1017-00004 · Entities. Aurelius Global Media Group · Engagement & Administration

epl-coverage-analysis-memo.docx DOCUMENT Finance & Banking

70 / 150 ← → ✕

CALDERWOOD & HARKNESS LLP

CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Gregory Tanaka, Vice President, Legal & Compliance, Apex Media Arts, Inc. Philippa Cartwright, General Counsel, Apex Global Media Group

FROM: Bernard Crawford

DATE: January 5, 2023

RE: EPL Coverage Analysis — Pemberton Mutual Assurance Co. Reservation of Rights Letter (Policy No. PMA-EPL-2022-00837); Fuentes v. Apex Media Arts, Inc., Case No. 22STCV38214 (L.A. Super. Ct.); Related Matters

This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Copies of this memorandum have been provided to AMA's insurance broker, Kestrel Risk Advisors Ltd. (Samuel Okonkwo, Managing Director, One Broadgate, London EC2M 2QS), at AMA's direction and for purposes of the common interest in connection with insurance matters, which does not constitute a waiver of any applicable privilege.

Right-click to update Table of Contents

I. Background

On November 8, 2022, Calderwood & Harkness LLP, acting on behalf of Apex Media Arts, Inc. ("AMA"), tendered AMA's defense in the Fuentes v. Apex Media Arts, Inc. class action and related matters to Pemberton Mutual Assurance Co. ("Pemberton") under Employment Practices Liability Policy No. PMA-EPL-2022-00837, effective March 1, 2022, through March 1, 2023 (the "Policy"). The tender was submitted by overnight courier and electronic mail to Pemberton's claims department, with a copy to AMA's insurance broker, Kestrel Risk Advisors Ltd. ("Kestrel").

The tender covered the following matters:

(a) The Fuentes v. Apex Media Arts, Inc. wage-and-hour class action, Case No. 22STCV38214, filed November 1, 2022, in the Superior Court of the State of California, County of Los Angeles (the "Fuentes Action");

(b) The Halloran v. Apex Media Arts, Inc. action, Case No. 22STCV39501, filed November 18, 2022, in the Superior Court of the State of California, County of Los Angeles, alleging substantially overlapping claims and since consolidated with the Fuentes Action (the "Halloran Action");

(c) The Private Attorneys General Act ("PAGA") representative claims asserted by the named plaintiffs and the putative aggrieved employees, based on a PAGA notice submitted to the California Labor & Workforce Development Agency ("LWDA") on September 15, 2022; and

(d) The anticipated individual action to be filed by Charles Aldrich, AMA's former Senior Vice President of Content & Development, arising out of his termination for cause on October 14, 2022 (the "Aldrich Dispute").

On December 22, 2022, Pemberton responded to the tender by issuing a formal reservation of rights letter (the "ROR Letter"). In the ROR Letter, Pemberton acknowledged coverage under the Policy and agreed to participate in AMA's defense of the Fuentes Action, the consolidated Halloran Action, and the PAGA claims, subject to a reservation of rights with respect to several policy provisions and exclusions. Pemberton separately addressed the Aldrich Dispute, as discussed in greater detail below.

The purpose of this memorandum is to analyze the key provisions of the ROR Letter and to assess their implications for AMA's defense strategy, settlement structuring, and litigation budget. Where appropriate, this memorandum sets forth recommendations for maximizing coverage and minimizing AMA's out-of-pocket exposure across all pending matters. This memorandum should be read in conjunction with the phase-based budget memorandum dated November 10, 2022, and the preliminary case assessment circulated to the addressees on December 1, 2022.

II. Key Provisions of Pemberton's Reservation of Rights

We address each material provision of the ROR Letter in turn.

A. Self-Insured Retention (SIR) — $5,000,000

The Policy provides for a Self-Insured Retention ("SIR") of Five Million Dollars ($5,000,000). Pemberton confirmed in the ROR Letter that AMA is responsible for the first $5,000,000 in combined defense costs and indemnity payments before Pemberton's coverage obligations are triggered. Under the terms of the Policy, both defense costs (including attorneys' fees, expert fees, and litigation expenses) and indemnity payments (including settlement amounts and judgments) count toward exhaustion of the SIR. This is consistent with the "eroding SIR" structure that is standard in the EPL market for insured entities of AMA's size and risk profile.

The SIR applies on a per-claim basis. Accordingly, the treatment of the various pending matters as one or more "Claims" under the Policy is of critical importance to AMA's aggregate exposure.

Favorable Batch-Clause Treatment. In a development that is materially favorable to AMA, Pemberton has confirmed in the ROR Letter that it treats the Fuentes class action, the Halloran Action (filed November 18, 2022, and now consolidated with Fuentes by stipulation and order dated December 15, 2022), and the PAGA claims as a single "Claim" under the Policy's batch clause, set forth at Section III.B.4 of the Policy. The batch clause provides, in relevant part, that "all Claims arising from the same or related Employment Practices, acts, errors, or omissions, or arising from a common nucleus of operative facts, shall be deemed a single Claim for purposes of determining the applicable Self-Insured Retention and the Aggregate Limit of Liability."

This treatment avoids the application of multiple SIRs to what are, in substance, related proceedings arising from the same course of conduct — namely, AMA's auto-deduction policy for meal periods, its overtime calculation methodology, and its wage statement practices. Had Pemberton taken the position that the Fuentes Action, the Halloran Action, and the PAGA claims constituted separate "Claims," AMA would have faced a potential aggregate SIR exposure of $15,000,000 (three separate $5,000,000 retentions) before any Pemberton coverage dollars would become available. Instead, AMA faces a single $5,000,000 SIR across all three matters.

The Policy provides for a $15,000,000 aggregate limit of liability above the SIR. Accordingly, AMA has a total of $15,000,000 in available coverage from Pemberton once the SIR is exhausted, subject to the reservations discussed below. The combined defense costs and indemnity exposure across the consolidated class action and PAGA matters will need to exceed $5,000,000 before Pemberton's payment obligations are triggered, but based on our preliminary assessment of settlement ranges and defense budgets, it is likely that the SIR will be exhausted or substantially eroded before final resolution of these matters.

B. PAGA Penalties

Pemberton has expressly reserved its rights regarding coverage for PAGA penalties. The ROR Letter states, in relevant part:

"Pemberton reserves its right to deny coverage for PAGA penalties on the grounds that such penalties constitute fines or penalties imposed by law, which may fall within the Policy's Penalty Exclusion (§ IV.F). Nothing in this letter shall be construed as an acknowledgment that PAGA penalties are covered under the Policy."

