SWH Corp. v. Select Insurance Co., 2006 WL 2786930 (Cal. Ct. App. Oct. 19, 2006), the court denied the insurers’ request for summary judgment on whether the amounts sought in a wage and hour suit were “restitution,” and thus not “loss,” under the policy.  The court also found that the underlying allegations did not come within the policy’s FLSA exclusion.  Similarly, in California Dairies Inc. v. RSUI Indemnity Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009), the court found that the policy’s FLSA exclusion applied to some, but not all, of the allegations against the company.

Fourth, an insurance company’s duty to pay for its insured’s defense is broader than its duty to cover judgments or settlements.  So, even if it is ultimately determined that an insurer is not obligated to cover an underlying wage and hour settlement or judgment, the insurer may still be obligated to cover defense costs in the interim.  This “litigation insurance” can be very valuable, because wage and hour suits often proceed as class actions, and the costs of defending such actions can be very substantial.

Employers also should be aware that some insurers do offer specialty policies designed to cover wage and hour claims.  These policies, however, frequently cover only defense costs and contain low limits of liability.  Furthermore, insurance companies often erroneously market such products on the premise that there is never wage and hour coverage under EPL policies.  Thus, although employers should consider whether such specialty coverage makes sense for their business, they should still preserve and, when necessary, exercise their right to pursue coverage under their EPL policies, which typically have higher limits.  The specialty policies also can differ materially from each other, so a careful review of any proposed policy language is warranted.

Regardless of whether an employer is currently facing wage and hour claims, there are steps that all companies can take now to put themselves in the best position to potentially secure insurance coverage should the need arise.

First, collect, organize and safeguard all of the company’s policies.  This includes an effort to identify and obtain policies issued to other pertinent companies, such as predecessors and current or former affiliates of your company.

Second, consider having an insurance professional audit the organization’s insurance portfolio to confirm that the company has the most complete and cost-effective coverage available.

Third, if the company becomes aware of the possibility of a wage and hour lawsuit, or is actually served with one, it should, with rare exceptions, promptly notify its insurers.

In sum, the coverage provided by insurance policies for wage and hour lawsuits can be an extremely valuable corporate asset.  Companies can maximize the benefits of this asset by acting proactively now, and by being willing to question coverage denials from their insurers.


Counterintuitive Strategies in Mediation

By Richard Shore

In an article just published in the Forbes Leadership Forum, I outline four counterintuitive strategies that harness the strengths of mediation rather than treating it as litigation light:

1.  Let the other side pick the mediator – agreeing to a mediator the other side likes can work in your favor, and save time and money to boot.

2.  Don’t argue about who is right – exchange views on the merits, but don’t let substantive disagreements hijack the process; remember that your goal in mediating is to reach a favorable settlement, not to win an argument.

3.  Leave the litigators at home – many litigators are good at settlement, but settlement calls for a different skill set and mindset than litigation; a separate settlement track allows you to use a diplomat to negotiate peace while the generals continue to fight the war.

4.  Deal with hard issues last – lock in a deal on a key term, usually money, and build the rest of the agreement on that foundation; even hard issues tend to fall into place once the parties believe they have a deal.

 Read the article here:

Fracking Risk and the Nationwide Underwriting Guidelines

By Kami Quinn and Michael Hatley

Nationwide Mutual Insurance Co. made headlines in the ongoing debate over hydraulic fracturing earlier this month, declaring that it won’t cover damage related to the controversial drilling process.

Hydraulic fracturing, commonly referred to as “fracking,” is a process in which a mixture of water, sand, and chemicals is injected into a drilling well at high pressure to fracture underground shale formations and release pockets of oil or natural gas.  Recent technological improvements have prompted an explosion in fracking activity, as oil and gas companies rush to develop new wells over major shale formations.

