Suit for Reimbursement of Beauty School Expenses Under California Labor Law Triggers Duty to Defend Despite Wage and Hour Exclusion

The United States District Court for the Southern District of California, applying California law, has held that an employment practices liability policy’s wage and hour exclusion does not apply to a claim for reimbursement of reasonable business expenses under the California Labor Code.  Hanover Ins. Co. v. Poway Acad. of Hair Design, Inc., 2016 WL 6698936 (S.D. Cal. Nov. 14, 2016).

The insureds, two beauty academies, were sued by a student for payments for her work in one of the academy’s teaching salons.  The student’s complaint alleged six claims against the insureds under the California Labor Code (CLC), including a claim for reimbursement of reasonable business expenses under CLC § 2802.  In particular, the student sought reimbursement for a “kit” of beauty tools and educational materials that the academy required her to purchase in order to work at the salon.

The two beauty academies had employment practices liability insurance policies that contained a wage and hour exclusion for claims for loss arising out of a violation of any state law “that governs wage, hour and payroll policies and practices.”  The insurer denied coverage and instituted coverage litigation.  The insureds admitted that five of six of the student’s claims fell under the exclusion but argued that the student’s claim under CLC § 2802 for reimbursement of expenses was not excluded, triggering the insurer’s duty to defend the entire lawsuit.

The court denied the insurer’s motion for summary judgment, holding that CLC § 2802 is not a wage and hour law.  The court found that CLC § 2802 has broader purposes than a typical wage and hour statute, such as providing employee indemnification for third-party suits.  The court also reasoned that the kit at issue included educational materials, and reimbursement for such materials would not necessarily be compensation.  While the court acknowledged that at least one other case characterized a similar claim as one for reimbursement of wages, the court opined that it is unclear whether CLC § 2802 is a wage and hour claim under California law, and so the insurer had to defend the insured’s suit.

The court also denied the insurer’s claim for reimbursement of defense costs for the non-covered claims.  While the court acknowledged the insurer’s right to recoupment, the court found that the insurer had not proven, by a preponderance of the evidence, that the defense costs it sought were allocated solely to the non-covered claims.