Insured Must Prove That Claim Falls Within Insuring Agreement


Insured Learns No Insurance Policy Insures Against Every Risk

People who buy liability insurance want it to cover every possible risk faced by the insured. When a loss or claim occurs the read the policy, perhaps for the first time, only to find the policy does not cover every possible risk and that, to get coverage, the insured is obligated to prove that the policy’s insuring agreement agreed to defend or indemnify the insured against the suit brought against the insured.

In W.G. Hall, LLC v. Zurich American Insurance Company, United States District Court Northern District Of California, Case No. 17-cv-00646 NC (August 31, 2017) W.G. Hall, LLC (WGH), a staffing services company, settled a wage and hour class action lawsuit. Before and after settling the class action, WGH sought coverage from its professional liability insurer, Zurich American Insurance Company for the amount it would pay out in the settlement agreement. Zurich refused to reimburse WGH for the settlement amount on several grounds, and WGH sued Zurich for breach of contract and derivative claims.

WGH seeks summary judgment on its claims for breach of contract and declaratory relief, as well as a judgment from the Court that none of five affirmative defenses raised by Zurich are applicable in this case. Zurich opposes WGH’s motion and seeks summary judgment on its behalf as to the entire case.


On November 27, 2013, Zurich issued to WGH an insurance coverage package effective from December 1, 2013, through May 19, 2015.  That package contained Professional Liability coverage.

WGH is a staffing services company, which hires and trains staffing services workers and furnishes them to its clients. Even when its employees are working directly for WGH’s clients, WGH remains the employer of record for its employees and provides payroll services for its clients for the work its employees perform. In 2014 and 2015, Danny Isquierdo and Freddy Robledo filed putative class actions against WGH, which were later consolidated in July 2015 (Isquierdo and Robledo litigation).

The alleged actions giving rise to these claims were that WGH failed to compensate its employees “for internal orientations, client orientations, reporting and consultations, post-assignment termination meetings, client interviews, related travel and other work off the clock. . . .”  WGH and the class reached a settlement, and the court preliminarily approved the class action settlement. Both parties agree that WGH reach a settlement without Zurich’s consent.


The burden is on the insured to bring the claim within the basic scope of coverage, and (unlike exclusions) courts will not indulge in a forced construction of the policy’s insuring clause to bring a claim within the policy’s coverage.  The burden falls upon the insurer to phrase exceptions and exclusions in clear and unmistakable language.

The Disputed Policy Text

The insurance policy at issue here provides the following: “We will pay those sums that the insured becomes legally obligated to pay as ‘damages’ because of any ‘claim’ arising from a ‘wrongful act’ to which this insurance applies. The ‘wrongful act’ must take place: a. During the policy period; and b. In the ‘coverage territory.'”

Construction of “Wrongful Act”

In both motions, the parties dispute whether the allegations in the underlying class action litigation fall under the policy’s coverage of “wrongful acts.” The meaning of “wrongful act” is key in this case because if there is no “wrongful act” within the meaning of the policy, Zurich is not required to provide coverage.

Under the policy, “wrongful act” means “any actual or alleged act, error, or omission, misstatement, or misleading statement in the course of providing ‘staffing services’ to your clients by you or by any person for whose acts you are legally responsible.” WGH asserts that the claims in the underlying litigation relating to unpaid wages constitute “wrongful acts.”

Failure to pay wages would be considered by any layperson an error or omission. Nonetheless, the law on this point favors Zurich. An insured’s alleged or actual refusal to make a payment under a contract does not give rise to a loss caused by a wrongful act.

WGH was required to pay employees’ wages. WGH has never claimed that no employment contract existed between itself and the plaintiffs in the underlying litigation, and indeed concedes that at least oral contracts existed with the plaintiffs. WGH did not meet its burden to show it was entitled to coverage. The Court granted Zurich’s motion for summary judgment on the first (breach of contract, second (breach of contract/duty to defend), and fourth (declaratory relief) claims for relief.

In addition, in its motion for summary judgment, Zurich argued convincingly that WGH’s third claim for bad faith/breach of the implied covenant of good faith and fair dealing claim fails because no coverage is due under the policy.

The Contract Exclusion Bars Coverage.

The policy states that Zurich need not cover “any ‘claim’, based upon or arising out of, in whole or in part: I. Any liability assumed by an insured under any contract or agreement, unless such liability would have attached to the insured by law in the absence of such contract or agreement.” Zurich contended that none of the claims against WGH would exist absent an employment contract, so the exclusion applies.

The exclusion here applies to “Any liability assumed by an insured under any contract or agreement, unless such liability would have attached to the insured by law in the absence of such contract or agreement.” In the policy, the phrase “arising out of” connotes a broad definition for the type of contract that will be excluded from coverage, as does the extension of the contract exclusion to “[a]ny liability assumed by an insured under any contract . . . .”

Absent an employment contract between the class plaintiffs and WGH, this case would not exist.

The Settlement Does Not Constitute “Damages.”

The parties dispute whether the settlement constitutes “damages” under the policy.

WGH admitted no liability in the underlying litigation. However, the plain language of the settlement agreement demonstrates that the manner in which the settlement proceeds were allocated precludes the settlement being considered “damages” under the policy.

As relevant here, the policy provides that settlements are covered as damages unless the purported damages are for personal profit or advantage which the insured is not legally entitled to or criminal or civil fines, penalties, fees, or sanctions. The Court found this is the only reasonable interpretation of the disputed language.

Zurich, therefore, is not obligated to cover WGH’s settlement in the underlying litigation because the claims against WGH and the settlement do not fall within the basic coverage provision of the policy.


The District Court gave consideration to every claim by the insured, none of which deserved its time and trouble, only to conclude as it was required to, that the claims against WGH were contract breach claims, not tort claims, that those claims did not fall within the insuring agreement and, in addition, were clearly and unambiguously excluded. In the end there was a waste of the time of the court and the litigants.


ZALMA-INS-CONSULT © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.


About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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