Insurance – Commercial – Schools & School Boards – Labor & Employment – Unpaid Overtime

Republic Franklin Ins. Co. v. Albemarle County School Board (Lawyers Weekly No. 12-01-0243, 12 pp.) (Niemeyer, J.) No. 10-1961, Feb. 24, 2012; USDC at Charlottesville, Va. (Moon, J.) 4^th Cir. Full-text opinion.

Holding: An Albemarle County school board’s failure to pay its school bus drivers and transportation assistants overtime pay under the Fair Labor Standards Act was a “wrongful act” under the school board’s commercial insurance policy, and the policy does not cover wage payments but should cover liquidated damages and attorney’s fees, the 4^th Circuit says.

The district court entered summary judgment for the carrier, declaring it owed no duty to defend or to indemnify the school board. The district court said the insured’s negligent, willful or intentional failure to honor a pre-existing obligation to pay money is not a “wrongful act” as that term is used in the policy. On appeal, the school board argues only that the claims for liquidated damages and attorney’s fees were not preexisting obligations, as were the damages, but damages resulting specifically from its wrongful acts in not paying the FLSA-required wages.

The policy at issue defines “wrongful act” as any breach of duty, neglect, error, omission, misstatement or misleading statement in the discharge of “educational institution” duties.

While a preexisting duty might be relevant to whether an insured suffers an insurable loss, it cannot be relevant to whether the insured is the subject of a claim for a wrongful act. Every duty breached or violated is necessarily a preexisting duty and it is the breach or violation of that duty which constitutes a wrongful act. The school board’s alleged failures are breaches of the duty imposed by the FLSA and therefore wrongful acts. By its plain language, the policy covers claims for the wrongful acts alleged in the underlying complaint.

Confusingly, the carrier conflates the concepts of “wrongful act” and “loss,” failing to recognize that a breach of a preexisting duty to pay is a wrongful act but that the resulting obligation to pay back wages may not be a loss resulting from that wrongful act. Such loss could only arise if the failure to fulfill the preexisting duty to pay wages caused “damages” apart from the back wages not paid.

We conclude the underlying FLSA complaint in this case alleges “wrongful acts” on the part of the school board within the meaning of the policy at issue.

We have already agreed with the school board that the preexisting duty doctrine eliminates back wages from the definition of “loss.” Because the underlying FLSA complaint against the school board asserts claims for liquidated damages and attorney’s fees arising, not from a preexisting duty but because of the school board’s alleged wrongful acts, we conclude they are damages resulting from a claim for the alleged wrongful act and therefore are covered losses.

We hold that any judgment against the school board, to the extent it would include liquidated damages and attorney’s fees, would amount to a “loss,” as defined in the policy, resulting from a claim for a “wrongful act.” Because the policy provides coverage for this loss, we reverse the district court judgment.

Judgment for carrier reversed.