Proponents tout the enormous energy potential this technology represents, while environmental groups insist that fracking poses a number of significant environmental risks, such as the possibility for release of methane or fracking chemicals (which often contain potentially toxic compounds, including formaldehyde) into drinking-water wells.  Lawsuits related to fracking activities are currently being litigated across the United States, including in New York, Pennsylvania, Texas, Colorado, and West Virginia.  The majority of these suits have been filed against energy companies on behalf of individual property owners, primarily for property damage and personal injury resulting from water, soil, or air contamination. 

Nationwide entered the fray this month after an internal memo was posted on the websites of anti-fracking groups stating:  “After months of research and discussion, we have determined that the exposures presented by hydraulic fracturing are too great to ignore.  Risks involved with hydraulic fracturing are now prohibited for General Liability, Commercial Auto, Motor Truck Cargo, Auto Physical Damage and Public Auto coverage.”

Advocates of fracking were quick to criticize the company’s position.  Opponents of drilling, on the other hand, seized on Nationwide’s statement as evidence of the dangers inherent in the process.  Other observers wondered if this marked the start of a trend, with other insurance companies poised to follow suit.

Standing alone, however, Nationwide’s move will have little overall impact on who bears the financial impact of the risks involved in fracking, whether fracking operators or homeowners.  As a consumer-oriented insurance company, Nationwide is unlikely to have provided coverage for any of the oil and gas companies engaged in fracking in the first place. The energy company targets of fracking-related lawsuits typically carry specialty coverage designed for the industry and issued by specialty insurers. 

 As for homeowners, Nationwide would most likely deny coverage for costs related to fracking under its homeowners policies even in the absence of these guidelines.  As Nationwide has stated since the underwriting guidelines became public, those policies were never intended to cover fracking-type damages in the first place.  Indeed, standard homeowners’ policies regularly exclude coverage for the types of damage that might be caused by fracking, such as cracked foundations or contaminated drinking-water. 

To the extent that Nationwide’s position has an impact, it will be with respect to “secondary” defendants of fracking-related suits, including transportation companies that haul the potentially toxic materials and other smaller players on the jobsite.  Even these entities, though, are likely to look to the oil and gas companies’ coverage as their first line of defense. 

Litigation between energy companies targeted by fracking-related lawsuits and select insurers over the application of specialty drilling policies to fracking suits is likely, and to be sure, insurers in this industry will be looking closely at such lawsuits as they refine their own underwriting standards.  It is the response of these carriers in paying claims under existing insurance and in underwriting future coverage that will have a real impact on the allocation of fracking-related risks in the marketplace.   


Hot Stuff and Little Lady: Two Food Recall Insurance Coverage Cases with Two Different Outcomes

By Jonathan Cohen

A U.S. district judge in South Dakota has recently interpreted a provision of an accidental product contamination insurance policy in favor of the policyholder, finding that a recall resulting from the failure to include monosodium glutamate (MSG) on a product label constituted “accidental contamination” because MSG “may likely result in physical symptoms of bodily injury, sickness or disease or death of any person.”

This ruling marks a major win for policyholders, particularly because of the judge’s careful and convincing analysis of the terms of the policy in question and because the decision contrasts with another recent decision that had rejected coverage in similar circumstances.

Hot Stuff, a sausage manufacturer, had an insurance policy with Houston Casualty Company (HCC), covering it for expenses it incurred in connection with product tampering or product contamination. Due to a packaging error by Hot Stuff, sausages containing MSG were labeled as not containing it. Hot Stuff initiated a recall. It designated the recall as a Class III recall, which the FDA defines as involving products that “will not cause adverse health consequences.” Hot Stuff then turned to its insurer for coverage of the recall-related expenses. It contended that MSG was a contaminant under the policy’s terms and that it could cause bodily injury.

HCC denied the claim, and at trial it pointed to expert testimony that MSG likely could not cause bodily injury.

After Hot Stuff brought a declaratory judgment action and moved for partial summary judgment, Chief Judge Karen E. Schreier of the U.S. District Court for South Dakota ruled in Hot Stuff’s favor that its expenses were covered by insurance.