This reservation is significant because the PAGA penalties claimed by the plaintiffs are substantial. According to the PAGA notice dated September 15, 2022, and filed with the LWDA, the plaintiffs estimate PAGA penalties in excess of $12.2 million, calculated on the basis of approximately 2,400 aggrieved employees over a one-year PAGA period, with multiple alleged violations per pay period. While the actual PAGA exposure may be significantly lower than the plaintiffs' calculation (which, as is typical, assumes maximum penalties for every pay period and every aggrieved employee), the PAGA component remains a material element of the overall case.

The legal landscape regarding insurability of PAGA penalties under EPL policies is unsettled. California courts have not definitively resolved whether PAGA penalties constitute "fines or penalties imposed by law" that are uninsurable as a matter of public policy, or whether they are more properly characterized as a form of statutory damages that may be covered under an EPL policy. The distinction is analytically significant. PAGA penalties are paid to the LWDA (seventy-five percent) and to aggrieved employees (twenty-five percent), which arguably gives them a hybrid character — partly punitive or regulatory in nature, and partly compensatory. Carriers routinely reserve on this issue, and Pemberton's reservation is consistent with standard market practice.

Assessment. Based on our experience with Pemberton and other EPL carriers, we assess that Pemberton will likely exclude PAGA penalties from its coverage contribution calculation in any settlement analysis. However, in the context of a global settlement that resolves both the class claims and the PAGA claims, Pemberton may be willing to negotiate a modest allocation toward the PAGA component as part of its overall settlement approval process. Carriers often recognize that PAGA claims and class claims are intertwined and that a global resolution is in all parties' interests. The key will be how the settlement is structured and allocated.

Recommendation. Any global settlement of the Fuentes/Halloran matters should be structured to minimize the allocation to PAGA penalties and to maximize the allocation to wage-and-hour claims that are clearly covered under the Policy. Specifically, the settlement allocation should emphasize the following covered categories:

• Meal period premiums under California Labor Code Sections 226.7 and 512;

• Overtime wages under California Labor Code Sections 510 and 1194;

• Wage statement penalties under California Labor Code Section 226(e);

• Waiting time penalties under California Labor Code Sections 201–203 (to the extent not excluded);

• Restitution under the Unfair Competition Law, California Business and Professions Code Section 17200 et seq.

To the extent practicable, the PAGA component of any settlement should be allocated as a distinct line item at the lowest defensible level, with appropriate supporting analysis documenting the basis for the allocation. We will work with plaintiffs' counsel during any mediation or settlement negotiations to ensure that the settlement structure is consistent with these objectives while remaining defensible before the court in connection with PAGA settlement approval.

C. Willful Violations

Pemberton reserved its rights regarding coverage for any damages attributable to "willful" violations of the California Labor Code, relying on the Policy's Intentional Acts Exclusion set forth at Section IV.A of the Policy. The Intentional Acts Exclusion provides that the Policy does not cover "Loss arising out of, based upon, or attributable to any deliberately fraudulent, dishonest, criminal, or intentional act or omission by any Insured." The ROR Letter states that Pemberton reserves its right to disclaim coverage for any portion of a judgment or settlement attributable to willful violations of the Labor Code, on the grounds that such violations may constitute "intentional acts" within the meaning of the exclusion.

Pemberton's reservation is directed at the plaintiffs' allegations that AMA "willfully and intentionally" implemented an auto-deduction policy designed to avoid paying meal period premiums to non-exempt production assistants and below-the-line crew members. The operative complaint in the Fuentes Action alleges, among other things, that AMA's management adopted the auto-deduction policy with knowledge that it would result in systematic underpayment of meal period premiums, and that AMA continued the practice despite internal complaints from employees and recommendations from its own payroll department to discontinue the policy. Similar allegations appear in the Halloran Action and in the PAGA notice.

Assessment. This reservation is standard and is not viewed as a significant impediment to coverage. The Intentional Acts Exclusion in EPL policies typically requires a finding of actual intent to injure — that is, the insured must have acted with the specific purpose of causing harm to the employee. Negligent or even knowing violations of wage-and-hour laws do not ordinarily trigger the exclusion. California courts have generally held that the "intentional act" exclusion in liability policies applies only where the insured acted with the specific intent to cause the type of harm alleged, not merely where the insured's conduct was deliberate or knowing. See, e.g., Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 741–42 (1993); Glenrock Assurance Am. Ins. Co. v. Superior Court, 155 Cal. App. 4th 1485 (2007).

In the wage-and-hour context, the allegation that an employer "willfully" failed to pay wages is a legal conclusion that, standing alone, does not establish the type of intentional misconduct necessary to trigger the Intentional Acts Exclusion. The term "willful" as used in Labor Code Section 203 (waiting time penalties) and other provisions has been interpreted by California courts to mean simply that the employer "intentionally failed or refused to perform an act that was required to be performed" — a standard that encompasses negligent or inadvertent failures as well as deliberate ones. See Amaral v. Cintas Corp. No. 2, 163 Cal. App. 4th 1157, 1201 (2008). This is a materially different standard from the "intent to injure" required by most intentional acts exclusions.

Accordingly, while Pemberton's reservation should be noted and tracked, we do not believe it presents a material risk to AMA's coverage position, provided that the case is resolved in a manner consistent with the recommendations set forth below.

Recommendation. To preserve AMA's coverage position, any settlement documents should avoid admissions or findings of willful misconduct. The settlement agreement and any court submissions in connection with preliminary and final approval of a class settlement should include standard "no admission of liability" language, and AMA should not stipulate to any characterization of its conduct as "willful" or "intentional" for purposes of the settlement. This is standard practice in the class settlement context and should not present any obstacle in negotiations with plaintiffs' counsel.

In addition, AMA should resist any effort by plaintiffs to include a provision in the settlement requiring AMA to adopt specific remedial measures predicated on a finding of willful misconduct. Any prospective relief or programmatic changes agreed to as part of a settlement should be framed as voluntary enhancements adopted by AMA in the ordinary course of business, rather than as corrective measures necessitated by prior willful violations.

D. Aldrich Executive Dispute — Coverage Denied

1. Pemberton's Denial

Pemberton's ROR Letter expressly denied coverage for the Aldrich executive dispute. At the time of the tender, the Aldrich matter was anticipated but not yet filed. Mr. Aldrich subsequently filed his complaint on December 9, 2022, in the Superior Court of the State of California, County of Los Angeles, Case No. 22STCV41087 (the "Aldrich Action"). AMA filed its Cross-Complaint on January 20, 2023.

Pemberton stated three grounds for its denial of coverage:

First — Insured v. Insured Exclusion (§ IV.C). Pemberton asserted that the Aldrich claims arise from an individual employment dispute between AMA and a former senior officer, rather than from a "pattern or practice" allegation affecting a class or group of employees. The Insured v. Insured Exclusion provides that the Policy does not cover "Loss arising from any Claim brought by or on behalf of any Insured Person against any other Insured Person." Because Mr. Aldrich served as Senior Vice President of Content & Development, he qualified as an "Insured Person" under the Policy during his tenure. To the extent AMA asserts cross-claims against Aldrich in his capacity as a former officer, the exclusion may apply to bar coverage for those cross-claims and, potentially, for the defense of his affirmative claims as well.

