Republic Franklin Ins. Co. v. Albemarle County School Board (4th Cit. (Va.) Feb. 24, 2012)
The Fourth Circuit recently held that an insured’s violation of the Fair Labor Standards Act (“FLSA”) constituted a “wrongful act” within the meaning of a school board’s insurance policy, triggering the insurer’s duty to defend. Although the court found that the policy did not cover unpaid wages arising from the school board’s violations, it concluded that the school board was entitled to coverage for any liquidated damages or attorneys’ fees assessed under the statute.
In January 2010, several transportation workers employed by the Albemarle County School Board (“the Board”) in Virginia filed suit under the FLSA on behalf of themselves and other employees similarly situated for unpaid wages and overtime pay. The workers asserted that they were not paid at the premium overtime rate when they worked for more than 40 hours in a week. As a result of the Board’s FLSA violations, the workers demanded unpaid wages, overtime pay, liquidated damages as authorized by the FLSA, and attorneys’ fees.
The Board promptly tendered its defense and indemnity to Republic Franklin Insurance Company (“Republic”), which had issued a “commercial package” insurance policy to the Board. Republic agreed to defend the Board against the action, but reserved its rights to challenge coverage on two grounds, including (1) that the Board’s violations of the FLSA did not constitute a “wrongful act” within the meaning of the policy; and (2) that the complaint did not allege a “loss.” In the ensuing declaratory judgment action, the district court agreed with Republic’s coverage position, finding that the Board’s violations of the FLSA did not amount to a “wrongful act,” reasoning that “[t]o find otherwise could encourage parties to routinely circumvent the requirements of the FLSA—whether negligently, willfully, or intentionally—because they have nothing to lose.”
The Fourth Circuit reversed, thereby rejecting Republic’s argument that the Board’s FLSA violations did not constitute a “wrongful act” because it had a preexisting duty to comply with the statute. The Fourth Circuit noted that “every duty breached or violated is necessarily a preexisting duty, and it is the breach of violation of that duty which constitutes the wrongful act.” The Fourth Circuit went on to find that although the policy did not coverage unpaid wages or overtime, it did cover liquidated damages and attorneys’ fees under the FLSA because such damages were compensatory, not punitive in nature.
For a copy of the decision, click here