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Damages for Failure to Pay Tips is Not a “Loss” under a D&O Policy

Blogs, Insurance Coverage

The United States District Court for the District Of Massachusetts recently granted summary judgment in favor of the Philadelphia Indemnity Insurance Company (PIIC) in a coverage dispute between PIIC and its golf club insured. Kittansett v. Philadelphia Indemnity Insurance Company, Civil Action No. 11-11385-DJC, (D. Mass. 2012). 

The Kittansett Club (“Kittansett”) is a golf club located in Marion, Massachusetts. PIIC issued Kittansett a “Flexi Plus Five” insurance policy, which included directors and officers liability coverage (“D&O coverage”). Under the D&O coverage, PIIC agreed to pay, on Kittansett’s behalf, “loss” for claims made for D&O wrongful acts. “Loss” was defined in the policy as “damages,” excluding criminal or civil fines or penalties imposed by law. “Damages” were further defined as “a monetary judgment, award or settlement, including punitive, exemplary or multiple portions thereof.” 

In the spring of 2009, Kittansett was sued by its servers and bartenders for an alleged failure to distribute the full proceeds of gratuities, as required by law (the “underlying action”). The underlying complaint alleged that Kittansett failed to remit the 18% gratuity typically added to its food and beverage bills and sought restitution, injunctive relief, statutory treble damages, and attorneys’ fees and costs. The underlying action was ultimately resolved by settlement.

PIIC denied coverage for the underlying action and settlement. As a result, Kittansett brought suit seeking declaratory relief and asserting claims for breach of contract and violations of Mass. Gen. L. c. 93A. The District Court granted summary judgment in PIIC’s favor. 

In so holding the Court first found that “loss” from a claim for a wrongful act in breach of a preexisting duty could only arise if the failure to fulfill the preexisting duty to pay wages caused damages apart from the back wages not paid. “Thus, while restitution payments made to fulfill a preexisting obligation are not losses resulting from a wrongful act in breach of that obligation, other payments such as liquidated damages and attorneys’ fees may likely be.”

The Court then went on to find that the claim for restitution in the underlying action arose not from the wrongful act, Kittansett’s preexisting duty under Mass. Gen. L. c 149 § 152A, and therefore did not constitute a “loss.” 

The Court acknowledged that although attorneys’ fees, if any, included in the settlement would constitute a “loss” they were nonetheless excluded by the “Earned Wages” exclusion contained in the policy.

A number of other jurisdictions have reached similar conclusions, including the Fourth Circuit in Republic Franklin Ins. Co. v. Albemarle County School Board, 670 F.3d 563 (4th Cor. 2012). Kittansett has filed an appeal with the First Circuit Court of Appeals. 

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