PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
This memorandum is a privileged and confidential attorney-client communication prepared by Calderwood & Harkness LLP at the direction of the General Counsel of Vantage Mobility Systems Corp. This memorandum is protected by the attorney-client privilege and the work product doctrine. It is not intended for disclosure to any third party and should not be disclosed without the prior written consent of Calderwood & Harkness LLP and Vantage Mobility Systems Corp. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
MEMORANDUM
TO: Priya Nandakumar, General Counsel, Vantage Mobility Systems Corp.
FROM: Renata Vasquez, Responsible Partner, and Devon Archer, Associate, Calderwood & Harkness LLP
DATE: August 22, 2025
RE: Insurance Coverage Analysis — Ridgeway National Insurance Company Reservation of Rights Letter Dated August 18, 2025; EPL Policy No. EPL-VMS-2024-07821; Gloria Reyes, individually and on behalf of all others similarly situated, and on behalf of the State of California v. Vantage Mobility Systems Corp., Case No. CIVSB-2025-04781, Superior Court of California, County of San Bernardino
C&H Matter No.: 1007-00004
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I. Executive Summary
The purpose of this memorandum is to analyze the Reservation of Rights ("ROR") letter issued by Ridgeway National Insurance Company ("Ridgeway" or the "Carrier") on August 18, 2025, under Employment Practices Liability ("EPL") Policy No. EPL-VMS-2024-07821 (the "Policy"), and to advise Vantage Mobility Systems Corp. ("Vantage" or "VMS") regarding the scope of available coverage, the risks presented by each of Ridgeway's coverage reservations, the implications for the defense and potential settlement of the underlying litigation, and the immediate action items we recommend.
Ridgeway has agreed, pursuant to its August 18, 2025 ROR letter, to fund Vantage's defense costs in the underlying action captioned Gloria Reyes, individually and on behalf of all others similarly situated, and on behalf of the State of California v. Vantage Mobility Systems Corp., Case No. CIVSB-2025-04781, Superior Court of California, County of San Bernardino (the "Underlying Action" or the "Reyes litigation"). The Carrier's agreement to fund defense costs is, however, expressly subject to the reservations set forth in the ROR letter. In addition, the Policy's $500,000 self-insured retention ("SIR") must erode first — that is, Vantage must bear the first $500,000 of combined defense costs and indemnity payments — before Ridgeway's funding obligation under the Policy commences.
The ROR letter identifies three separate coverage reservations, each of which presents distinct analytical issues and varying degrees of risk to Vantage:
(i) Wage-and-Hour Exclusion. Ridgeway reserves the right to deny coverage — and in particular indemnity coverage — for the meal and rest break premium pay claims asserted under California Labor Code sections 226.7 and 512 on the basis that these claims fall within the Policy's wage-and-hour exclusion endorsement. The scope of this exclusion, and particularly whether it reaches the statutory premium payments characterized by the California Supreme Court as compensatory in nature, depends on the precise language of the exclusion and any carve-backs for defense costs.
(ii) PAGA Civil Penalties. Ridgeway reserves the right to deny coverage for the civil penalties sought under the Private Attorneys General Act of 2004 ("PAGA"), California Labor Code section 2698 et seq., on the grounds that such penalties are uninsurable as a matter of California public policy and independently excluded under the Policy's penalties and fines exclusion.
(iii) Knowing Violation / Intentional Acts Exclusion. Ridgeway reserves the right to invoke the Policy's intentional acts exclusion on the theory that Vantage's implementation and maintenance of the automatic 30-minute meal period deduction in its ApexTime 6.2 timekeeping system — a practice in effect from approximately January 2020 through March 15, 2024 — constituted a "knowing" violation of California labor law, particularly in light of the internal HR audit memorandum dated February 8, 2024 authored by Sandra Olsen, Vice President of Human Resources.
Bottom Line Assessment: Defense cost funding under the Policy appears secure for the present, and Ridgeway has not withdrawn or conditioned its agreement to participate in the defense. However, coverage for indemnity — meaning coverage for any settlement payment or adverse judgment — is at significant risk on multiple grounds. PAGA penalties, which we estimate at approximately $5.5 million in this action, are very likely uninsurable under California law and independently excluded under the Policy, and Vantage should plan to bear this exposure entirely outside of insurance. The realistic settlement range for the Underlying Action, which we have estimated at $8.5 million to $18.7 million in our Preliminary Case Assessment Memorandum, when combined with estimated defense costs of $2.5 million to $3.8 million through trial, will in many scenarios exceed the Policy's $10 million per-occurrence limit even if indemnity coverage is confirmed and the wage-and-hour exclusion does not apply. This creates a material uninsured exposure gap that VMS and its private equity sponsor, Ashgrove Equity Partners Industrial Partners, LP, must account for in financial planning and exit preparation.
Recommendations: We recommend that Vantage take the following immediate steps: (1) prepare and transmit a written response to Ridgeway's August 18, 2025 ROR letter that preserves all coverage arguments and formally objects to each reservation of rights; (2) continue submitting monthly defense cost invoices to Neil Pemberton, AVP – Complex Claims, Ridgeway National Insurance Company, in compliance with the Carrier's litigation management guidelines; (3) retain dedicated insurance coverage counsel if Ridgeway narrows or denies coverage for any material component of the claims, so that coverage counsel may pursue declaratory relief or other remedies against the Carrier if necessary; (4) coordinate with Ridgeway on all material case developments, including settlement posture and anticipated mediation; and (5) budget for the uninsured exposure components, including the $500,000 SIR, PAGA penalties, and any gap between the settlement amount and available limits after defense cost erosion.
The remainder of this memorandum sets forth the factual background, the relevant Policy provisions, our analysis of each of Ridgeway's three coverage reservations, the implications for defense costs and settlement strategy, and our detailed recommendations.
II. Background
A. The Underlying Litigation
On August 1, 2025, plaintiff Gloria Reyes filed a class action complaint and PAGA representative action in the Superior Court of California, County of San Bernardino, Case No. CIVSB-2025-04781 (the "Underlying Action" or the "Reyes litigation"). Ms. Reyes is a former Production Associate assigned to Trim Line B, second shift, at Vantage's manufacturing facility located at 11780 Cherry Avenue, Fontana, California 92337 (the "Fontana Plant"). According to the complaint, Ms. Reyes was employed by Vantage from approximately March 12, 2021 through January 19, 2025. Her hourly wage at the time of separation was $22.75 per hour.
