“Tip” Cases Likely to Multiply, As Coverage Issues Abound

As more and more restaurant servers go to court to try to recover wages, tips, or other benefits that they contend have been unlawfully withheld by their employers, there are more and more insurance coverage claims relating to these actions.  Recently, for example, a federal district court in Massachusetts found that claims that a club withheld servers’ tips were not covered by a D&O policy. The court also expressed a view on other important issues that might be particularly relevant in future cases.  

The case involved The Kittansett Club, a not-for-profit golf club in Marion, Massachusetts. A club employee, on behalf of himself and other servers and bartenders, sued the club and one of its former officers for their alleged “failure to distribute the full proceeds of gratuities to [Kittansett’s] employees as required by law.” According to the complaint, Kittansett typically added an 18 percent gratuity to food and beverage bills but the defendants did not “remit the proceeds of this gratuity” to employees who served the food or beverage. The complaint argued that this alleged conduct violated Massachusetts statutory law. The defendants’ insurer disclaimed coverage.  The defendants settled the action themselves, and sued their insurer.

The Decision

The court ruled that the “Earned Wages” exclusion, which excluded coverage for any claims arising out of an insured’s failure to pay Earned Wages, unambiguously applied in this case and the defendants thus were not entitled to coverage under the policy. Accordingly, it decided, the insurer’s refusal to defend and indemnify the defendants did not violate the policy and did not constitute a breach of contract.

The court’s opinion also contained a number of other interesting statements about the policy and the law:

• The insureds’ conduct as alleged in the complaint fell within the policy’s definition of a “D&O Wrongful Act”;
• Although the alleged conduct amounted to a “D&O Wrongful Act,” the resulting loss, at least in part, was not “for” the D&O Wrongful Act as required for coverage under the policy; and
• The non-restitutionary component of the parties’ financial settlement – statutory treble damages, attorney’s fees, and costs – were not excluded as “penalties” from the definition of what constituted a “Loss” from the insureds’ wrongful act and would be covered under the policy if no exclusion applied.

The “Earned Wages” exclusion, however, led the court to conclude that the defendants were not entitled to a declaratory judgment that their insurer was required to defend and indemnify them under the policy.

The Rivkin Rule

As the decision in The Kittansett Club v. Philadelphia Indemnity Ins. Co., No. 11-11385-DJC (D. Mass. Sept. 10, 2012), makes clear, there can be many insurance coverage issues that arise in these kinds of “tips” cases. Reviewing all policy terms may be crucial to determining whether an insurer has any coverage obligations in these situations.