Second — Offensive Litigation by the Insured. Pemberton noted that AMA's affirmative cross-claims against Aldrich — including claims for breach of contract, trade secret misappropriation under the California Uniform Trade Secrets Act ("CUTSA"), Cal. Civ. Code § 3426 et seq., breach of fiduciary duty, and conversion — constitute offensive litigation by the insured rather than the defense of claims brought against the insured. The Policy provides coverage for "Defense Costs" incurred in the defense of "Claims" made against the insured. AMA's prosecution of affirmative cross-claims does not fall within the scope of "defense" coverage under the Policy.

Third — Not "Employment Practices." Pemberton argued that AMA's restrictive covenant claims, trade secret claims, and related cross-claims relate to AMA's proprietary business interests and the protection of confidential information, rather than to "Employment Practices" as defined under the Policy. The Policy defines "Employment Practices" to include, among other things, wrongful termination, harassment, discrimination, retaliation, and violations of employment-related statutes. Claims arising from the enforcement of restrictive covenants, the protection of trade secrets, and allegations of misappropriation of proprietary materials do not fall within this definition, according to Pemberton.

2. Context on Aldrich's Claims and AMA's Cross-Claims

To provide context for the coverage analysis, the following summarizes the key facts and claims in the Aldrich dispute.

Mr. Charles Aldrich served as AMA's Senior Vice President of Content & Development from September 2017 until his termination for cause on October 14, 2022. His employment was governed by an Employment Agreement dated September 5, 2017, as amended by a First Amendment effective August 1, 2020 (collectively, the "Aldrich Employment Agreement"). AMA terminated Mr. Aldrich for cause pursuant to Section 7.2(b) of the Aldrich Employment Agreement, based on AMA's determination that Mr. Aldrich had engaged in material breaches of his confidentiality and non-disclosure obligations, as well as conduct constituting gross negligence and willful misconduct in the performance of his duties.

Aldrich's Complaint. On December 9, 2022, Mr. Aldrich filed a complaint in the Aldrich Action asserting the following causes of action:

(a) Wrongful termination in violation of public policy;

(b) Breach of contract (seeking severance and other payments allegedly owed under the Aldrich Employment Agreement);

(d) Declaratory relief (seeking a declaration that the non-competition provision of the Aldrich Employment Agreement is void and unenforceable under California Business and Professions Code Section 16600); and

(e) Failure to reimburse business expenses under California Labor Code Section 2802.

Mr. Aldrich's aggregate demand, as set forth in his complaint and in pre-litigation demand correspondence, totals approximately $4,150,000, broken down as follows:

AMA's Cross-Complaint. AMA filed its Cross-Complaint in the Aldrich Action on January 20, 2023, asserting the following causes of action:

(a) Breach of the Aldrich Employment Agreement — specifically, Sections 9.1 (Confidential Information), 9.2 (Non-Disclosure), 9.3 (Return of Materials), and 9.4 (Non-Solicitation of Employees);

(b) Misappropriation of trade secrets under CUTSA, Cal. Civ. Code § 3426 et seq.;

(d) Conversion.

AMA's Cross-Complaint is based on evidence that, in the weeks preceding his termination, Mr. Aldrich transmitted proprietary materials from his AMA email account to his personal email address and, subsequently, to accounts associated with Halcyon Creek Productions LLC, a production company that Mr. Aldrich appears to have established in anticipation of his departure from AMA. The materials at issue include: (i) show format bibles for three AMA original series in development; (ii) sizzle reels for two unscripted projects; and (iii) the proprietary revenue model for AMA's flagship Summit Challenge franchise, including confidential licensing and distribution data. AMA's forensic IT team identified the unauthorized transmissions during a routine review of email activity following Mr. Aldrich's termination.

3. Assessment and Recommendation

Assessment. Pemberton's position on the Aldrich dispute is not unreasonable and is consistent with market practice for EPL carriers confronted with individual executive disputes that involve a combination of employment claims and proprietary rights claims. While certain of Mr. Aldrich's causes of action — particularly the wrongful termination and Labor Code Section 2802 claims — arguably fall within the definition of "Employment Practices" under the Policy, the overall character of the dispute is dominated by the restrictive covenant and trade secret issues, which are outside the scope of EPL coverage. The Insured v. Insured Exclusion presents an additional obstacle, particularly in light of AMA's affirmative cross-claims against Mr. Aldrich in his capacity as a former officer.

From a cost-benefit perspective, the expense of challenging Pemberton's denial through coverage litigation or arbitration would likely exceed the potential recovery, particularly given the strength of Pemberton's arguments and the uncertain outcome of any such challenge. Coverage litigation would also consume management attention and legal resources that are better directed at the underlying dispute.

Recommendation. We do not recommend challenging Pemberton's denial of coverage for the Aldrich dispute at this time. AMA should plan to self-fund the Aldrich defense (both the defense of Mr. Aldrich's affirmative claims and the prosecution of AMA's Cross-Complaint) and any settlement or judgment in the Aldrich Action. Based on our preliminary case assessment, we estimate that a reasonable settlement range for the Aldrich dispute is $1,500,000 to $3,000,000, depending on the strength of AMA's for-cause termination defense and the outcome of discovery regarding Mr. Aldrich's unauthorized transmission of proprietary materials.

D&O Policy Preservation. Although Pemberton has denied EPL coverage for the Aldrich dispute, AMA should preserve its rights under its Directors & Officers Liability insurance program in the event that Mr. Aldrich amends his complaint to add individual officers as defendants. The D&O program consists of the following:

• Primary Tower: Redcliffe Specialty Insurance Ltd., Policy No. RSI-DO-2022-04419, with a $10,000,000 limit of liability; and

• Excess Tower: Ashford Re Ltd., Policy No. ARL-EX-2022-01102, with a $25,000,000 limit of liability, excess of the Redcliffe primary layer.

The D&O scenario has not yet materialized, as Mr. Aldrich's current complaint names only AMA as a defendant. However, based on the nature of the allegations and the identity of the individuals involved in the termination decision, there is a reasonable possibility that Mr. Aldrich may seek to add individual officer defendants — particularly Jonathan Mercer (President of AMA) and Dwayne Prescott (Vice President of Unscripted Programming), both of whom participated in the decision to terminate Mr. Aldrich for cause and both of whom are referenced by name in Mr. Aldrich's complaint.