Plaintiff is represented by Nakamura Lozano & Pratt LLP, with offices at 350 South Grand Avenue, Suite 2800, Los Angeles, California 90071. Victor Lozano is the lead partner on the matter, and Michelle Tran is the associate handling day-to-day case management. Nakamura Lozano & Pratt is a well-known plaintiff-side employment class action firm with significant experience in California wage-and-hour litigation. The firm has obtained several multi-million dollar class action settlements in comparable cases in the Central District of California and in Los Angeles and Riverside County Superior Courts over the past five years, and the firm's involvement elevates the risk profile of this matter.
The complaint defines a putative class of approximately 3,550 current and former non-exempt hourly employees who were employed at the Fontana Plant during the proposed class period, which runs from August 4, 2021 through the present. The August 4, 2021 start date of the class period reflects the four-year statute of limitations applicable to the Unfair Competition Law ("UCL") claim, which is the longest potentially applicable limitations period for the causes of action asserted.
The complaint asserts seven causes of action:
1. Meal Period Violations (Cal. Lab. Code §§ 226.7, 512) — alleging that Vantage failed to provide compliant, uninterrupted, duty-free 30-minute meal periods to class members, and that Vantage's automatic meal period deduction practice in ApexTime 6.2 resulted in the systematic denial of premium pay for missed, short, or late meal periods.
2. Rest Period Violations (Cal. Lab. Code § 226.7) — alleging that Vantage failed to authorize and permit compliant 10-minute rest periods, particularly during "surge" production periods involving overtime shifts extending to 12 hours, and that rest periods were shortened, delayed, or denied outright during high-demand production cycles.
3. Unpaid Wages (Cal. Lab. Code §§ 204, 1194) — alleging that Vantage's time-rounding policy in ApexTime, which rounds clock-in and clock-out punches to the nearest six-minute (0.1 hour) increment, resulted in systematic underpayment of regular and overtime wages over the class period.
4. Inaccurate Wage Statements (Cal. Lab. Code § 226) — alleging that Vantage's pay stubs failed to accurately reflect all hours worked, all premium pay owed, and all applicable pay rates, in violation of the itemized wage statement requirements of section 226.
5. Waiting Time Penalties (Cal. Lab. Code § 203) — alleging that Vantage failed to timely pay all wages due to class members upon separation of employment, entitling separated employees to waiting time penalties of up to 30 days of wages.
6. Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et seq.) — alleging that the foregoing labor code violations constitute unlawful, unfair, and fraudulent business practices under California's UCL, and seeking restitution of all amounts unlawfully withheld.
7. PAGA Penalties (Cal. Lab. Code § 2698 et seq.) — as a representative action on behalf of the State of California, seeking civil penalties of $100 per employee per pay period for initial violations and $200 per employee per pay period for subsequent violations of the Labor Code provisions cited above.
With respect to the PAGA component, plaintiff served a PAGA notice on the California Labor & Workforce Development Agency ("LWDA") on May 22, 2025. The LWDA assigned the matter Case No. LWDA-CM-2025-831447. The 65-day investigation and cure period prescribed by Labor Code section 2699.3(a)(2)(A) expired on July 26, 2025 without the LWDA electing to investigate or cite Vantage. Accordingly, plaintiff was authorized to commence the PAGA representative action upon expiration of that period, and the PAGA claims were included in the complaint filed on August 1, 2025.
Vantage was served with the summons and complaint on August 12, 2025 via its registered agent for service of process, CT Agents, Inc., in Sacramento, California. Under California Code of Civil Procedure section 412.20 and applicable service rules, Vantage's responsive pleading is due on September 11, 2025. Calderwood & Harkness LLP was engaged as lead defense counsel effective August 4, 2025, following Vantage's receipt of an advance courtesy copy of the complaint from plaintiff's counsel. Whitfield Garza LLP, through Elena Garza, has been retained as local counsel for proceedings in the San Bernardino County Superior Court.
B. Central Liability Drivers
The factual allegations in the complaint center on several distinct but interrelated workplace practices at the Fontana Plant. Our initial investigation of these practices, as set forth in greater detail in our Preliminary Case Assessment Memorandum, has identified the following central liability drivers:
Automatic Meal Period Deduction in ApexTime 6.2. From approximately January 2020 through March 15, 2024, Vantage's timekeeping system, ApexTime version 6.2, was configured to automatically deduct 30 minutes from each non-exempt employee's daily recorded work time for a presumed meal period. Under this configuration, if an employee did not affirmatively clock out and clock back in for a meal period, the system automatically deducted 30 minutes from the employee's total hours worked regardless of whether a bona fide duty-free meal break was actually taken. This auto-deduction feature is the single most significant liability driver in the case.
The auto-deduction practice created a dual compliance exposure. First, for employees who worked through their meal periods or took shortened or late meal periods, the auto-deduction resulted in an underpayment of straight-time and overtime wages because the system deducted 30 minutes of compensable work time. Second, and independently, for employees who missed, shortened, or delayed meal periods, Vantage failed to pay the one-hour premium pay required under Labor Code section 226.7 because the auto-deduction feature masked the meal period violations — the system assumed a compliant break was taken and did not flag non-compliance.
Internal HR Audit and Remedial Action. On February 8, 2024, Sandra Olsen, Vice President of Human Resources at Vantage, authored an internal memorandum to the Fontana Plant HR team identifying the auto-deduction feature as a compliance risk. The Olsen memorandum, which we have reviewed in its entirety, states in relevant part that the auto-deduction configuration "does not conform to current best practices for California meal period compliance" and that "the absence of an affirmative clock-out/clock-in requirement creates exposure for premium pay liability if employees are not in fact receiving compliant duty-free meal periods." The memorandum recommended that the auto-deduction feature be deactivated and replaced with a mandatory manual clock-out/clock-in procedure.
