West Marine Products v. National Union Fire Insurance Company of Pittsburgh

Background

West Marine sought insurance coverage for two state-court wage-and-hour lawsuits: the Adams Action and the Wade Action. West Marine alleged that National Union owed duties to defend and indemnify it in the Adams Action, and that Westchester owed duties to defend and indemnify it in both actions. The complaint asserted eight causes of action, including breach of contract, bad faith, and declaratory relief. Federal Insurance Company, a third defendant, had already been voluntarily dismissed.

The Adams Action asserted California Labor Code claims involving overtime, minimum wages, meal and rest breaks, wage statements, payroll records, timely payment of wages, a California unfair-competition claim, and a claim under the Private Attorneys General Act. The Wade Action asserted a single Private Attorneys General Act claim alleging numerous California wage-and-hour violations, as well as alleged failures to reimburse business expenses and provide adequate seating.

Discovery Request

West Marine asked the court to deny the dismissal motions until it could obtain discovery about policy underwriting and negotiation, policy drafting, claims handling, and claims submitted by other insureds. The court denied the request. It held that the policies were not ambiguous and that West Marine had not identified a plausible basis for believing that extrinsic evidence would show a different contractual meaning.

National Union Coverage

The court held that the Adams Action did not fall within the National Union policy’s definition of an Employment Practices Violation. The alleged wage-and-hour violations did not constitute a covered wrongful dismissal, discharge, or termination, including the policy’s reference to breach of an implied contract. The court rejected West Marine’s argument that California employment contracts implicitly required compliance with the California Labor Code.

The court also held that the Adams Action did not allege a covered employment-related misrepresentation. The claim concerning inaccurate wage statements did not require a misrepresentation, and related allegations about inaccurate wage statements, payroll records, and alleged false representations were background or predicate allegations rather than separate covered claims. The court further held that the policy’s coverage for failure to provide or enforce corporate policies and procedures was limited to failures connected to another listed Employment Practices Violation; because the Adams Action alleged wage-and-hour violations rather than a covered Employment Practices Violation, that provision did not provide coverage.

Independently, the court held that National Union’s wage-and-hour exclusion barred coverage. The exclusion applied to violations of the Fair Labor Standards Act or similar state laws, as well as failures to pay wages or overtime and failures to provide legally required meal or rest breaks. The court concluded that the Adams claims, including related wage-statement, payroll-record, timely-payment, unfair-competition, and Private Attorneys General Act claims, arose from or were connected to those excluded wage-and-hour allegations.

The court therefore dismissed the first cause of action for breach of the duty to defend and indemnify, the second cause of action for bad faith, and the third cause of action for declaratory relief against National Union. The dismissal was without leave to amend because amendment would be futile.

Westchester Coverage for the Adams Action

The court rejected West Marine’s argument that the Adams Action involved covered breach-of-implied-contract or employment-related-misrepresentation claims. Although some allegations could arguably be characterized as a wrongful failure to adopt or enforce workplace practices, the court held that the Westchester exclusion applied. The exclusion broadly covered claims involving unpaid wages, related laws, and violations of laws similar to the Fair Labor Standards Act.

The court dismissed the fourth cause of action for breach of contract based on the Adams Action and the portion of the seventh cause of action for declaratory relief directed to that action. It held that Westchester had no duty to defend or indemnify the Adams Action.

Westchester Coverage for the Wade Action

The court held that nearly all alleged conduct in the Wade Action was excluded for the same reasons applicable to the Adams Action. However, the allegations concerning failure to reimburse necessary business expenses under California Labor Code sections 2800 and 2802, and failure to provide adequate seating, could potentially involve a covered failure to adopt or enforce workplace practices and might not be related to wages. The court therefore granted in part and denied in part the motion to dismiss the fifth cause of action as to the duty to indemnify. West Marine could proceed only to the extent that its indemnity claim was based on those two categories of allegations.

The court separately held that Westchester had no duty to defend the Wade Action. Under the policy, when a claim was partly excluded, the insured—not the insurer—had the duty to defend. The portion of the fifth cause of action alleging a breach of the duty to defend was dismissed.

Bad Faith and Final Disposition

The court dismissed the sixth cause of action for bad faith to the extent it was based on the Adams Action because there was no coverage, but held that the claim remained legally cognizable to the extent it was based on the Wade Action. The motion to dismiss the sixth cause of action was therefore granted in part and denied in part.

In its conclusion, the court granted National Union’s motion to dismiss the first, second, and third causes of action without leave to amend. It granted Westchester’s motion in part by dismissing, without leave to amend, the Adams-related contract claim; the Wade indemnity claim for specified wage-and-hour allegations; the Wade defense claim; the Adams-related portion of the bad-faith claim; and the Adams-related declaratory-relief claim. Westchester’s motion was denied in all other respects. West Marine could file a narrowly tailored amended complaint against Westchester by December 10, 2021.