The Fourth Circuit recently held that an insured’s failure to pay its employees’ wages in accordance with the Fair Labor Standards Act triggered the insurer’s duty to defend under a commercial package insurance policy. In Republic Franklin Ins. Co. v. Albemarle County School Board, the court determined that to the extent a judgment arising from an FLSA claim included liquidated damages and attorneys’ fees, it amounted to a loss under the policy resulting from a “wrongful act.”
Several transportation workers employed by a Virginia school board alleged that the board had not paid them for all the work they had done and failed to pay overtime. The workers demanded liquidated damages and attorneys’ fees. Republic agreed to defend the board under a reservation of rights, contending that the FLSA violations were not “wrongful acts” and that any judgment that might be entered would not impose “losses” under the policy.
Republic won summary judgment at the district court, but the Fourth Circuit reversed. The court determined that the FLSA violation did constitute a “wrongful act” under the policy, and differentiated between a judgment awarding unpaid wages – a preexisting duty, and thus not a “loss” – and an award of liquidated damages and attorneys’ fees. The court reasoned that because the latter resulted specifically from a claim for an alleged wrongful act, it was a covered loss under the policy.