Following the Olsen memorandum, Vantage issued a corrective action memorandum dated March 10, 2024, which directed the Fontana Plant IT team to deactivate the auto-deduction feature in ApexTime 6.2 and implement a manual clock-out/clock-in requirement for all non-exempt employees. The corrective action was implemented effective March 15, 2024. Since that date, all non-exempt employees at the Fontana Plant have been required to affirmatively clock out and clock back in for each meal period.
The Olsen memorandum and the corrective action timeline are significant for two reasons. First, plaintiff will use the Olsen memorandum as evidence that Vantage had actual knowledge of the meal period compliance risk, strengthening plaintiff's case on liability and potentially supporting a claim of willful or knowing violations. Second, and directly relevant to this coverage analysis, Ridgeway has identified the Olsen memorandum as the factual predicate for its reservation under the knowing violation / intentional acts exclusion, as discussed in Section IV.C below.
Time-Rounding Policy. Independently of the auto-deduction issue, plaintiff alleges that Vantage's time-rounding policy in ApexTime — which rounds all clock-in and clock-out punches to the nearest six-minute (0.1 hour) increment — resulted in systematic underpayment of wages. Under California law, a neutral rounding policy is permissible only if, over time, it does not result in a failure to compensate employees for all time actually worked. See See's Candy Shops, Inc. v. Superior Court (2012) 210 Cal.App.4th 889. Plaintiff alleges that the rounding policy as applied at the Fontana Plant systematically favored Vantage because the majority of employees clocked in one to four minutes early and clocked out one to three minutes late, with the result that rounding consistently truncated compensable time.
Rest Period Violations During Surge Production. Plaintiff further alleges that during "surge" production periods — periods of high customer demand during which the Fontana Plant operated extended overtime shifts of up to 12 hours — non-exempt employees were not authorized and permitted to take compliant 10-minute rest periods. Plaintiff alleges that during surge periods, supervisors instructed employees to take shortened rest periods of five to seven minutes or to skip rest periods entirely in order to maintain production line throughput. This allegation is more difficult to prove on a class-wide basis because it turns on individualized supervisor conduct, but it contributes to overall exposure.
C. Exposure Summary
Based on our preliminary analysis, which is detailed in the Preliminary Case Assessment Memorandum transmitted under separate cover on August 15, 2025, the maximum theoretical exposure for all statutory categories exceeds $65 million. This figure is, however, inflated by overlapping and duplicative categories (for example, UCL restitution is largely duplicative of premium pay) and by statutory caps that would apply in practice. The following table summarizes the principal exposure categories:
Our assessment of the realistic settlement range is $8,500,000 to $18,700,000, reflecting typical settlement discounts in comparable California wage-and-hour class actions, the strength of plaintiff's case on the auto-deduction claims (which are relatively strong), the weaker claims regarding rest periods and time rounding (which involve more individualized issues), the risk of class certification denial, and the litigation costs and delay associated with a full trial. The midpoint realistic exposure is approximately $13,600,000.
Estimated defense costs are as follows:
• Through class certification: $800,000 – $1,200,000
• Through trial: $2,500,000 – $3,800,000
These defense cost estimates are based on the current staffing plan, Calderwood & Harkness's standard hourly rates, and comparable experience in defending California wage-and-hour class actions of this scope and complexity.
III. Summary of the EPL Policy
A. Policy Identification and Period
The relevant insurance policy is the Employment Practices Liability Policy issued by Ridgeway National Insurance Company, a Connecticut-domiciled insurer with principal offices at 100 Constitution Plaza, Hartford, Connecticut 06103. The key policy details are as follows:
• Policy Number: EPL-VMS-2024-07821
• Named Insured: Vantage Mobility Systems Corp. (a Delaware corporation with headquarters at 4200 Industrial Parkway, Auburn Hills, Michigan 48326)
• Policy Period: July 1, 2024 through July 1, 2025
• Carrier Contact (Claims): Neil Pemberton, AVP – Complex Claims, Ridgeway National Insurance Company
The claim arising from the Reyes litigation was reported to Ridgeway during the active Policy period. Although the complaint was filed on August 1, 2025 — technically one month after the expiration of the Policy period on July 1, 2025 — the PAGA notice served on the LWDA on May 22, 2025 and the underlying factual events giving rise to the complaint all occurred during or before the Policy period. Under EPL policies, which are typically written on a "claims-made" basis, the relevant date is generally the date on which the "claim" was first made against the insured. If the Policy defines "claim" to include a written demand or administrative proceeding (including a PAGA notice), then the claim was first made on May 22, 2025, well within the Policy period. Even if the Policy defines "claim" as the filing of a civil proceeding, the complaint was filed on August 1, 2025, which may fall within an "extended reporting period" or "tail" provision typically included in claims-made policies. We have not yet obtained the complete Policy form with all endorsements and must do so promptly to confirm that the claim is within the Policy period and to assess any issues relating to the retroactive date.
The Policy has been renewed annually in prior years. Prior-year policies may also be implicated depending on the definition of "claim," the retroactive date, and the applicable "related claims" provision. If the prior-year policies contain the same or similar terms, they may provide additional limits; conversely, if a "related claims" provision aggregates all related claims under the first policy year in which any such claim was reported, the limits available may be confined to a single policy year.
B. Coverage Limits and SIR
The Policy provides the following coverage limits and self-insured retention:
• Per-Occurrence Limit: $10,000,000
• Aggregate Limit: $20,000,000
• Self-Insured Retention (SIR): $500,000
The SIR structure under the Policy requires that defense costs and indemnity payments within the SIR erode first before Ridgeway's funding obligation commences. In practical terms, this means that Vantage must pay the first $500,000 of combined defense costs and indemnity payments out of pocket. Once the $500,000 SIR has been fully exhausted, Ridgeway is obligated — subject to the terms and conditions of the Policy, including the reservations in the ROR letter — to fund defense costs and indemnity payments up to the per-occurrence limit of $10,000,000.
Critically, the Policy is structured as a defense-within-limits policy, also commonly referred to as a "wasting" or "eroding limits" policy. Under this structure, defense costs incurred by Vantage and funded by Ridgeway erode and reduce the per-occurrence and aggregate limits dollar-for-dollar. This means that every dollar spent on defense reduces the amount of coverage available for indemnity (i.e., settlement or judgment). This is the standard structure for EPL policies and is distinct from a defense-outside-limits structure (common in CGL policies) where the insurer's duty to defend is in addition to, and does not reduce, the policy limits. The defense-within-limits structure has significant implications for the relationship between defense costs and available coverage, as discussed in Section V.B below.