A precautionary notice of circumstances was sent to Redcliffe Specialty Insurance Ltd. on November 8, 2022, contemporaneously with the tender to Pemberton. That notice preserves AMA's right to seek D&O coverage in the event the Aldrich dispute gives rise to claims against individual directors or officers. We recommend that AMA continue to coordinate with Kestrel Risk Advisors on any developments that may affect the D&O program.

E. Defense Counsel Approval

Pemberton confirmed in the ROR Letter its consent to AMA's retention of Calderwood & Harkness LLP as defense counsel for the Fuentes/Halloran class action and PAGA matters. The consent is subject to the billing rates and staffing arrangements set forth in Calderwood & Harkness's engagement letter dated November 1, 2022 (C&H Matter No. 1017-00004).

The following members of the Calderwood & Harkness engagement team have been approved by Pemberton:

Pemberton has requested that AMA provide copies of monthly invoices for audit purposes, which is a standard requirement for EPL carriers participating in the defense of insured matters. All billing submissions to Pemberton will be coordinated through AMA's insurance broker, Kestrel Risk Advisors Ltd., in accordance with the procedures outlined in Pemberton's litigation management guidelines. Invoices should be submitted in the LEDES format and should include appropriate task and activity codes. We will ensure that our billing practices comply with Pemberton's guidelines and that any block-billed or non-conforming entries are corrected prior to submission.

We note that Pemberton's consent to Calderwood & Harkness's retention applies only to the Fuentes/Halloran and PAGA matters. As discussed in Section II.D above, Pemberton has denied coverage for the Aldrich dispute, and accordingly, AMA's retention of Calderwood & Harkness for the Aldrich Action is a separate matter not subject to Pemberton's billing guidelines or approval.

III. Recommendations

Based on the foregoing analysis, we recommend the following actions:

1. SIR Erosion Tracking

AMA should establish and maintain a running tally of all defense costs incurred in connection with the Fuentes/Halloran class action and PAGA matters, tracking such costs against the $5,000,000 SIR. This tally should be updated on a monthly basis, in coordination with Calderwood & Harkness's billing submissions and AMA's internal accounting.

AMA should advise Pemberton in writing when cumulative defense costs and indemnity payments are approaching the SIR threshold. This notification is important for two reasons: first, the Policy may impose a contractual obligation on AMA to provide timely notice of SIR exhaustion; and second, Pemberton's direct participation in defense funding will be triggered upon exhaustion of the SIR, and Pemberton will need adequate lead time to assign a claims examiner, review defense counsel's billing, and coordinate payment.

For reference, the current preliminary budget estimate for total defense fees and expenses in the Fuentes/Halloran and PAGA matters is approximately $3,450,000, as set forth in the phase-based budget memorandum dated November 10, 2022. On the basis of current projections, total defense costs alone are expected to fall within the SIR. However, settlement payments will also count toward SIR exhaustion. If the class action settles for any amount in excess of approximately $1,550,000 (i.e., the difference between the projected defense costs and the $5,000,000 SIR), the SIR will be exhausted and Pemberton's coverage will be triggered. Given the magnitude of the class claims, a settlement in excess of that threshold is a realistic possibility, and indeed a likely outcome.

2. Settlement Structuring

As discussed in Sections II.B and II.C above, the structure and allocation of any class settlement will have a direct and material impact on the extent of Pemberton's coverage contribution. To maximize Pemberton's participation, any settlement should be structured as follows:

(a) Maximize allocations to covered wage-and-hour claims. The settlement allocation should emphasize claims that are clearly covered under the Policy, including: meal period premiums under California Labor Code Sections 226.7 and 512; overtime wages under California Labor Code Sections 510 and 1194; wage statement penalties under California Labor Code Section 226(e); and restitution under California Business and Professions Code Section 17200 et seq.

(b) Minimize allocations to PAGA penalties. Because Pemberton may exclude PAGA penalties from its coverage contribution under the Penalty Exclusion (§ IV.F), the PAGA component of any settlement should be allocated as a distinct line item at the lowest defensible level. We note that PAGA settlement approval requires court review and that the LWDA is entitled to notice and an opportunity to object. The PAGA allocation must therefore be reasonable and supportable, but there is significant flexibility in how the overall settlement fund is apportioned between class claims and PAGA penalties.

(c) Avoid components attributable to "willful" conduct. The settlement should not include any allocation, admission, or characterization that could be interpreted as attributing any portion of the settlement to "willful" violations of the Labor Code. As noted above, settlement documents should include standard "no admission of liability" language, and AMA should not stipulate to willfulness for any purpose.

We will coordinate with plaintiffs' counsel during any mediation or settlement negotiations to ensure that the settlement structure is consistent with these coverage objectives. We anticipate that the first mediation session will take place in the second quarter of 2023, and we will prepare a detailed settlement structuring memorandum in advance of that session.

3. Aldrich Self-Funding

AMA should budget for the full cost of the Aldrich defense and any settlement or judgment as a self-funded matter. Based on our preliminary case assessment, we estimate the following:

• Defense costs (through trial): $750,000 – $1,200,000

• Settlement range: $1,500,000 – $3,000,000

• Combined exposure (defense + settlement): $2,250,000 – $4,200,000

No EPL contribution from Pemberton is anticipated for the Aldrich dispute. AMA should account for this exposure in its litigation reserve and budget planning for fiscal year 2023. We will provide updated exposure estimates as discovery progresses and the case develops.

4. D&O Policy Monitoring

AMA should continue to monitor the Aldrich Action for potential D&O implications. As discussed above, the most significant trigger for D&O coverage would be an amendment of Mr. Aldrich's complaint to add individual officer defendants — specifically Jonathan Mercer and Dwayne Prescott, who participated directly in the termination decision and are identified by name in the existing complaint.

A precautionary notice of circumstances was sent to Redcliffe Specialty Insurance Ltd. on November 8, 2022, and acknowledged by Redcliffe on November 21, 2022. This notice preserves AMA's ability to seek D&O coverage in the event the dispute gives rise to individual officer claims.

We recommend the following ongoing actions:

(a) Monitor Mr. Aldrich's discovery requests and deposition testimony for any indication that he intends to pursue individual officer claims;

(b) Monitor any amendment to Mr. Aldrich's complaint;

(c) Coordinate with Kestrel Risk Advisors on any developments that may require supplemental notice to Redcliffe or Ashford Re; and

(d) In the event individual officers are named, immediately tender the defense of such claims to Redcliffe under the D&O policy and engage coverage counsel as necessary.

