Republic Franklin Insurance Company v.  Albemarle County School Board

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 REPUBLIC FRANKLIN INSURANCE
COMPANY,
Plaintiff-Appellee,
v. No. 10-1961 
ALBEMARLE COUNTY SCHOOL
BOARD,
Defendant-Appellant. 
Appeal from the United States District Court
for the Western District of Virginia, at Charlottesville.
Norman K. Moon, Senior District Judge.
(3:10-cv-00007-nkm)
Argued: December 8, 2011
Decided: February 24, 2012
Before NIEMEYER, MOTZ, and FLOYD, Circuit Judges.
Reversed by published opinion. Judge Niemeyer wrote the
opinion, in which Judge Motz and Judge Floyd joined.
COUNSEL
ARGUED: Annie Kim, ALBEMARLE COUNTY ATTOR-
NEY’S OFFICE, Charlottesville, Virginia, for Appellant.
Elizabeth S. Skilling, HARMAN, CLAYTOR, CORRIGAN

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& WELLMAN, Richmond, Virginia, for Appellee. ON
BRIEF: Thomas S. Garrett, HARMAN, CLAYTOR, COR-
RIGAN & WELLMAN, Richmond, Virginia, for Appellee.
OPINION
NIEMEYER, Circuit Judge:
Republic Franklin Insurance Company commenced this
action against its insured, the Albemarle County (Virginia)
School Board, for a declaratory judgment that Franklin Insur-
ance owed no duty to defend the School Board in an action
commenced by School Board employees for violations of the
Fair Labor Standards Act ("FLSA" or "the Act") nor any duty
to indemnify the School Board for any judgment that might
be entered in the action. The employees alleged that the
School Board had failed to pay them for all the work they had
done and failed to pay them the overtime rate when they
worked over 40 hours in a week. Franklin Insurance asserted
(1) that the FLSA violations were not "wrongful acts" as cov-
ered by the commercial insurance policy it issued to the
School Board and (2) that any judgment that might be entered
against the School Board would not impose "losses" on the
School Board, as "loss" is defined in the policy.
The district court entered summary judgment in favor of
Franklin Insurance, holding that the School Board’s failures
to pay its employees in accordance with the FLSA were not
"wrongful acts" covered by the policy because the School
Board had a preexisting duty to pay its employees in compli-
ance with the Act. The court also concluded that any judg-
ment that might be entered against the School Board for
failure to comply with the FLSA would not cause the School
Board to sustain a "loss" as defined in the policy.
We reverse, concluding that the failure to comply with the
FLSA was a wrongful act and that, while a judgment award-
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ing unpaid wages would not be a covered loss under the pol-
icy because payment of those wages was a preexisting duty,
any obligation to pay liquidated damages and attorneys’ fees
would cause the School Board a loss from a wrongful act,
covered by the policy.
I
In January 2010, six employees of the School Board, who
were either bus drivers or "transportation assistants" hired to
maintain and clean buses, commenced an action against the
School Board under the FLSA on behalf of themselves and
other employees similarly situated for unpaid wages and over-
time pay. They asserted that they were not paid for all of the
time that they worked and that they were not paid at the pre-
mium overtime rate when they worked for more than 40 hours
in a week. They demanded, among other things, unpaid wages
and overtime pay, liquidated damages as authorized by the
FLSA, and attorneys’ fees. As of July 2010, approximately 90
present and former employees had opted into the action, pur-
suant to 29 U.S.C. § 216(b).
The School Board promptly tendered the defense of the
action to Republic Franklin Insurance Company, which had
issued a "commercial package" insurance policy to the School
Board. Franklin Insurance agreed to defend the action with a
reservation of rights to challenge coverage. It also com-
menced this action, requesting a declaratory judgment that it
did not have the obligation either to defend the underlying
FLSA action or to indemnify the School Board for any judg-
ment that the School Board might be required to pay. In its
answer, the School Board filed a counterclaim for a declara-
tory judgment that Franklin Insurance had a duty to defend
the action and to indemnify it for the amount of any judgment
that might be entered.
On the parties’ cross-motions for summary judgment, the
district court entered judgment, dated July 23, 2010, in favor
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of Franklin Insurance, declaring that Franklin Insurance owed
no duty to defend or to indemnify the School Board. In its
opinion, the court concluded that the "insured’s negligent,
willful, or intentional failure to honor a pre-existing obliga-
tion to pay money is not a ‘wrongful act’ as that term is used
in the policy. . . . To find otherwise could encourage parties
to routinely circumvent the requirements of the FLSA—
whether negligently, willfully, or intentionally—because they
have nothing to lose." The court also concluded that the
School Board had not demonstrated its potential liability for
a "loss" falling within the policy’s definition of "loss." It
noted that the definition of loss "expressly excludes ‘penalties
imposed by law.’ . . . [T]he statute clearly designates liqui-
dated damages and attorneys’ fees as ‘Penalties,’ and the pol-
icy unambiguously excludes such amounts from the definition
of ‘loss.’" The court also found that because the claim for
back wages was not a claim for "damages," as required by the
definition of loss, but rather an existing operating cost, so too
was a claim for the liquidated damages and attorneys’ fees not
a loss "because that claim did not exist independently of the
claim for back wages." Finally, the court concluded, "if the
failure to pay wages does not constitute a ‘wrongful act’
under the policy, it follows that the statutory remedies allow-
able in connection with any failure to pay those wages do not
result from a claim for a wrongful act."