C. Key Policy Provisions Relevant to the ROR
While we have not yet obtained and reviewed the complete Policy form with all endorsements — and doing so is one of our most urgent recommendations — we can identify the following key Policy provisions that are relevant to Ridgeway's coverage reservations based on the ROR letter, our experience with Ridgeway's standard EPL policy forms, and industry custom:
Insuring Agreement. The Policy's insuring agreement covers "Loss" arising from "Claims" made against the Insured during the Policy period for "Wrongful Employment Practices." This is the standard tripartite structure of an EPL insuring agreement: (i) there must be a "Claim" (as defined in the Policy); (ii) the Claim must allege a "Wrongful Employment Practice" (as defined in the Policy); and (iii) the Claim must result in a "Loss" (as defined in the Policy). If any of these three elements is absent or excluded, there is no coverage.
Definition of "Wrongful Employment Practice." EPL policies typically define "Wrongful Employment Practice" to include a broad range of employment-related conduct, including wrongful termination, discrimination, harassment, retaliation, failure to promote, negligent hiring or supervision, defamation in an employment context, and various other employment-related torts. Wage-and-hour claims may or may not fall within this definition depending on the specific policy form and any endorsements. Some EPL policies affirmatively include certain categories of wage-and-hour claims within the definition of "Wrongful Employment Practice" (often subject to a sub-limit or separate endorsement), while others exclude such claims entirely. The interplay between the definition of "Wrongful Employment Practice" and the wage-and-hour exclusion endorsement is a critical issue in this analysis.
Wage-and-Hour Exclusion Endorsement. As noted in the ROR letter, the Policy contains a wage-and-hour exclusion endorsement. Standard EPL wage-and-hour exclusions typically exclude coverage for claims "arising out of, based upon, or attributable to" any actual or alleged violation of any federal, state, or local statute, regulation, or ordinance governing wages, hours, overtime compensation, or employee benefits. Some versions of this exclusion contain a carve-back that preserves "defense costs only" coverage for wage-and-hour claims, meaning that the insurer will fund the defense of such claims but will not provide indemnity for any resulting settlement or judgment. Other versions include a sub-limited endorsement that provides a reduced limit (e.g., $1,000,000 or $2,500,000) for wage-and-hour claims. The precise scope of the wage-and-hour exclusion in Vantage's Policy — including whether it contains any carve-back or sub-limit — is critical and must be determined by reviewing the actual Policy language.
Intentional Acts / Knowing Violation Exclusion. The Policy contains an exclusion for Loss arising from any dishonest, fraudulent, criminal, or knowing violation of law by the Insured. This exclusion is standard in EPL policies and is designed to prevent insurance from covering conduct that the insured knew was wrongful at the time it was committed. Such exclusions typically contain a "final adjudication" requirement, meaning that the exclusion applies only if a court or other tribunal has rendered a final, non-appealable adjudication that the insured's conduct was knowing, intentional, dishonest, or fraudulent, or if the insured has admitted to such conduct. Some policy forms, however, apply the exclusion if the insured "had knowledge" of the violation regardless of whether there has been a final adjudication. The distinction between these two formulations is of central importance to Ridgeway's third reservation, as discussed in Section IV.C below.
Penalties and Fines Exclusion. The Policy likely contains a separate exclusion for civil or criminal penalties, fines, or sanctions imposed by law. This exclusion typically excludes from the definition of "Loss" any amount constituting a fine, penalty, or sanction imposed by law, whether civil or criminal. This exclusion operates independently of the public policy bar on insuring punitive or penal amounts.
Definition of "Claim." The Policy's definition of "Claim" is relevant to determining when the claim was first made for purposes of the claims-made trigger. Under most EPL policy forms, "Claim" is defined to include (a) a written demand for monetary or non-monetary relief, (b) a civil proceeding commenced by the service of a complaint or similar document, or (c) an administrative proceeding, investigation, or charge. If the definition encompasses the PAGA notice served on the LWDA, then the "Claim" was first made on May 22, 2025, within the Policy period. This is likely the correct result, but the precise definition must be confirmed by reviewing the Policy.
IV. Analysis of Ridgeway's Three Coverage Reservations
A. Reservation (i): Wage-and-Hour Exclusion
1. The Exclusion as Likely Worded
Standard EPL policies issued by major carriers, including Ridgeway National, contain a wage-and-hour exclusion endorsement that is typically added to the base policy form by endorsement. The standard formulation of this exclusion, based on our experience with Ridgeway's policy forms and industry precedent, excludes from coverage any claim "arising out of, based upon, or attributable to" any actual or alleged violation of any federal, state, or local law, statute, regulation, or ordinance governing or relating to wages, hours, overtime compensation, or employee benefits.
The breadth of this exclusion turns on three interpretive variables. First, the causal nexus language — "arising out of, based upon, or attributable to" — is deliberately broad and is generally construed to encompass any claim that has a factual or legal connection to the specified subject matter. Second, the subject matter scope — "wages, hours, overtime compensation, or employee benefits" — must be interpreted to determine whether California meal and rest break premium pay falls within its reach. Third, the presence or absence of a carve-back for defense costs or a sub-limit for wage-and-hour claims can materially alter the practical impact of the exclusion.
Some EPL policies include a "defense costs only" carve-back within the wage-and-hour exclusion endorsement. Under such a carve-back, the insurer excludes indemnity coverage for wage-and-hour claims but agrees to fund the defense of such claims up to the policy limits. Other policies include a sub-limited wage-and-hour coverage endorsement that provides a separate, reduced limit (often $1,000,000 to $2,500,000) for defense costs and, in some cases, indemnity for wage-and-hour claims. We have not yet confirmed whether the Vantage Policy contains either of these features, and obtaining the complete Policy form is a priority recommendation.
2. Application to Meal and Rest Break Premium Pay Claims
The central question under Reservation (i) is whether the premium pay claims asserted under California Labor Code section 226.7 — which requires employers to pay one additional hour of pay at the employee's regular rate of compensation for each workday that a compliant meal or rest period is not provided — fall within the scope of the wage-and-hour exclusion.