IV. Conclusion

Pemberton's reservation of rights, as set forth in the ROR Letter dated December 22, 2022, is within expected parameters for EPL coverage of wage-and-hour class actions and related PAGA proceedings. The principal takeaways are as follows:

Favorable outcomes. The batch-clause treatment of the Fuentes class action, the consolidated Halloran Action, and the PAGA claims as a single "Claim" under the Policy is a materially favorable result for AMA, as it limits AMA's SIR exposure to a single $5,000,000 retention across all three matters. This treatment was not guaranteed and reflects a reasonable interpretation of the Policy's batch clause by Pemberton.

Manageable reservations. The PAGA penalty reservation and the willful-conduct reservation are standard reservations that are routinely asserted by EPL carriers. Neither reservation presents an insurmountable obstacle to coverage. Both can be effectively managed through careful settlement structuring, as described in Sections II.B, II.C, and III.2 above.

Self-funded Aldrich matter. The denial of coverage for the Aldrich executive dispute requires AMA to self-fund that matter in its entirety. While certain elements of Mr. Aldrich's claims might arguably fall within the scope of EPL coverage, the cost and risk of challenging Pemberton's denial outweigh the potential benefit. AMA should preserve its D&O policy rights as a precautionary measure.

Coverage coordination. Going forward, Bernard Crawford of Calderwood & Harkness LLP will serve as the primary point of contact for all insurance coordination on this matter, including communications with Pemberton, Kestrel Risk Advisors, and, as necessary, Redcliffe Specialty Insurance Ltd. and Ashford Re Ltd.

All inquiries regarding coverage, billing submissions, and SIR erosion tracking should be directed to:

Bernard Crawford Calderwood & Harkness LLP Telephone: (213) 555-7214

Email: bcrawford@calderwoodharkness.com

We will continue to update the addressees as developments warrant, and we will circulate a revised coverage analysis if and when Pemberton issues any supplemental reservation of rights or changes its coverage position on any of the matters discussed herein.

This memorandum is intended for informational purposes only and does not constitute legal advice regarding the interpretation of the Policy or any other insurance contract. The analysis set forth herein is based on the terms of the ROR Letter and the Policy as currently understood and is subject to revision as additional information becomes available.

Component	Amount
Severance (per § 7.3 of Employment Agreement)	$970,000
Pro-rata annual bonus	$168,750
RSU acceleration (per Equity Award Agreement)	~$332,200
COBRA continuation (18 months)	~$50,400
Unreimbursed business expenses (Lab. Code § 2802)	$28,400
Emotional distress damages	$500,000
Lost future compensation	$1,200,000
Attorneys' fees	$750,000
Punitive damages	$200,000
Total	~$4,150,000
Attorney	Role	Approved Rate
Renata Vasquez	Partner (Lead Trial Counsel)	$1,125/hr
Bernard Crawford	Partner (Coverage & Strategy)	$1,075/hr
Devon Archer	Senior Associate	$785/hr
Nadia Petrov	Associate	$625/hr