The court found that the correct inquiry was whether the policy terms providing coverage for a product that “may likely” cause illness would be satisfied if there were any possibility of illness resulting from the ingestion of MSG — or whether illness needed to be “a probability” for the coverage to be triggered. Under the plain reading of the policy, the court found that coverage would exist “if any person could experience physical symptoms of bodily injury, sickness or disease as a result of his or her exposure to the MSG-containing sausage.”

The judge found that even the insurance company’s expert agreed that, for a small subset of the population, physical symptoms possibly could result – and that was all that was required.

Alternatively, the court also found that since the term “may likely” in the insurance policy was ambiguous, any ambiguity must be resolved in favor of the insured. It was ambiguous because the word “may” refers to a possibility or a slight chance, while the word “likely” refers to a distinct probability.

The court’s decision in Hot Stuff is both a sensible result, given the language of the insurance policy, and a positive development upon which policyholders should rely when addressing coverage under recall policies.

The decision should give policyholders comfort, especially in contrast with the ruling of a judge in the U.S. District Court for the Northern District of Illinois in another recent case, Little Lady Foods, Inc. v. Houston Casualty Co., No. 10 C 8280 (N.D. Ill. Sept. 22, 2011), 

In that case, a food manufacturer recalled its product after testing revealed the presence of bacteria within the Listeria genus, which includes seven strains of bacteria. At the time of the recall, the company did not know whether the Listeria present in the product was the one strain of Listeria, Listeria monocytogenes, that causes bodily injury. After the recall, tests concluded that the Listeria that was present in the product was not the strain that could cause bodily injury. Based on these later tests, the court concluded that the recall did not trigger the policy’s requirement that the recall resulted from contamination that “may likely result in bodily injury.”

The Hot Stuff court distinguished Little Lady because it found that the undisputed evidence in the case proved that MSG might cause injury, whereas the Listeria at issue in Little Lady had no meaningful possibility of causing injury.

The Hot Stuff and Little Lady cases demonstrate that food companies considering recall coverage need to be vigilant about ensuring that they have the best possible coverage language to avoid the issues raised here. Companies also should not be daunted by an insurer’s efforts to avoid payment under its policies. There often are strong counterarguments to insurers’ positions that can lead to a successful outcome for the policyholder.

Victory for Elderly Policyholders in Conseco Case

 In a case that Gilbert LLP has pursued for several years on behalf of a certified class of thousands of policyholders who purchased life insurance from Conseco Life Insurance Company, our clients have just won a significant victory in the U.S. District Court for the Northern District of California.

A U.S. district judge’s July 17 decision to grant a preliminary injunction against Conseco marked a major win for the class, who are contending that Conseco is imposing unaffordable charges on some members of the class.

The Court ordered that Conseco must take immediate action to stop imposing these charges, known as cost-of-insurance charges, on some members of the class pending the outcome of a trial. The Plaintiffs affected are largely elderly policyholders who own life insurance policies called Lifetrend policies and who will lose their life insurance coverage before the end of next year because the cost-of-insurance and expense charges will deplete their policy accumulation accounts.

The Court held that the class is likely to prevail in the case based on the merits of its breach of contract claims against Conseco. The Court also held that the policyholders whose accumulation accounts will be exhausted before the end of next year because of the charges face irreparable harm.

The Court found that the policyholders who are unable to make the payments to sustain their policies will lose the peace of mind that comes with life insurance and that loss, the Court found, “cannot be remedied by money damages after the fact.”

In its opinion, the Court noted the case of a 91-year-old policyholder who already paid hundreds of thousands of dollars for his policy and recently faced deductions of over $7,000 per month in new cost-of-insurance charges.

We believe that this ruling is correct on the law and is also a significant step toward providing fairness and justice to our clients, elderly people whose savings were being depleted by the excessive insurance charges. Partner Craig Litherland says the decision represents “an important milestone in this litigation, and demonstrates that the Judge found the merits of plaintiffs’ case to be compelling.”

Andrea Hopkins, Michelle Price, Emily Grim, and Daniel Wolf also are working on the case.

How Far Can Lawyers Go in Researching Jurors on Social Media Sites?