Argument for Coverage (Vantage's Position). The strongest argument for coverage rests on the characterization of section 226.7 premium pay as established by the California Supreme Court in Kirby v. Immoos Fire Protection, Inc. (2012) 53 Cal.4th 1244. In Kirby, the Supreme Court held that premium pay under section 226.7 is not a "penalty" but rather a "premium wage" that is compensatory in nature. The Court explained that section 226.7 premium pay compensates employees for the employer's failure to provide compliant meal and rest periods and is akin to a statutory wage that the employer is required to pay under specified circumstances. This characterization was further reinforced in Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93, where the Supreme Court held that section 226.7 premiums constitute "wages" for purposes of the derivative wage statement (§ 226) and waiting time (§ 203) penalty provisions.
Based on this characterization, Vantage can argue that section 226.7 premium pay is not "wages" in the traditional sense of compensation for hours worked, but rather a statutory premium or penalty equivalent that the employer incurs for a compliance failure (the failure to provide a compliant break). If the wage-and-hour exclusion is construed narrowly to apply only to claims for unpaid wages, overtime, and benefits — that is, claims based on the employer's failure to compensate the employee for work actually performed — then section 226.7 premiums may fall outside the exclusion because they are not compensation for work performed but rather a statutory premium for a break that was not provided. This argument has textual support if the exclusion is limited to violations of laws "governing wages, hours, [and] overtime" and does not specifically reference meal period, rest period, or break-time statutes.
Additionally, some courts and commentators have distinguished between "traditional" wage-and-hour claims (unpaid overtime, minimum wage violations, misclassification) and "workplace conditions" claims (failure to provide breaks, unsafe working conditions) for purposes of EPL coverage analysis. Under this framework, meal and rest break claims are more properly characterized as workplace conditions claims — the employer failed to provide a compliant break — rather than pure wage-and-hour claims, and the exclusion should not apply.
Argument Against Coverage (Ridgeway's Likely Position). Ridgeway will almost certainly argue that the wage-and-hour exclusion applies to the meal and rest break claims. The Carrier's argument will proceed as follows: (1) sections 226.7 and 512 are codified in the California Labor Code, which is the state's comprehensive wage-and-hour statute; (2) the claims arise from alleged violations of these statutes, which govern an employer's obligation to provide meal and rest periods and to pay premium wages for non-compliance; (3) the exclusion applies to any claim "arising out of" any violation of a wage-and-hour statute, and these claims plainly arise out of violations of wage-and-hour statutes; (4) the broad causal nexus language ("arising out of, based upon, or attributable to") sweeps in any claim with a connection to the specified statutes, regardless of the specific nature of the remedy sought.
Ridgeway will further argue that the Kirby characterization of section 226.7 premiums as "wages" actually supports the Carrier's position rather than undermining it: if premium pay is a "wage," then a claim for premium pay is a claim for unpaid wages, which falls squarely within an exclusion for claims arising from violations of laws governing "wages."
This is a genuinely difficult interpretive question, and the outcome depends primarily on the precise language of the exclusion. If the exclusion broadly encompasses claims "arising out of" any violation of "any law governing wages," Ridgeway's position is strong. If the exclusion is narrower — for example, if it applies only to claims "for" unpaid "wages, overtime, or benefits" — Vantage's argument has greater force.
3. Application to Derivative Claims
The complaint also asserts several causes of action that are derivative of the underlying meal and rest break violations. These include waiting time penalties under Labor Code section 203 (which are triggered by the employer's failure to pay all wages, including premium pay, upon separation), wage statement penalties under section 226 (which are triggered by inaccurate wage statements that fail to reflect premium pay owed), and UCL restitution under Business and Professions Code section 17200 (which is measured by the amount of wages and premiums unlawfully withheld).
If the wage-and-hour exclusion applies to the primary meal and rest break premium pay claims, it will almost certainly extend to these derivative claims as well. The derivative claims "arise out of" the same underlying statutory violations, and the broad causal nexus language of the exclusion would capture them. Conversely, if the exclusion does not apply to the premium pay claims, the derivative claims should also be covered, subject to any separate exclusion for penalties (which would independently reach the section 203 and section 226 penalty claims).
4. Assessment. Coverage for indemnity on the premium pay claims is uncertain and turns on the precise exclusion language, which we have not yet obtained. This is the most consequential of the three reservations because the premium pay claims constitute the largest component of realistic exposure. Within the $8.5 million to $18.7 million realistic settlement range, the vast majority of the settlement value is attributable to meal and rest period premium pay.
Defense cost coverage is more likely to be preserved, either because the exclusion contains a defense-costs carve-back, or because Ridgeway has independently agreed to fund defense costs under the ROR letter (at least for the time being). Even if the exclusion is ultimately held to bar indemnity coverage, the defense funding arrangement under the ROR letter should remain in place unless Ridgeway affirmatively withdraws from the defense, which would carry significant consequences for the Carrier under California's insurance bad faith jurisprudence.
This reservation presents the highest-impact coverage risk in the analysis. If the wage-and-hour exclusion applies to indemnity, Vantage will bear the bulk of any settlement or judgment out of pocket, leaving only defense cost coverage and, potentially, coverage for any non-wage-and-hour components of the settlement (such as non-PAGA penalty amounts, if any are independently covered).
B. Reservation (ii): PAGA Penalties as Uninsurable
1. Nature of PAGA Penalties
The Private Attorneys General Act of 2004, codified at California Labor Code section 2698 et seq., authorizes "aggrieved employees" to bring civil actions on behalf of the State of California to recover civil penalties for violations of the Labor Code. PAGA was enacted to address the chronic under-enforcement of California's labor laws by authorizing private attorneys general to step into the shoes of state enforcement agencies and seek the same civil penalties that those agencies could seek in an administrative enforcement action.
Under PAGA, the civil penalties are calculated as $100 per aggrieved employee per pay period for initial violations and $200 per aggrieved employee per pay period for subsequent violations, unless a different penalty amount is specified in the underlying Labor Code provision. Cal. Lab. Code § 2699(f)(2). The penalties recovered in a PAGA action are distributed as follows: 75% of the penalty amount is payable to the LWDA, and 25% is payable to the aggrieved employees. Cal. Lab. Code § 2699(i).
