Alleged Violations of Fair Labor Standards Act and New York Labor Law Not “Wrongful Acts” Under Employment Practices Liability Policy

The Eastern District of New York, applying New York law, has held that alleged violations of the New York Labor Law (NYLL) and the Fair Labor Standards Act (FLSA) did not constitute covered “Wrongful Acts” as defined by the applicable employment practices liability insurance policy.  Sirob Imports Inc. v. Mount Vernon Fire Ins. Co., 2020 WL 1550587 (E.D.N.Y. Mar. 31, 2020).  However, the court concluded that such allegations were ultimately covered under the policy’s Fair Labor Standards Act Sub-Limit Endorsement because the two statutes were “similar.”

The insurer issued to the insured company an employment practices liability insurance policy, which provided coverage for “Claims” for “actual or alleged” “Wrongful Acts.”  An exclusion in the policy barred coverage for Claims arising out of “violations of the [FLSA], any amendments thereto, or any similar provisions of any federal, state, or local law.”  However, the Policy also included a Fair Labor Standards Act Sub-Limit Endorsement, which provided coverage for Claims for actual or alleged violations of the FLSA “or the provisions of any similar federal, state or local law.”

In the underlying action, two employees filed suit against the insured asserting overtime and other compensation claims under the FLSA and the NYLL.  The insurer filed a declaratory judgment action to determine coverage for those claims under the policy.

First, the court held that the complaint’s allegations did not qualify as “Wrongful Acts” as defined by the policy.  The court rejected the insured’s argument that the NYLL claims were covered by the insuring provision as claims for “Wrongful Acts” because the underlying action alleged facts “that [could] bring the matter within” the definition of one of the “Wrongful Acts,” even if no claim for that act was actually asserted.  The court reasoned that the policy’s language clearly provided coverage for “Claims,” but not for any tort that conceivably might be asserted based on the allegations in the complaint.  The court also rejected the insured’s attempt to distinguish “actual” from “alleged” “Wrongful Acts,” stating that such an interpretation was “nonsensical” because “it would make no sense for [the insurer] to issue a policy where the scope of coverage depended on a legal analysis of all claims a plaintiff might be able to bring, where that plaintiff has failed to do so or indicate an intent to do so.”

The court also rejected the insured’s argument that the alleged NYLL claims alleged “Wrongful Acts” because the conduct “could be potentially construed as a covered ‘failure to enforce written policies and procedures relating to any Wrongful Act.’”  The court noted that “not every act that is ‘wrongful’ in the colloquial sense is a ‘Wrongful Act,’” and that the conduct at issue had “nothing to do with a failure to enforce written policies or procedures.”  The court further highlighted that the insured ignored the policy’s exclusion for violations of the FLSA or “any similar provisions of any federal, state, or local law,” such as the NYLL.

Second, the court determined that all of the claims alleging FLSA and NYLL violations were covered under the Sub-Limit Endorsement because the NYLL was “similar” to the FLSA for purposes of the Endorsement.  The court noted that the NYLL regulates employee compensation, a central component of the FLSA, and a component expressly included in the Endorsement’s description of “similar” state labor law provisions.