By Barry Buchman and Emily Grim

As in any case, a favorable jury can be a key component to success in an insurance coverage trial. Selecting a sympathetic jury, however, is no easy task. Historically, jury selection has been akin to a guessing game, as practitioners have relied largely upon jury questionnaires or brief interviews during voir dire to glean information on the background and beliefs of potential jurors.

With the explosion in popularity of social networking sites such as Facebook, MySpace, Twitter, and LinkedIn, however, practitioners have a new weapon in their litigation arsenal: social media research.

Unlike jury questionnaires, which often reveal only basic information about a juror’s background, social media content can provide a unique window into a juror’s personal views, biases or affiliations. In insurance coverage cases, for example, an attorney might search for the following:

• A juror may have posted on Facebook, Twitter, or a personal blog some information about a past negative experience with his or her own insurance company, suggesting a potential lack of sympathy towards insurers.

• A juror may have expressed sentiments on Facebook, Twitter, or a personal blog that are critical of large corporations, potentially suggesting either lack of sympathy for an insurer or, conversely, lack of sympathy for large corporate policyholders.

Further, lawyers also may discover that one or more jurors themselves is violating court instructions by commenting about a trial online while it is in progress, or by following one or more of the trial participants, such as a lawyer or witness, online. This has been a growing problem, and courts recently have taken measures to address it.

Can a trial lawyer use such information to try to keep a juror out, or to try to make sure a juror stays in? Is this ethical?

There is an emerging consensus among courts and bar associations that social media research of jurors is legally and ethically permissible. Indeed, one court has gone so far as to indicate that at least some limited amount of such research is required, because of the obligation to represent a client zealously, within the limits of the law, when the information is available simply by going online and looking at a publicly available website. Recent ethics opinions indicate that viewing the public portion of a person’s Facebook page, for example, gives rise to no ethical implications, as the user has no privacy expectations concerning that content and the act involves no inappropriate or deceptive communications by the attorney. What if the juror had written a newspaper op-ed article about the topic? There would be no ethical reason not to read it and act accordingly.

However, a good deal of information on sites such as Twitter, Facebook, and LinkedIn can be accessed only by “friends” of the user on Facebook, those who “follow” the user on Twitter, those who are first-degree connections on LinkedIn, and so on. This information is not available to the general public. A trial lawyer who takes action to “friend” the prospective juror, to “follow” him or her on Twitter, or the like, in order to get access to the information, may well have crossed an ethical line – in this case, the rule against communicating directly with a juror. According to some ethics opinions, lawyers also may have to stop viewing even the publicly-available online information of a prospective or actual juror if the juror becomes aware of the monitoring, because of the risk that the juror will feel intimidated or harassed.

This area continues to be a rapidly evolving one, and thus there remain, of course, many unanswered questions regarding the legal and ethical boundaries around the use of social media in litigation. Stay tuned; we will continue to monitor this area and we will post updates.

Companies With Formaldehyde Risks Should Consider Insurance Issues Sooner, Not Later

By Kami Quinn and Emily Grim

In June 2011, the U.S. Department of Health and Human Services released a report identifying formaldehyde as a “known carcinogen” with possible ties to leukemia.

Commentators have speculated that this development may spur a wave of toxic tort litigation. Formaldehyde is used in a wide variety of products, including building materials, adhesives, fabrics and beauty products. The ubiquity of formaldehyde has put it on the list of torts that are mentioned as potentially “the next asbestos.”

There is some recent precedent for tort liability based on formaldehyde. In April 2012, thousands of Gulf Coast residents displaced by Hurricane Katrina won a $14.8 million settlement against companies that manufactured and installed FEMA-distributed travel trailers containing toxic levels of formaldehyde.

As defendants and potential defendants of formaldehyde-based claims are considering their defenses and strategies to reduce or avoid claims, they should be aware that insurers are also considering their own defenses against claims for coverage of these claims by policyholders. One insurer defense against these claims, the pollution exclusion, has already been litigated in Florida courts.