From the judgment declaring that Franklin Insurance’s pol-
icy does not cover the claims made in the underlying FLSA
action, the School Board appeals, arguing only that the claims
for liquidated damages and attorneys’ fees were covered by
the policy because liquidated damages and attorneys’ fees
were not preexisting obligations but damages resulting specif-
ically from its wrongful acts in not paying the wages required
by the FLSA.
II
The parties agree that Virginia law applies in this diversity
action, see Resource Bankshares Corp. v. St. Paul Mercury
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Ins. Co., 407 F.3d 631, 635 (4th Cir. 2005), and that under
Virginia law, the interpretation of an insurance policy follows
the same principles as the interpretation of any other contract
and is a question of law for the court, see Seabulk Offshore,
Ltd. v. Am. Home Assurance Co., 377 F.3d 408, 419 (4th Cir.
2004); State Farm Fire & Cas. Co. v. Walton, 423 S.E.2d
188, 191 (Va. 1992). While the initial burden of proving cov-
erage falls on the insured, Resource Bankshares, 407 F.3d at
636, "doubts over coverage are typically to be resolved in
favor of the [insured] and against a limitation of coverage."
CACI, Int’l, Inc. v. St. Paul Fire & Marine Ins. Co., 566 F.3d
150, 155 (4th Cir. 2009).
Under the terms of the commercial policy issued by Frank-
lin Insurance to the School Board, Franklin Insurance agreed
to "pay for all ‘loss’ resulting from a ‘claim’ for a ‘wrongful
act’ to which this insurance applies." The policy defines
"loss" as "any amount which an insured is legally obligated
to pay as damages," and the term includes coverage for puni-
tive damages "where insurable by law." "Loss," however,
does not include "fines or penalties imposed by law" or "oper-
ating costs of [the insured’s] institution such as would be
included in [the insured’s] ‘educational institution’s’ budget."
The policy defines "wrongful act" as "any breach of duty,
neglect, error, omission, misstatement, or misleading state-
ment in the discharge of ‘educational institution’ duties."
The School Board contends that the district court erred in
its conclusion that the underlying FLSA complaint did not
allege a "wrongful act." It argues that the complaint clearly
alleges numerous wrongful acts committed by the School
Board in failing to pay its employees the wages and overtime
pay required by the FLSA. The School Board contends further
that the district court erred in holding that "because back
wages are not covered ‘loss,’ liquidated damages and attor-
neys’ fees, similarly, cannot be covered ‘loss’ since all three
remedies arise from ‘the same act or event—defendant’s fail-
ure to pay the appropriate wages.’" The School Board asserts
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that the policy contains no such limitation and, indeed, con-
templates that some remedies for a wrongful act will be cov-
ered while others are not. Finally, the School Board contends
that the district court erred in concluding that liquidated dam-
ages and attorneys’ fees are excluded as "fines and penalties
imposed by law" or by their close linkage to a claim for back
wages, which is not covered. It argues that liquidated dam-
ages and attorneys’ fees are damages resulting from a wrong-
ful act, independent of the obligation to pay back wages.
Franklin Insurance, urging that we affirm the district
court’s judgment, argues that "the alleged failure to pay
wages and premium overtime [pay] pursuant to the require-
ments of the [FLSA] is not a wrongful act" because "the fail-
ure to comply with a pre-existing legal obligation is not a
‘wrongful act.’" It also contends that a judgment obligating
the School Board to pay liquidated damages and attorneys’
fees would not be a covered loss within the policy’s defini-
tion. According to Franklin Insurance, "[i]f the back pay that
was owed is not covered, any liquidated damages or attor-
neys’ fees awarded in connection with these damages are also
not covered," because "the liquidated damages and attorneys’
fees request arises from the School Board’s alleged failure to
comply with its preexisting obligation to pay wages."
The parties’ arguments thus raise two basic questions: (1)
whether the underlying FLSA complaint alleges a claim for a
wrongful act; and (2) whether liquidated damages and attor-
neys’ fees claimed because of the FLSA violations are losses
covered by the policy. We address these issues in order.
