Can Insurance Coverage Reduce or Eliminate Joint Employer Risks in Franchising? Part 2
Can Insurance Coverage Reduce or Eliminate Joint Employer Risks in Franchising? Part 2

Gray Plant Mooty colleagues Carl Zwisler and Nicholas Nierengarten discuss insurance coverage for franchisors.

Gray Plant Mooty franchise lawyer Carl Zwisler, spoke with his colleague Nicholas Nierengarten, an insurance coverage lawyer to discuss whether insurance coverage can protect franchisors and franchisees from joint employer risks, as well as other risks that are common in franchising. This is part two of their chat.
Carl Zwisler: What are the claims procedures for issues dealing with EPLI?

Nicholas Nierengarten: EPLI is typically written on a “claims-made” basis, which means that the policy theoretically covers wrongful acts that occurred prior to the date the policy was issued. In order to limit its exposure for such acts, the insurer usually excludes “prior acts” unless another claims-made policy was in force immediately prior to the current policy. Finally, the defense costs are usually applied against the limit, which means that legal defense costs could significantly reduce or even exhaust the policy’s limit. This is an important consideration not only in initially setting the limit for the policy, but in litigation strategy as well.

There has been a surge in wage and hour claims in recent years. These can be based on the FLSA or similar state wage and hour statutes. They are easy to bring and are often brought as class actions. Moreover, the Department of Labor has continued to expand the reach of the FLSA. Last year, DOL proposed regulations narrowing the FLSA exemptions such that fewer employees can be paid a salary. Most recently, DOL’s proposed “joint employer” standards that will only add fuel to the fire and potentially expose franchisors to massive claims. As I noted earlier, FSLA claims and similar state statute claims are typically excluded. However, some EPLI policies now contain a “sublimit” for the costs of defending wage and hour claims, but do not provide any indemnity protection or coverage for attorneys’ fees awarded to a prevailing plaintiff.

CZ: Nick, what is a “sublimit”?

NN: A “sublimit” is an extra limitation on coverage for certain types of losses. It does not provide additional coverage, but rather it is part of the policy’s limit and sets the maximum amount the insurer will pay for specific types of losses (in this case, legal costs associated with defending wage and hour claims) and applies within, not in addition to, the policy’s regular aggregate limit. The wage and hour defense cost sublimit is typically $100,000. Keep in mind that a wage and hour claim may be only one of multiple claims, some of which might be covered under other insuring provisions in the EPLI policy or even different lines of coverage.

CZIf EPLI will not protect against unfair labor practice claims of the type brought against McDonald's, is there any protection franchisees and franchisors can purchase for a reasonable price to protect against those claims?

NNNot in the current marketplace. Since this risk cannot be effectively transferred to an insurer, the franchisor needs to minimize the risk through appropriate language in the franchise agreement and operations manual, and follow practices that demonstrate that the franchisor does not dictate or control labor and employment matters of the franchisee.

CZIf both a franchisee and a franchisor are sued as joint employers, aren't the total damages the same as they would be if only the direct employer were liable? If that is the case, with indemnification and adequate coverage by franchisees, can't franchisors avoid the theoretical concerns that have been raised about franchisors needing to control their franchisees' employees to mitigate risk?

NN: The key here is “damages.” It’s not clear from the Browning-Ferris decision or the NLRB’s claims against McDonald’s what monetary “damages”, if any, are being sought. Rather, the thrust appears to be the scope of the collective bargaining unit and alleged unfair labor practices. Typically, an NLRB remedial order requires the respondent to cease and desist, and to remedy unfair labor practices. The upshot is that the franchisor could be responsible for remedying unfair labor practices at the franchisee level and, if it fails to do so, it could face a claim for injunctive relief.

On the other hand, wage and hour claims do seek damages, but as I noted earlier, coverage here is limited to some portion of defense costs (typically $100,000). While theoretically the total damages are the same, an award would likely be made on a “joint and several” basis (not apportioned between the franchisor and the franchisee). Indeed, in its recent “Interpretation” DOL asserts that when joint employment exists, all of the joint employers are “jointly and severally” liable under the FLSA. As a result, the franchisor would need to rely on indemnification, which, of course, is only as good as the franchisee’s balance sheet. If the franchisee does not have the wherewithal to pay the damages, the franchisor may have to pay all of the damages.

CZIs there umbrella coverage that franchisees should obtain to cover these claims?
NNConceptually, an umbrella policy sits on top of what’s called the underling insurance, usually the insured’s CGL insurance. As the name implies, it provides greater coverage than the CGL policy. Unfortunately, most, if not all, umbrella policies expressly exclude employment-related practices. Nevertheless and as I noted earlier, it’s always prudent to compare the actual claims with the language in the policies themselves to determine whether there is a basis for claiming coverage.

CZ: Thank you Nick. I had hoped to also discuss how to insure against cybersecurity breaches, but we have run out of time. Perhaps we could address that hot topic in another issue.