In the Reyes litigation, we estimate the PAGA penalty exposure at approximately $5,500,000, based on the putative class size of approximately 3,550 employees, the class period, the applicable pay period frequency (bi-weekly), and the number of alleged Labor Code violations per pay period. Of this amount, approximately $4,125,000 would be payable to the LWDA and approximately $1,375,000 would be distributed to the aggrieved employees.
2. Insurability of PAGA Penalties Under California Law
The question of whether PAGA penalties are insurable under California law is governed by the intersection of two principles: (1) the general rule of California public policy that penalties and fines imposed as punishment for violations of law are not insurable, and (2) the specific provisions of the EPL Policy.
Public Policy Bar. California courts have long held that allowing an insured to transfer the burden of a punitive or penal sanction to an insurer through an insurance policy would undermine the deterrent purpose of the sanction and is therefore contrary to public policy. See, e.g., PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 318 (holding that punitive damages are uninsurable under California public policy); Leavitt v. Adriatic Specialty Insurance (1970) 6 Cal.App.3d 490 (fines and penalties imposed for violations of law are uninsurable). This principle applies regardless of whether the insurer is willing to provide coverage; the public policy bar operates as a matter of law to invalidate any insurance coverage for penalties and fines.
PAGA penalties are civil penalties paid to the State of California (75% to the LWDA) as a consequence of the employer's violation of the Labor Code. They are punitive and regulatory in character — they are designed to punish past violations and deter future violations, not to compensate employees for harm suffered. The California Supreme Court has repeatedly emphasized the quasi-governmental enforcement function of PAGA actions. See Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 380-81; see also Kim v. Reins International California, Inc. (2020) 9 Cal.5th 73, 83. Given this characterization, PAGA penalties fall squarely within the category of sanctions that are uninsurable as a matter of California public policy.
While no published California appellate decision has squarely addressed the insurability of PAGA penalties, the weight of authority and the reasoning of the relevant precedent strongly support the conclusion that they are not insurable. Several federal district court decisions applying California law have reached or assumed this conclusion. See, e.g., Soho Glob. Health LLC v. National Union Fire Ins. Co. (C.D. Cal. 2023) (holding that PAGA penalties are excluded from coverage under EPL policy's penalties exclusion and noting public policy concerns); cf. Hartford Cas. Ins. Co. v. Swift Distribution, Inc. (9th Cir. 2020) 808 F.App'x 453 (analyzing exclusion for penalties in EPL context). The consistent analytical framework applied in these cases supports the conclusion that PAGA penalties are uninsurable.
3. The 25% Employee Share
An argument could be made that the 25% of PAGA penalties allocated to aggrieved employees is compensatory rather than punitive in character, and that this portion should be treated differently for insurability purposes. Under this theory, the 25% employee share functions as restitution or additional compensation to employees who were harmed by the employer's Labor Code violations, and insurance coverage for this compensatory component would not offend public policy.
This argument, however, is unlikely to prevail. PAGA penalties are unitary — the statute imposes a single penalty amount per employee per pay period, and the 75%/25% allocation between the LWDA and employees is a distribution mechanism, not a characterization of the nature of the penalty. The California Supreme Court has not distinguished between the two portions for any analytical purpose. In Naranjo v. Spectrum Security Services, Inc. (2022) 13 Cal.5th 93, the Court discussed the nature of PAGA penalties in the context of the broader statutory scheme and did not suggest that the employee share is compensatory while the LWDA share is penal. Both components arise from the same statutory penalty, and the entirety of the penalty is imposed as a consequence of the employer's violation of law.
Ridgeway will almost certainly take the position that the entire PAGA penalty amount — including the 25% employee share — is excluded from coverage both as uninsurable under public policy and as falling within the Policy's penalties and fines exclusion.
4. Assessment. PAGA penalties of approximately $5,500,000 are very likely uninsurable and excluded from coverage under both California public policy and the Policy's penalties and fines exclusion. We assess the probability that Ridgeway will deny coverage for PAGA penalties as very high, and the probability that Vantage could successfully challenge such a denial as low.
Vantage should assume that it will bear the full PAGA penalty exposure — currently estimated at approximately $5,500,000 — outside of insurance, regardless of the outcome of the other coverage disputes.
This conclusion has important implications for settlement strategy. To the extent that a global settlement of the Reyes litigation includes a PAGA component, the portion of the settlement allocated to PAGA penalties will be borne entirely by Vantage. Accordingly, if the settlement can be structured to minimize the PAGA allocation and maximize the allocation to premium pay claims (which have a stronger argument for coverage under the Policy), Vantage's net out-of-pocket exposure will be reduced. We discuss this further in Section VII below.
C. Reservation (iii): Knowing Violation / Intentional Acts Exclusion
1. The Exclusion
The Policy's intentional acts / knowing violation exclusion is a standard provision in EPL policies that excludes from coverage any "Loss" arising from any dishonest, fraudulent, criminal, or "knowing" violation of law by the Insured. This exclusion serves a dual purpose: it reflects the public policy principle that insurance should not protect insureds who knowingly engage in unlawful conduct, and it protects the insurer from moral hazard by ensuring that the insured has an incentive to comply with the law.
The critical interpretive question for this exclusion is whether it requires final adjudication of knowing or intentional conduct as a prerequisite to its application. Most modern EPL policy forms contain a final adjudication requirement, which provides that the exclusion applies only if a court or other tribunal of competent jurisdiction has rendered a final, non-appealable adjudication that the insured's conduct was knowing, intentional, dishonest, or fraudulent, or if the insured has made an admission to such effect. Under a final adjudication requirement, the insurer cannot invoke the exclusion based solely on allegations in the complaint or on documentary evidence suggesting knowledge; the exclusion is triggered only by an actual judicial determination.
Some policy forms, however, use broader language that does not require final adjudication. For example, some exclusions apply if the insured "had knowledge" of the violation at the time it occurred, or if the insured "knew or should have known" that its conduct violated the law. Under these broader formulations, the insurer can invoke the exclusion based on circumstantial evidence of knowledge without awaiting a judicial determination.
