Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance



No Coverage For Massachusetts Tips Cases, Say Three Trial Court Judges

Tips cases – claims that restaurants or other employers improperly pooled or failed to distribute gratuities – are increasingly frequent, and frequently successful.  Unfortunately for employers, even those who have coverage above and beyond basic general liability insurance, both state and federal trial courts have recently ruled against policyholders on the issue of coverage for Massachusetts tips cases.  This will be the first of three posts, each discussing one of three recent rulings.

No Coverage for Tips Cases Under D&O and EPL Policies:  The Kittansett Club v. Philadelphia Indemnity Ins. Co., United States District Court for the District of Massachusetts Civil Action No. 11-11385 (Casper, J., September 10, 2012). 

Employees of The Kittansett Club brought a suit alleging that the golf club added a gratuity to food and beverage bills but did not distribute the tip to the servers and bartenders, in violation of Massachusetts General Laws c. 149, § 152A (the Massachusetts tips act) and common law.  The club settled and sued its insurer for failing to defend and indemnify it under the club’s directors and officers (”D&O”) and employment practices liability (“EPL”) policies.

The Court ruled on three issues.  First, the alleged failure to distribute the gratuity was a “D&O Wrongful Act” as that term was broadly defined under the policy.

Second, the restitution of the gratuity was not a “Loss” arising from the D&O Wrongful Act.  The Court reasoned that the duty to distribute the gratuity to the wait staff existed before the wrongful act and did not arise from it.  However, the Court stated, treble damages, described in the statute as “liquidated damages,” as well as attorney’s fees and costs, are not restitution for a pre-existing obligation, but are compensatory damages, so these components of the settlement are covered if not otherwise excluded.

Which brings us to the third and dispositive issue: the Court ruled that the policy’s exclusion for claims arising out of the failure to pay “Earned Wages” applied, negating any duty to defend the club or indemnify for the settlement under the D&O or EPL coverage.  The Court agreed with the insurer that “wages” unambiguously included gratuities, citing Black’s Law Dictionary, workers compensation case law, and the Internal Revenue Code in support of this determination.

In future posts I will discuss a Massachusetts Superior Court judge’s decision finding no coverage under EPL policies, and a federal District Court determination that general liability coverage and employee benefits liability coverage do not cover statutory tips claims.

Harvey Nosowitz
(617) 621-6555

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Harvey Nosowitz

Posted In: Employment Claims

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