CALDERWOOD & HARKNESS LLP
CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Gregory Tanaka, Vice President, Legal & Compliance, Apex Media Arts, Inc. Philippa Cartwright, General Counsel, Apex Global Media Group
FROM: Bernard Crawford
DATE: January 5, 2023
RE: EPL Coverage Analysis — Pemberton Mutual Assurance Co. Reservation of Rights Letter (Policy No. PMA-EPL-2022-00837); Fuentes v. Apex Media Arts, Inc., Case No. 22STCV38214 (L.A. Super. Ct.); Related Matters
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Copies of this memorandum have been provided to AMA's insurance broker, Kestrel Risk Advisors Ltd. (Samuel Okonkwo, Managing Director, One Broadgate, London EC2M 2QS), at AMA's direction and for purposes of the common interest in connection with insurance matters, which does not constitute a waiver of any applicable privilege.
Right-click to update Table of Contents
I. Background
On November 8, 2022, Calderwood & Harkness LLP, acting on behalf of Apex Media Arts, Inc. ("AMA"), tendered AMA's defense in the Fuentes v. Apex Media Arts, Inc. class action and related matters to Pemberton Mutual Assurance Co. ("Pemberton") under Employment Practices Liability Policy No. PMA-EPL-2022-00837, effective March 1, 2022, through March 1, 2023 (the "Policy"). The tender was submitted by overnight courier and electronic mail to Pemberton's claims department, with a copy to AMA's insurance broker, Kestrel Risk Advisors Ltd. ("Kestrel").
The tender covered the following matters:
(a) The Fuentes v. Apex Media Arts, Inc. wage-and-hour class action, Case No. 22STCV38214, filed November 1, 2022, in the Superior Court of the State of California, County of Los Angeles (the "Fuentes Action");
(b) The Halloran v. Apex Media Arts, Inc. action, Case No. 22STCV39501, filed November 18, 2022, in the Superior Court of the State of California, County of Los Angeles, alleging substantially overlapping claims and since consolidated with the Fuentes Action (the "Halloran Action");
(c) The Private Attorneys General Act ("PAGA") representative claims asserted by the named plaintiffs and the putative aggrieved employees, based on a PAGA notice submitted to the California Labor & Workforce Development Agency ("LWDA") on September 15, 2022; and
(d) The anticipated individual action to be filed by Charles Aldrich, AMA's former Senior Vice President of Content & Development, arising out of his termination for cause on October 14, 2022 (the "Aldrich Dispute").
On December 22, 2022, Pemberton responded to the tender by issuing a formal reservation of rights letter (the "ROR Letter"). In the ROR Letter, Pemberton acknowledged coverage under the Policy and agreed to participate in AMA's defense of the Fuentes Action, the consolidated Halloran Action, and the PAGA claims, subject to a reservation of rights with respect to several policy provisions and exclusions. Pemberton separately addressed the Aldrich Dispute, as discussed in greater detail below.
The purpose of this memorandum is to analyze the key provisions of the ROR Letter and to assess their implications for AMA's defense strategy, settlement structuring, and litigation budget. Where appropriate, this memorandum sets forth recommendations for maximizing coverage and minimizing AMA's out-of-pocket exposure across all pending matters. This memorandum should be read in conjunction with the phase-based budget memorandum dated November 10, 2022, and the preliminary case assessment circulated to the addressees on December 1, 2022.
II. Key Provisions of Pemberton's Reservation of Rights
We address each material provision of the ROR Letter in turn.
A. Self-Insured Retention (SIR) — $5,000,000
The Policy provides for a Self-Insured Retention ("SIR") of Five Million Dollars ($5,000,000). Pemberton confirmed in the ROR Letter that AMA is responsible for the first $5,000,000 in combined defense costs and indemnity payments before Pemberton's coverage obligations are triggered. Under the terms of the Policy, both defense costs (including attorneys' fees, expert fees, and litigation expenses) and indemnity payments (including settlement amounts and judgments) count toward exhaustion of the SIR. This is consistent with the "eroding SIR" structure that is standard in the EPL market for insured entities of AMA's size and risk profile.
The SIR applies on a per-claim basis. Accordingly, the treatment of the various pending matters as one or more "Claims" under the Policy is of critical importance to AMA's aggregate exposure.
Favorable Batch-Clause Treatment. In a development that is materially favorable to AMA, Pemberton has confirmed in the ROR Letter that it treats the Fuentes class action, the Halloran Action (filed November 18, 2022, and now consolidated with Fuentes by stipulation and order dated December 15, 2022), and the PAGA claims as a single "Claim" under the Policy's batch clause, set forth at Section III.B.4 of the Policy. The batch clause provides, in relevant part, that "all Claims arising from the same or related Employment Practices, acts, errors, or omissions, or arising from a common nucleus of operative facts, shall be deemed a single Claim for purposes of determining the applicable Self-Insured Retention and the Aggregate Limit of Liability."
This treatment avoids the application of multiple SIRs to what are, in substance, related proceedings arising from the same course of conduct — namely, AMA's auto-deduction policy for meal periods, its overtime calculation methodology, and its wage statement practices. Had Pemberton taken the position that the Fuentes Action, the Halloran Action, and the PAGA claims constituted separate "Claims," AMA would have faced a potential aggregate SIR exposure of $15,000,000 (three separate $5,000,000 retentions) before any Pemberton coverage dollars would become available. Instead, AMA faces a single $5,000,000 SIR across all three matters.
The Policy provides for a $15,000,000 aggregate limit of liability above the SIR. Accordingly, AMA has a total of $15,000,000 in available coverage from Pemberton once the SIR is exhausted, subject to the reservations discussed below. The combined defense costs and indemnity exposure across the consolidated class action and PAGA matters will need to exceed $5,000,000 before Pemberton's payment obligations are triggered, but based on our preliminary assessment of settlement ranges and defense budgets, it is likely that the SIR will be exhausted or substantially eroded before final resolution of these matters.
B. PAGA Penalties
Pemberton has expressly reserved its rights regarding coverage for PAGA penalties. The ROR Letter states, in relevant part:
"Pemberton reserves its right to deny coverage for PAGA penalties on the grounds that such penalties constitute fines or penalties imposed by law, which may fall within the Policy's Penalty Exclusion (§ IV.F). Nothing in this letter shall be construed as an acknowledgment that PAGA penalties are covered under the Policy."
This reservation is significant because the PAGA penalties claimed by the plaintiffs are substantial. According to the PAGA notice dated September 15, 2022, and filed with the LWDA, the plaintiffs estimate PAGA penalties in excess of $12.2 million, calculated on the basis of approximately 2,400 aggrieved employees over a one-year PAGA period, with multiple alleged violations per pay period. While the actual PAGA exposure may be significantly lower than the plaintiffs' calculation (which, as is typical, assumes maximum penalties for every pay period and every aggrieved employee), the PAGA component remains a material element of the overall case.
The legal landscape regarding insurability of PAGA penalties under EPL policies is unsettled. California courts have not definitively resolved whether PAGA penalties constitute "fines or penalties imposed by law" that are uninsurable as a matter of public policy, or whether they are more properly characterized as a form of statutory damages that may be covered under an EPL policy. The distinction is analytically significant. PAGA penalties are paid to the LWDA (seventy-five percent) and to aggrieved employees (twenty-five percent), which arguably gives them a hybrid character — partly punitive or regulatory in nature, and partly compensatory. Carriers routinely reserve on this issue, and Pemberton's reservation is consistent with standard market practice.
Assessment. Based on our experience with Pemberton and other EPL carriers, we assess that Pemberton will likely exclude PAGA penalties from its coverage contribution calculation in any settlement analysis. However, in the context of a global settlement that resolves both the class claims and the PAGA claims, Pemberton may be willing to negotiate a modest allocation toward the PAGA component as part of its overall settlement approval process. Carriers often recognize that PAGA claims and class claims are intertwined and that a global resolution is in all parties' interests. The key will be how the settlement is structured and allocated.
Recommendation. Any global settlement of the Fuentes/Halloran matters should be structured to minimize the allocation to PAGA penalties and to maximize the allocation to wage-and-hour claims that are clearly covered under the Policy. Specifically, the settlement allocation should emphasize the following covered categories:
• Meal period premiums under California Labor Code Sections 226.7 and 512;