A
On its argument that the underlying FLSA action does not
claim a "wrongful act," Franklin Insurance maintains that the
School Board’s failure to comply with the FLSA cannot be a
wrongful act because the School Board had a preexisting duty
to comply with the Act. It asserts that the "School Board’s
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obligation to pay wages arose as soon as the work at issue was
performed and therefore cannot constitute a later wrongful act
covered by the policy," citing Noxubee County School District
v. United National Insurance Co., 883 So. 2d 1159 (Miss.
2004).
While a preexisting duty might be relevant to whether an
insured suffers an insurable loss, it cannot be relevant to
whether the insured is the subject of a claim for a wrongful
act. Every duty breached or violated is necessarily a preexist-
ing duty, and it is the breach or violation of that duty which
constitutes a wrongful act. And, this is precisely how the
insurance policy in this case defines a wrongful act: "‘Wrong-
ful act’ means any breach of duty, neglect, error, [or] omis-
sion." In the underlying FLSA complaint, the employees
allege that the School Board failed to pay them wages for all
work done and for overtime work, in violation of the duties
imposed by the FLSA. The School Board’s alleged failures
are thus breaches of the duty imposed by the FLSA and there-
fore wrongful acts. By its plain language, the policy covers
claims for the wrongful acts alleged in the underlying com-
plaint.
Confusingly, Franklin Insurance conflates the concepts of
"wrongful act" and "loss," failing to recognize that a breach
of a preexisting duty to pay is a wrongful act but that the
resulting obligation to pay back wages may not be a loss
resulting from that wrongful act. Such loss could only arise if
the failure to fulfill the preexisting duty to pay wages caused
"damages" apart from the back wages not paid. See Pacific
Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584, 590-91 (1st Cir.
2004).
In Pacific Insurance, the insured recognized that it had not
fulfilled its obligations to fund an ERISA plan, giving rise to
a participant’s suit. Nonetheless it contended that the "loss" it
suffered as a result of having to fund the plan in order to settle
the suit was a loss covered by its insurance policy. The court
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held that the funds the insured had to use to meet its original
ERISA obligation to fund the plan were not a covered loss
because "the underlying obligation for which reimbursement
[was] sought existed regardless of whether [the insured] first
complied with its fiduciary duties or breached them." Pacific
Ins., 369 F.3d at 590-91. In other words, the defendant had a
preexisting duty to fund the ERISA plan; thus, the funds used
later to do so were not losses incurred "by reason of any
actual or alleged failure to discharge" its fiduciary duty. Id. at
592 (emphasis added). Agreeing with an earlier Seventh Cir-
cuit decision, the Pacific Insurance court concluded at bottom
that the preexisting contractual duty was the cause of the
asserted loss, not the allegedly wrongful act of failing to fund
the ERISA plan as required. Id. at 593 (citing May Dep’t
Stores v. Fed. Ins. Co., 305 F.3d 597, 601 (7th Cir. 2002)
(holding that the alleged "loss" (funds not paid into an ERISA
plan) arose from the preexisting contractual obligations of the
plan, not from the breach of ERISA in failing to pay bene-
fits)).
Similarly, in another Mississippi case relied on by Franklin
Insurance also involving an underlying FLSA action, the
court concluded that the obligation to pay back wages for
unpaid overtime work was not a "loss" under the policy at
issue because it was not, as the policy required, incurred "by
reason of a Wrongful Act" but rather by reason of a preexist-
ing obligation. Oktibbeha Cnty. Sch. Dist. v. Coregis Ins. Co.,
173 F. Supp. 2d 541, 543 (N.D. Miss. 2001).
In sum, these cases—Pacific Insurance, May Department
Stores, and Oktibbeha County—stand for the proposition that
a judgment ordering an insured to pay money that the insured
was already obligated to pay, either by contract or by statute,
is not a "loss" covered under an insurance policy that requires
that the loss be caused by a "wrongful act." The alleged "loss"
in such cases arises from the contract or the statute itself, not
from the failure to abide by it. These cases do not stand for
the proposition that the failure to comply with a preexisting
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duty cannot be a "wrongful act." Such a rule would not only
be incompatible with the definition of "wrongful act" in such
policies—defined broadly to include "any breach of duty"—
but also is counterintuitive because no violation of the law
could ever be a "wrongful act" as there would always be a
preexisting duty to follow the law.
Accordingly, we conclude that the underlying FLSA com-
plaint in this case alleges "wrongful acts" on the part of the
School Board within the meaning of the policy issued by
Franklin Insurance.
B
On the question of whether the underlying FLSA complaint
claims sums that amount to "losses" under the Franklin Insur-
ance policy, the School Board does not contend that the obli-
gation to pay back wages and overtime pay created "losses."