Whether Vantage's Policy requires final adjudication or uses a broader formulation is a critical factual question that we cannot resolve without reviewing the actual Policy language. This is one of the most important reasons why obtaining the complete Policy form is an urgent priority.
2. Ridgeway's Theory
Based on the ROR letter, Ridgeway's theory for invoking the knowing violation exclusion is grounded in two factual predicates:
First, Ridgeway points to the internal HR audit memorandum dated February 8, 2024, authored by Sandra Olsen, Vice President of Human Resources. The Olsen memorandum identified the ApexTime 6.2 auto-deduction feature as a compliance risk and recommended its deactivation. Ridgeway argues that this memorandum demonstrates that Vantage had actual knowledge of the non-compliant auto-deduction practice as of at least February 8, 2024. Ridgeway further notes that Vantage continued the auto-deduction practice for approximately five weeks after the Olsen memorandum was issued, from February 8 through March 15, 2024, during which time Vantage continued to auto-deduct meal periods from employee time records despite knowing that the practice created compliance exposure.
Second, and more broadly, Ridgeway may argue that the implementation of an automatic 30-minute meal period deduction — regardless of whether employees actually took meal periods — was inherently a "knowing" violation of California meal period law. Under California law, an employer has an affirmative obligation to "provide" meal periods; simply auto-deducting time without verifying that breaks were taken is inconsistent with this obligation. Ridgeway may argue that any reasonable employer operating in California would have known that an auto-deduction policy — one that assumes breaks are taken without any verification mechanism — violates the meal period statutes.
3. Vantage's Counter-Arguments
Vantage has several strong counter-arguments to the knowing violation reservation:
Good-Faith Implementation. The auto-deduction policy was implemented in ApexTime 6.2 in approximately January 2020 as an administrative convenience. Vantage believed, at the time of implementation, that its non-exempt employees at the Fontana Plant were in fact taking compliant 30-minute meal periods, and that the auto-deduction was merely recording in the timekeeping system what was occurring in practice. The purpose of the auto-deduction was to reduce the administrative burden on employees and supervisors associated with manual clock-out and clock-in procedures, not to deprive employees of meal periods or avoid paying premium wages. Vantage's subjective belief that the policy was compliant is relevant to the "knowing" element of the exclusion.
Prompt Remedial Action. When Sandra Olsen's February 8, 2024 HR audit memorandum identified the compliance risk associated with the auto-deduction feature, Vantage acted promptly. A corrective action memorandum was issued on March 10, 2024, and the auto-deduction feature was deactivated effective March 15, 2024. The five-week period between the identification of the compliance risk and the deactivation of the feature reflects a reasonable remediation timeline — the corrective action required coordination between HR, plant management, and the IT team responsible for the ApexTime configuration, as well as employee communication and training on the new manual clock-out/clock-in procedure. The fact that Vantage took prompt corrective action upon learning of the risk is strong evidence that Vantage did not "knowingly" violate the law. A knowing violator would not have voluntarily discontinued the non-compliant practice.
Final Adjudication Requirement. If the Policy's knowing violation exclusion contains a final adjudication requirement — as most modern EPL policy forms do — then the exclusion cannot be invoked at this stage of the litigation. No court has adjudicated whether Vantage's conduct was "knowing" or "intentional," and no admission of knowing conduct has been made. In the absence of a final adjudication, Ridgeway is obligated to continue funding defense costs and indemnity under the Policy, and it may not rely on the knowing violation exclusion to deny or limit coverage.
Good-Faith Compliance Infrastructure. Vantage maintained written meal and rest break policies in its Employee Handbook (Section 4.3, most recently revised June 2022) and conducted periodic supervisor training on meal and rest period requirements (most recently updated September 2023). While these compliance measures did not prevent the auto-deduction issue, they demonstrate that Vantage made good-faith efforts to comply with California meal period law. A "knowing" violator would not have invested in compliance policies and training.
Settlement Context. If the Reyes litigation is resolved through settlement — which is the anticipated resolution — there will be no "final adjudication" of whether Vantage's conduct was knowing or intentional. Settlement agreements in wage-and-hour class actions typically do not include admissions of liability, and indeed are often structured to include an express denial of liability. If the Policy's knowing violation exclusion requires final adjudication, a settlement without an adjudication of knowing conduct should preclude application of the exclusion.
4. Assessment. The knowing violation exclusion is unlikely to apply at this stage, particularly if the Policy requires final adjudication. Ridgeway cannot deny coverage based solely on the Olsen memorandum or on the allegations in the complaint; it must await a judicial determination of knowing conduct, which is unlikely to occur if the case settles.
However, the February 8, 2024 HR audit memorandum is a "hot document" that creates risk on multiple dimensions. In the underlying litigation, plaintiff's counsel will almost certainly seek the Olsen memorandum in discovery, and it will be a powerful exhibit in support of plaintiff's claims and any motion for class certification. For coverage purposes, the memorandum provides Ridgeway with a factual basis for the knowing violation argument. If the Policy does not require final adjudication — that is, if the exclusion applies whenever the insured "had knowledge" of the violation — the Olsen memorandum could support a coverage denial even in the absence of a judicial determination.
The five-week gap between the Olsen memorandum (February 8, 2024) and the deactivation of the auto-deduction feature (March 15, 2024) is relatively short, and in our assessment reflects a reasonable remediation timeline. However, Ridgeway could characterize this five-week period as a period of continued knowing non-compliance — that is, a period during which Vantage continued the auto-deduction practice with actual knowledge that it was non-compliant. Any meal period violations that occurred during this five-week window may be particularly vulnerable to a knowing violation defense.
In summary, the risk posed by this reservation depends heavily on the precise Policy language. If the Policy requires final adjudication, this reservation is a low-to-moderate risk. If the Policy does not require final adjudication, this reservation is a moderate-to-high risk, particularly for violations occurring after February 8, 2024.