• Overtime wages under California Labor Code Sections 510 and 1194;
• Wage statement penalties under California Labor Code Section 226(e);
• Waiting time penalties under California Labor Code Sections 201–203 (to the extent not excluded);
• Restitution under the Unfair Competition Law, California Business and Professions Code Section 17200 et seq.
To the extent practicable, the PAGA component of any settlement should be allocated as a distinct line item at the lowest defensible level, with appropriate supporting analysis documenting the basis for the allocation. We will work with plaintiffs' counsel during any mediation or settlement negotiations to ensure that the settlement structure is consistent with these objectives while remaining defensible before the court in connection with PAGA settlement approval.
C. Willful Violations
Pemberton reserved its rights regarding coverage for any damages attributable to "willful" violations of the California Labor Code, relying on the Policy's Intentional Acts Exclusion set forth at Section IV.A of the Policy. The Intentional Acts Exclusion provides that the Policy does not cover "Loss arising out of, based upon, or attributable to any deliberately fraudulent, dishonest, criminal, or intentional act or omission by any Insured." The ROR Letter states that Pemberton reserves its right to disclaim coverage for any portion of a judgment or settlement attributable to willful violations of the Labor Code, on the grounds that such violations may constitute "intentional acts" within the meaning of the exclusion.
Pemberton's reservation is directed at the plaintiffs' allegations that AMA "willfully and intentionally" implemented an auto-deduction policy designed to avoid paying meal period premiums to non-exempt production assistants and below-the-line crew members. The operative complaint in the Fuentes Action alleges, among other things, that AMA's management adopted the auto-deduction policy with knowledge that it would result in systematic underpayment of meal period premiums, and that AMA continued the practice despite internal complaints from employees and recommendations from its own payroll department to discontinue the policy. Similar allegations appear in the Halloran Action and in the PAGA notice.
Assessment. This reservation is standard and is not viewed as a significant impediment to coverage. The Intentional Acts Exclusion in EPL policies typically requires a finding of actual intent to injure — that is, the insured must have acted with the specific purpose of causing harm to the employee. Negligent or even knowing violations of wage-and-hour laws do not ordinarily trigger the exclusion. California courts have generally held that the "intentional act" exclusion in liability policies applies only where the insured acted with the specific intent to cause the type of harm alleged, not merely where the insured's conduct was deliberate or knowing. See, e.g., Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 741–42 (1993); Glenrock Assurance Am. Ins. Co. v. Superior Court, 155 Cal. App. 4th 1485 (2007).
In the wage-and-hour context, the allegation that an employer "willfully" failed to pay wages is a legal conclusion that, standing alone, does not establish the type of intentional misconduct necessary to trigger the Intentional Acts Exclusion. The term "willful" as used in Labor Code Section 203 (waiting time penalties) and other provisions has been interpreted by California courts to mean simply that the employer "intentionally failed or refused to perform an act that was required to be performed" — a standard that encompasses negligent or inadvertent failures as well as deliberate ones. See Amaral v. Cintas Corp. No. 2, 163 Cal. App. 4th 1157, 1201 (2008). This is a materially different standard from the "intent to injure" required by most intentional acts exclusions.
Accordingly, while Pemberton's reservation should be noted and tracked, we do not believe it presents a material risk to AMA's coverage position, provided that the case is resolved in a manner consistent with the recommendations set forth below.
Recommendation. To preserve AMA's coverage position, any settlement documents should avoid admissions or findings of willful misconduct. The settlement agreement and any court submissions in connection with preliminary and final approval of a class settlement should include standard "no admission of liability" language, and AMA should not stipulate to any characterization of its conduct as "willful" or "intentional" for purposes of the settlement. This is standard practice in the class settlement context and should not present any obstacle in negotiations with plaintiffs' counsel.
In addition, AMA should resist any effort by plaintiffs to include a provision in the settlement requiring AMA to adopt specific remedial measures predicated on a finding of willful misconduct. Any prospective relief or programmatic changes agreed to as part of a settlement should be framed as voluntary enhancements adopted by AMA in the ordinary course of business, rather than as corrective measures necessitated by prior willful violations.
D. Aldrich Executive Dispute — Coverage Denied
1. Pemberton's Denial
Pemberton's ROR Letter expressly denied coverage for the Aldrich executive dispute. At the time of the tender, the Aldrich matter was anticipated but not yet filed. Mr. Aldrich subsequently filed his complaint on December 9, 2022, in the Superior Court of the State of California, County of Los Angeles, Case No. 22STCV41087 (the "Aldrich Action"). AMA filed its Cross-Complaint on January 20, 2023.
Pemberton stated three grounds for its denial of coverage:
First — Insured v. Insured Exclusion (§ IV.C). Pemberton asserted that the Aldrich claims arise from an individual employment dispute between AMA and a former senior officer, rather than from a "pattern or practice" allegation affecting a class or group of employees. The Insured v. Insured Exclusion provides that the Policy does not cover "Loss arising from any Claim brought by or on behalf of any Insured Person against any other Insured Person." Because Mr. Aldrich served as Senior Vice President of Content & Development, he qualified as an "Insured Person" under the Policy during his tenure. To the extent AMA asserts cross-claims against Aldrich in his capacity as a former officer, the exclusion may apply to bar coverage for those cross-claims and, potentially, for the defense of his affirmative claims as well.
Second — Offensive Litigation by the Insured. Pemberton noted that AMA's affirmative cross-claims against Aldrich — including claims for breach of contract, trade secret misappropriation under the California Uniform Trade Secrets Act ("CUTSA"), Cal. Civ. Code § 3426 et seq., breach of fiduciary duty, and conversion — constitute offensive litigation by the insured rather than the defense of claims brought against the insured. The Policy provides coverage for "Defense Costs" incurred in the defense of "Claims" made against the insured. AMA's prosecution of affirmative cross-claims does not fall within the scope of "defense" coverage under the Policy.
Third — Not "Employment Practices." Pemberton argued that AMA's restrictive covenant claims, trade secret claims, and related cross-claims relate to AMA's proprietary business interests and the protection of confidential information, rather than to "Employment Practices" as defined under the Policy. The Policy defines "Employment Practices" to include, among other things, wrongful termination, harassment, discrimination, retaliation, and violations of employment-related statutes. Claims arising from the enforcement of restrictive covenants, the protection of trade secrets, and allegations of misappropriation of proprietary materials do not fall within this definition, according to Pemberton.
2. Context on Aldrich's Claims and AMA's Cross-Claims
To provide context for the coverage analysis, the following summarizes the key facts and claims in the Aldrich dispute.
Mr. Charles Aldrich served as AMA's Senior Vice President of Content & Development from September 2017 until his termination for cause on October 14, 2022. His employment was governed by an Employment Agreement dated September 5, 2017, as amended by a First Amendment effective August 1, 2020 (collectively, the "Aldrich Employment Agreement"). AMA terminated Mr. Aldrich for cause pursuant to Section 7.2(b) of the Aldrich Employment Agreement, based on AMA's determination that Mr. Aldrich had engaged in material breaches of his confidentiality and non-disclosure obligations, as well as conduct constituting gross negligence and willful misconduct in the performance of his duties.
Aldrich's Complaint. On December 9, 2022, Mr. Aldrich filed a complaint in the Aldrich Action asserting the following causes of action:
(a) Wrongful termination in violation of public policy;
(b) Breach of contract (seeking severance and other payments allegedly owed under the Aldrich Employment Agreement);
(c) Breach of the implied covenant of good faith and fair dealing;
(d) Declaratory relief (seeking a declaration that the non-competition provision of the Aldrich Employment Agreement is void and unenforceable under California Business and Professions Code Section 16600); and
(e) Failure to reimburse business expenses under California Labor Code Section 2802.