It concedes that the obligation to pay back wages and over-
time pay is a preexisting duty that was not the result of its
wrongful act in allegedly violating the FLSA. But it does con-
tend that the other financial consequences resulting specifi-
cally from its wrongful acts, in the form of liquidated
damages and attorneys’ fees, would be losses covered by the
policy.
On that point, Franklin Insurance contends that liquidated
damages and attorneys’ fees cannot be covered losses because
(1) they are inextricably connected with the claims for back
wages and overtime pay, which themselves do not create
losses, and thus none of these damages can be covered losses;
(2) they are "fines or penalties imposed by law" and therefore
excluded by the terms of the policy; and (3) they are restitu-
tionary in nature and therefore not "damages," as required by
the policy’s definition of "loss."
The policy defines loss as "any amount which an insured
is legally obligated to pay as damages" resulting from a claim
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for a wrongful act. The School Board contends that, unlike
back wages, the liquidated damages and attorneys’ fees would
be damages resulting from its allegedly wrongful acts.
We have already agreed with the School Board that the pre-
existing duty doctrine eliminates back wages from the defini-
tion of "loss." As we have noted, though, the liquidated
damages and attorneys’ fees would not be payable because of
any preexisting duty, and thus they do meet the policy’s
requirement that they "result[ ] from a claim for a wrongful
act." The issue still remains whether liquidated damages and
attorneys’ fees would be "damages," as required by the poli-
cy’s definition of "loss."
In contending that liquidated damages and attorneys’ fees
are not damages, but rather fines or penalties, Franklin Insur-
ance overlooks controlling Supreme Court precedent holding
that liquidated damages as authorized by the FLSA are not
penalties but rather compensatory damages "for the retention
of a workman’s pay which might result in damages too
obscure and difficult of proof for estimate other than by liqui-
dated damages." Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697,
707 (1944); see also Marshall v. Brunner, 668 F.2d 748, 753
(3d Cir. 1982) (liquidated damages "are compensatory, not
punitive in nature"). And the Eleventh Circuit has concluded
more generally that "all of the relief provided in [29 U.S.C.]
§ 216(b) [authorizing liquidated damages and attorneys’ fees]
is compensatory in nature." Snapp v. Unlimited Concepts,
Inc., 208 F.3d 928, 934-35 (11th Cir. 2000); see also Lanza
v. Sugarland Run Homeowners’ Ass’n, 97 F. Supp. 2d 737,
740 (E.D. Va. 2000) ("This scheme makes clear that § 216(b)
is designed to compensate the aggrieved employee, not punish
the offending employer"). Accordingly, we reject Franklin
Insurance’s argument.
Franklin Insurance argues alternatively that liquidated dam-
ages are restitutionary in nature and therefore not damages. It
reasons that any award that seeks to "restore an individual to
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his or her original position" is "restitutionary in nature" and
therefore excluded from the definition of "damages." This
argument fails again for the same reasons—the Supreme
Court has concluded that liquidated damages are compensa-
tory damages. In addition, were we able to accept Franklin
Insurance’s argument, we would be excluding almost all tort
awards from the definition of "damages."
The district court, in finding liquidated damages and attor-
neys’ fees to be penalties and therefore not "damages," relied
on the title of 29 U.S.C. § 216, which labels the section, "Pen-
alties." That reliance, however, was misplaced. First, while
the entire section is labeled "Penalties," presumably because
it includes subsections authorizing criminal and civil penal-
ties, the particular subsection authorizing liquidated damages
and attorneys’ fees, § 216(b), is labeled "Damages; right of
action; attorney’s fees and costs; termination of right of
action." If any title could be relied on, it would have to be the
title to § 216(b). But titles are not generally meant to take the
place of the substantive provisions of the text. See Bhd. of
R.R. Trainmen v. Baltimore & Ohio R.R., 331 U.S. 519, 528
(1947). In this case, § 216(b) authorizes liquidated damages
and attorneys’ fees, not penalties, as the Supreme Court
observed in O’Neil.
Because the underlying FLSA complaint against the School
Board asserts claims for liquidated damages and attorneys’
fees arising, not from a preexisting duty, but because of the
School Board’s alleged wrongful acts, we conclude that they
are damages resulting from a claim for the alleged wrongful
act and therefore are covered losses.
At bottom, because the underlying FLSA complaint filed
against the School Board demands not only back wages, but
also liquidated damages and attorneys’ fees resulting from the
School Board’s wrongful acts in failing to comply with the
FLSA, we hold that any judgment against the School Board,
to the extent it would include liquidated damages and attor-
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neys’ fees, would amount to a "loss," as defined in the Frank-
lin Insurance policy, "resulting from a claim for a ‘wrongful
act.’" Because Franklin Insurance’s policy provides coverage
for this loss, we reverse the judgment of the district court.
REVERSED
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