IL App 2nd / Wage Theft

Unearned Wage and Benefit Theft Subject to Salary Exclusion

The Illinois Appellate Court for the Second District, in an opinion written by Justice Hutchinson with Justices McLaren and Bridges concurring, applying Illinois law, affirmed the trial court and held that wage theft is not covered under the insurance policy at issue. According to the appellate court, unearned salary payments are nonetheless salary and thus excluded from coverage based on the plain language of the policy.

The policyholders, known collectively as 3BC Properties, LLC (“3BC”), own and operate four Dunkin Donuts franchises in DuPage County, Illinois. 3BC purchased identical business owners’ insurance policies for each restaurant from State Farm Fire and Casualty Company (“State Farm”). Because the policies were identical, the court referred to them as a single policy.

3BC employed Ms. Brenda Vazquez to manage all four restaurants; her duties included reviewing employee time records for payment. Four of Vasquez’s relatives worked at 3BC’s Dunkin Donuts’ restaurants. 3BC discovered that Vasquez falsified time records for herself and her family members, resulting in unearned fraudulent salary payments of more than $66,000. 3BC reported the fraud to the authorities and submitted a claim to State Farm under its business insurance policy.

State Farm denied coverage, and 3BC sued for a declaratory judgement to determine coverage. The policy at issue included an “Employee Dishonesty” provision that insured 3BC against “some” losses stemming from employee fraud or dishonesty. However, the provision specifically excluded loss related to “salaries…or other ‘employee’ benefits earned in the normal course of employment.” The parties filed cross-motions for summary judgment, and the trial court found in State Farm’s favor. 3BC appealed.

3BC argued that the salary exclusion was meant to relate to “bona fide salary disputes,” and because there was no dispute that Vasquez committed fraud by falsifying time records, the “money was not earned in the normal course of employment” and therefore, the loss was not excluded.  The appellate court rejected 3BC’s argument and found such reading at odds with the policy’s plain language. The provision at issue clearly and ambiguously excluded coverage for salary payments, regardless of employee criminal conduct. 3BC Properties, LLC v. State Farm Fire & Casualty Co., 2020 IL App (2d) No. 190501 (July 27, 2020).