In In re FEMA Trailer Formaldehyde Products Liability Litigation, MDL NO. 07-1873 (Jan. 25, 2011), the court applied a total pollution exclusion in a commercial general liability policy to deny coverage to a company that provided trailers for use as temporary FEMA housing for damages related to the escape of formaldehyde-related fumes.

The wording of pollution exclusions vary, as does their interpretation under various state laws. Moreover, specialty policies are available to cover the “gap” in coverage created by this exclusion. Policyholders at risk for formaldehyde-based suits should evaluate closely their current coverage position with respect to these claims and what options may be available to them that would better spread their risk.

Insurers, however, are unlikely to invoke only pollution exclusions to avoid payment of these claims. In fact, insurers may rely on the same studies that defendants and potential defendants of formaldehyde suits use to refute causation to argue that “injury,” which triggers some insurance policies, only occurred at some point other than the policy period. Fights over appropriate trigger are familiar to those who have litigated coverage for other long-tail claims, but changing or different science could re-open those issues.

To minimize the ultimate financial impact of formaldehyde claims, policyholders must bear coverage issues in mind as they formulate their defense and carefully consider their arguments with respect to causation and injury.

This is not an exhaustive list of the likely coverage issues that will arise if formaldehyde becomes a significant mass tort, but these illustrations do make clear that a company with risks in this area would be well-advised to consider the insurance aspect of the issue sooner rather than later.

Welcome to “We’ve Got You Covered”

Welcome to the newly launched Gilbert LLP risk management and insurance recovery law blog, “We’ve Got You Covered.” In this blog, our attorneys will discuss new and interesting developments in the areas of strategic risk management and insurance coverage law, provide some insight into insurance-related issues behind the current headlines, and hopefully have some fun writing these posts.

As a firm that focuses on strategic liability and risk management and insurance  litigation and recovery for policyholders, we are not like other law firms — and this blog won’t be like other law blogs. If there’s a headline in the paper that may have hidden implications for insurance coverage or that might spark a high-stakes battle somewhere down the line, we’ll explain it.  It might involve unique issues in mass tort; it might involve a dispute over a failure to deliver products on time; it may involve a product recall; it could involve a bankruptcy restructuring; or it might involve issues that result from a breach of data privacy. We will look at each situation in a different way than you might expect.  The ideas we present will be unique and thought-provoking.

If a federal or state court interprets an insurance policy, either a standard clause or an unusual provision, in an interesting way, we will try to tell you what the decision means from a business perspective.

At Gilbert LLP, we are committed to solving our clients’ problems through negotiated settlement as often as possible. So occasionally we will write about the advantages of mediation or other forms of ADR and provide some tips for getting it done successfully.

We sometimes will talk about our own cases, but we don’t see promoting our wins as the primary purpose of this blog.  We enjoy helping our clients, who range from the largest companies in the world to individuals with a significant or complicated insurance problem, and we enjoy interpreting and writing about issues and interesting cases in the insurance world,  whether or not we’re directly involved in the case.

We view this blog as a way for us to communicate more directly with you — our clients, colleagues and friends.  We hope that through the articles we post you will get to know us better.  We hope that you will find our posts informative and entertaining.  We look forward to reading your comments on any of the articles we post.

Scott D. Gilbert

Miriam Smolen Joins Gilbert LLP

It is appropriate that on the day we launch our new blog, we announce with great pleasure that Miriam Smolen, most recently Associate General Counsel at Fannie Mae and former Assistant U.S. Attorney for the District of Columbia, has joined Gilbert LLP as partner.  Miriam will specialize in strategic risk  management and complex insurance coverage litigation, with particular emphasis on directors & officers liability, professional services liability, and financial services, housing and corporate compliance issues.

With the addition of Miriam to the firm, we continue to broaden and strengthen our core insurance litigation practice.  We are a unique law firm, specializing in strategic risk management and insurance recovery.  Miriam’s extensive experience and knowledge will be a great asset to the firm and to our clients.  We are extremely pleased that she is joining the Gilbert team.

You can reach Miriam directly at or 202-772-2255.