Katrina Might Spur Claims By Adjusters

As insurance professionals have descended into the Gulf Region by the thousands to handle myriad claims, long hours, work on weekends and a never-ending list of claims to adjust are the norm. Many have predicted, in fact, that this work will continue through spring 2006.

In addition, these conditions create exposures not often contemplated in the wake of a natural disaster–claims by employees for overtime and new theories for imposition of ERISA liability.

Class-action Web sites sponsored by the plaintiffs' bar also have predicted a deluge of wage and hour cases on behalf of construction and rescue workers engaged in relief and rebuilding efforts in Alabama, Louisiana, Mississippi and Texas.

Under federal law, employers must pay overtime–time-and-a-half–to certain employees by virtue of the Fair Labor Standards Act. Those entitled to overtime are "non-exempt" from the law's provisions. Most states have analogous statutes and labor regulations, and some have even more onerous requirements. (The California Labor Code is a prime example.)

In the past 24 months, FLSA collective actions and state law wage and hour class actions have hit industry after industry as the plaintiffs' bar attacks the payroll practices of employers. Among the examples in the insurance industry:

o Farmer's Insurance Group paid $210 million in Bell, et al. vs. Farmer's Insurance to settle California state law wage and hour overtime claims of adjusters in 2004.

o State Farm paid $135 million under similar circumstances, also in 2004.

o Allstate paid $120 million in similar California wage and hour lawsuits in 2005.

The Gulf is equally experienced in blockbuster wage and hour litigation–the settlement in 2004 of Vela, et al. vs. City of Houston for $72 million is witness to that.

As adjusters are involved in the night and day servicing of Gulf policyholders, conditions are ripe for subsequent wage and hour claims. Under either applicable state law or FLSA, workers dissatisfied with their financial circumstances may be inclined to sue for overtime.

The theory pressed by the plaintiffs' bar would be that the duties and work of certain adjusters are such that they are "non-exempt" under the FLSA and/or applicable state law, and therefore entitled to overtime pay. Variations on these theories will involve claims that so-called "exempt" employees are misclassified, required to work "off the clock," denied reimbursements or meal/rest breaks, or received bonuses that were miscalculated.

The U.S. Department of Labor's most recent regulations on FLSA became effective Aug. 23, 2004. The status of claims adjusters as exempt or non-exempt is apt to be litigated given the huge settlement in the Bell vs. Farmer's Insurance case and other class actions.

Under DOL regulations, some claims adjusters may be non-exempt depending upon the discretion and independence they enjoy in carrying out their functions. The latest DOL private letter opinion of Aug. 25, 2005 also suggests some adjusters are exempt while others may be non-exempt depending on their specific duties.

Meanwhile, as in other evolving areas of exposure, employers are subject to the phenomenon of claims migration. In the overtime area, plaintiffs' lawyers are beginning to utilize ERISA as a tag-along theory to accompany wage and hour claims.

The recent ruling of In Re Farmer's Insurance Exchange Claims Representatives' Overtime Litigation, 2005 WL 1972565 (D. Ore. Aug. 15, 2005), illustrates this claims migration phenomenon. In this case, claims representatives classified by Farmer's as exempt alleged that not only were they entitled to back-pay for unpaid overtime but also to relief under ERISA because the company failed to credit untracked overtime hours as hours of service under the company's benefit plans.

The court denied the company's motion to dismiss the ERISA claims. Specifically, the court found plaintiffs had stated a valid cause of action because the company may have violated ERISA's record-keeping provisions by failing to track hours worked. The defendant may have breached its fiduciary duty under the company's savings and pension plan by failing to credit all hours–and any overtime pay–required to be credited under the benefit plans.

For ERISA purposes, the court recognized that a fiduciary may have an independent obligation to determine hours of service without regard to how the employer recorded those hours for payroll purposes. While the court recognized that plaintiffs' theory was a novel one and rested on the drawing of a very fine line between payroll and fiduciary decisions, the result is troubling for all employers and leaves a window of opportunity for the plaintiffs' bar in pressing both overtime wage and hour claims and ERISA claims.

Gerald L. Maatman Jr. is a partner with Seyfarth Shaw LLP in Chicago.

"These conditions create exposures not often contemplated in the wake of a natural disaster–claims by adjusters for overtime and new theories for imposition of ERISA liability.

Gerald L. Maatman Jr.

Caption for shot of adjusters on Katrina:

The theory pressed by plaintiff attorneys bar would be that the duties and work of certain adjusters are such that they are "non-exempt" under federal or state law, and therefore entitled to overtime pay.