V. Defense Cost Coverage and SIR Erosion
A. Current Status of Defense Funding
Ridgeway has agreed, pursuant to the August 18, 2025 ROR letter, to fund Vantage's defense costs in the Reyes litigation, subject to the reservations of rights described in the letter and subject to the exhaustion of the $500,000 SIR. As noted above, the SIR erodes first, meaning that Vantage must bear the first $500,000 of combined defense costs and indemnity payments out of pocket before Ridgeway's funding obligation commences.
Calderwood & Harkness's current standard hourly billing rates for this engagement are as follows:
• Partner (Renata Vasquez): $1,150 per hour
• Senior Associate: $825 per hour
• Associate (Devon Archer): $675 per hour
Monthly invoices are submitted to Vantage and, once the SIR is exhausted, to Ridgeway for reimbursement. Our estimated defense costs through the major litigation milestones are:
• Through class certification (anticipated Q4 2025 – Q2 2026): $800,000 – $1,200,000
• Through trial (if no pre-trial resolution): $2,500,000 – $3,800,000
Given the current staffing plan and billing rates, we anticipate that the $500,000 SIR will be exhausted relatively early in the litigation — likely within the first three to five months of active defense. The responsive pleading, initial discovery, written discovery propounding and response, depositions of key witnesses (including Sandra Olsen, the plant manager, and the named plaintiff), and class certification briefing will collectively consume defense costs well in excess of $500,000. Once the SIR is exhausted, Vantage should promptly notify Ridgeway and request written confirmation that the Carrier's funding obligation has commenced.
B. Defense-Within-Limits Implications
Because the Policy is a defense-within-limits policy, every dollar of defense costs funded by Ridgeway erodes the $10 million per-occurrence limit. This structure creates a significant tension between the resources devoted to defense and the coverage available for indemnity.
The following table illustrates the interplay between defense costs and available indemnity coverage:
When compared to the realistic settlement range of $8.5 million to $18.7 million, the following observations emerge:
• If defense costs reach $2,500,000 (the low end of the through-trial estimate), the remaining per-occurrence limit is $7,500,000. A settlement at the midpoint of the realistic range ($13,600,000) would exceed available coverage by approximately $6,100,000. Even a settlement at the low end of the realistic range ($8,500,000) would exceed available coverage by approximately $1,000,000.
• If defense costs reach $3,800,000 (the high end of the through-trial estimate), the remaining per-occurrence limit is only $6,200,000. A settlement at the midpoint would exceed available coverage by approximately $7,400,000. A settlement at the low end would exceed available coverage by approximately $2,300,000.
• Only if the case is resolved very early in the litigation — at or shortly after the class certification stage, with defense costs of approximately $800,000 to $1,000,000 — would the remaining per-occurrence limit of $9,000,000 to $9,200,000 be sufficient to cover a low-end settlement of $8,500,000 (and even then, only barely, and only if all components of the settlement are covered, which is unlikely given the PAGA exclusion).
This dynamic creates a potential "burning limits" tension between Ridgeway and Vantage. Ridgeway, as the party ultimately funding defense costs and indemnity from the same $10 million limit, has a strong economic incentive to resolve the case early and cheaply in order to preserve limits and minimize its total payout. Vantage, on the other hand, may have an interest in a more aggressive defense posture if it believes that class certification can be defeated or that the case can be materially weakened through discovery and dispositive motions — even if such a strategy incurs higher defense costs. These potentially divergent interests should be discussed openly with Ridgeway as the litigation progresses, and Vantage should be mindful of the Carrier's economic incentives when evaluating Ridgeway's settlement recommendations.
C. Multiple Claims / Occurrence Issues
The complaint in the Reyes litigation asserts seven causes of action, but all arise from a single pattern of conduct: Vantage's meal period, rest period, and timekeeping practices at the Fontana Plant during the class period. Under standard EPL policy interpretation, multiple causes of action arising from a single pattern of related conduct are typically treated as a single "occurrence" or a single "claim" for purposes of the per-occurrence limit. Ridgeway will very likely treat the Reyes litigation as a single occurrence subject to one $10 million per-occurrence limit.
If individual employee claims within the class could be characterized as separate "occurrences," the $20 million aggregate limit would potentially be implicated. However, this characterization is unlikely to prevail. The complaint alleges class-wide policies and practices, not individualized acts of misconduct against individual employees. The auto-deduction policy, the time-rounding policy, and the alleged rest period denials during surge production are all institutional practices that apply uniformly across the class. Under these circumstances, the entire class action constitutes a single occurrence.
The practical consequence is that Vantage should plan on the basis of a single $10 million per-occurrence limit, not the $20 million aggregate limit.
VI. Coverage Gap Analysis
A. Components Likely Uncovered
Based on our analysis of Ridgeway's three coverage reservations and the applicable Policy provisions and law, we identify the following components of the potential exposure that are likely uncovered:
PAGA Penalties (~$5,500,000). As discussed in Section IV.B, PAGA penalties are very likely uninsurable under California public policy and independently excluded under the Policy's penalties and fines exclusion. Vantage should treat the full PAGA penalty exposure as an out-of-pocket cost regardless of the outcome of the other coverage disputes.
Amounts Exceeding the Per-Occurrence Limit After Defense Cost Erosion. As discussed in Section V.B, the defense-within-limits structure means that defense costs reduce the available per-occurrence limit. Depending on when the case resolves and the total defense costs incurred, the remaining per-occurrence limit may be insufficient to cover the full indemnity amount. Any settlement or judgment amount in excess of the remaining per-occurrence limit will be borne by Vantage.
Premium Pay Claims (If Wage-and-Hour Exclusion Applies to Indemnity). If Ridgeway's wage-and-hour exclusion is construed to bar indemnity coverage for the meal and rest break premium pay claims under sections 226.7 and 512, the bulk of the realistic settlement exposure will be uncovered. This is the most consequential coverage risk, because the premium pay claims drive the majority of the settlement value.
B. Components Likely Covered
Defense Costs. Defense costs are the component most likely to remain covered, at least under the current ROR arrangement. Ridgeway has agreed to fund defense costs, and even if the wage-and-hour exclusion ultimately bars indemnity coverage, defense costs may remain covered under a defense-costs carve-back (if one exists in the Policy endorsement) or under the general insuring agreement as applied to the non-wage-and-hour causes of action (e.g., the UCL and PAGA claims, which may not be subject to the wage-and-hour exclusion even if