Mr. Aldrich's aggregate demand, as set forth in his complaint and in pre-litigation demand correspondence, totals approximately $4,150,000, broken down as follows:
AMA's Cross-Complaint. AMA filed its Cross-Complaint in the Aldrich Action on January 20, 2023, asserting the following causes of action:
(a) Breach of the Aldrich Employment Agreement — specifically, Sections 9.1 (Confidential Information), 9.2 (Non-Disclosure), 9.3 (Return of Materials), and 9.4 (Non-Solicitation of Employees);
(b) Misappropriation of trade secrets under CUTSA, Cal. Civ. Code § 3426 et seq.;
(c) Breach of fiduciary duty; and
(d) Conversion.
AMA's Cross-Complaint is based on evidence that, in the weeks preceding his termination, Mr. Aldrich transmitted proprietary materials from his AMA email account to his personal email address and, subsequently, to accounts associated with Halcyon Creek Productions LLC, a production company that Mr. Aldrich appears to have established in anticipation of his departure from AMA. The materials at issue include: (i) show format bibles for three AMA original series in development; (ii) sizzle reels for two unscripted projects; and (iii) the proprietary revenue model for AMA's flagship Summit Challenge franchise, including confidential licensing and distribution data. AMA's forensic IT team identified the unauthorized transmissions during a routine review of email activity following Mr. Aldrich's termination.
3. Assessment and Recommendation
Assessment. Pemberton's position on the Aldrich dispute is not unreasonable and is consistent with market practice for EPL carriers confronted with individual executive disputes that involve a combination of employment claims and proprietary rights claims. While certain of Mr. Aldrich's causes of action — particularly the wrongful termination and Labor Code Section 2802 claims — arguably fall within the definition of "Employment Practices" under the Policy, the overall character of the dispute is dominated by the restrictive covenant and trade secret issues, which are outside the scope of EPL coverage. The Insured v. Insured Exclusion presents an additional obstacle, particularly in light of AMA's affirmative cross-claims against Mr. Aldrich in his capacity as a former officer.
From a cost-benefit perspective, the expense of challenging Pemberton's denial through coverage litigation or arbitration would likely exceed the potential recovery, particularly given the strength of Pemberton's arguments and the uncertain outcome of any such challenge. Coverage litigation would also consume management attention and legal resources that are better directed at the underlying dispute.
Recommendation. We do not recommend challenging Pemberton's denial of coverage for the Aldrich dispute at this time. AMA should plan to self-fund the Aldrich defense (both the defense of Mr. Aldrich's affirmative claims and the prosecution of AMA's Cross-Complaint) and any settlement or judgment in the Aldrich Action. Based on our preliminary case assessment, we estimate that a reasonable settlement range for the Aldrich dispute is $1,500,000 to $3,000,000, depending on the strength of AMA's for-cause termination defense and the outcome of discovery regarding Mr. Aldrich's unauthorized transmission of proprietary materials.
D&O Policy Preservation. Although Pemberton has denied EPL coverage for the Aldrich dispute, AMA should preserve its rights under its Directors & Officers Liability insurance program in the event that Mr. Aldrich amends his complaint to add individual officers as defendants. The D&O program consists of the following:
• Primary Tower: Redcliffe Specialty Insurance Ltd., Policy No. RSI-DO-2022-04419, with a $10,000,000 limit of liability; and
• Excess Tower: Ashford Re Ltd., Policy No. ARL-EX-2022-01102, with a $25,000,000 limit of liability, excess of the Redcliffe primary layer.
The D&O scenario has not yet materialized, as Mr. Aldrich's current complaint names only AMA as a defendant. However, based on the nature of the allegations and the identity of the individuals involved in the termination decision, there is a reasonable possibility that Mr. Aldrich may seek to add individual officer defendants — particularly Jonathan Mercer (President of AMA) and Dwayne Prescott (Vice President of Unscripted Programming), both of whom participated in the decision to terminate Mr. Aldrich for cause and both of whom are referenced by name in Mr. Aldrich's complaint.
A precautionary notice of circumstances was sent to Redcliffe Specialty Insurance Ltd. on November 8, 2022, contemporaneously with the tender to Pemberton. That notice preserves AMA's right to seek D&O coverage in the event the Aldrich dispute gives rise to claims against individual directors or officers. We recommend that AMA continue to coordinate with Kestrel Risk Advisors on any developments that may affect the D&O program.
E. Defense Counsel Approval
Pemberton confirmed in the ROR Letter its consent to AMA's retention of Calderwood & Harkness LLP as defense counsel for the Fuentes/Halloran class action and PAGA matters. The consent is subject to the billing rates and staffing arrangements set forth in Calderwood & Harkness's engagement letter dated November 1, 2022 (C&H Matter No. 1017-00004).
The following members of the Calderwood & Harkness engagement team have been approved by Pemberton:
Pemberton has requested that AMA provide copies of monthly invoices for audit purposes, which is a standard requirement for EPL carriers participating in the defense of insured matters. All billing submissions to Pemberton will be coordinated through AMA's insurance broker, Kestrel Risk Advisors Ltd., in accordance with the procedures outlined in Pemberton's litigation management guidelines. Invoices should be submitted in the LEDES format and should include appropriate task and activity codes. We will ensure that our billing practices comply with Pemberton's guidelines and that any block-billed or non-conforming entries are corrected prior to submission.
We note that Pemberton's consent to Calderwood & Harkness's retention applies only to the Fuentes/Halloran and PAGA matters. As discussed in Section II.D above, Pemberton has denied coverage for the Aldrich dispute, and accordingly, AMA's retention of Calderwood & Harkness for the Aldrich Action is a separate matter not subject to Pemberton's billing guidelines or approval.
III. Recommendations
Based on the foregoing analysis, we recommend the following actions:
1. SIR Erosion Tracking
AMA should establish and maintain a running tally of all defense costs incurred in connection with the Fuentes/Halloran class action and PAGA matters, tracking such costs against the $5,000,000 SIR. This tally should be updated on a monthly basis, in coordination with Calderwood & Harkness's billing submissions and AMA's internal accounting.
AMA should advise Pemberton in writing when cumulative defense costs and indemnity payments are approaching the SIR threshold. This notification is important for two reasons: first, the Policy may impose a contractual obligation on AMA to provide timely notice of SIR exhaustion; and second, Pemberton's direct participation in defense funding will be triggered upon exhaustion of the SIR, and Pemberton will need adequate lead time to assign a claims examiner, review defense counsel's billing, and coordinate payment.
For reference, the current preliminary budget estimate for total defense fees and expenses in the Fuentes/Halloran and PAGA matters is approximately $3,450,000, as set forth in the phase-based budget memorandum dated November 10, 2022. On the basis of current projections, total defense costs alone are expected to fall within the SIR. However, settlement payments will also count toward SIR exhaustion. If the class action settles for any amount in excess of approximately $1,550,000 (i.e., the difference between the projected defense costs and the $5,000,000 SIR), the SIR will be exhausted and Pemberton's coverage will be triggered. Given the magnitude of the class claims, a settlement in excess of that threshold is a realistic possibility, and indeed a likely outcome.
2. Settlement Structuring
As discussed in Sections II.B and II.C above, the structure and allocation of any class settlement will have a direct and material impact on the extent of Pemberton's coverage contribution. To maximize Pemberton's participation, any settlement should be structured as follows:
(a) Maximize allocations to covered wage-and-hour claims. The settlement allocation should emphasize claims that are clearly covered under the Policy, including: meal period premiums under California Labor Code Sections 226.7 and 512; overtime wages under California Labor Code Sections 510 and 1194; wage statement penalties under California Labor Code Section 226(e); and restitution under California Business and Professions Code Section 17200 et seq.
(b) Minimize allocations to PAGA penalties. Because Pemberton may exclude PAGA penalties from its coverage contribution under the Penalty Exclusion (§ IV.F), the PAGA component of any settlement should be allocated as a distinct line item at the lowest defensible level. We note that PAGA settlement approval requires court review and that the LWDA is entitled to notice and an opportunity to object. The PAGA allocation must therefore be reasonable and supportable, but there is significant flexibility in how the overall settlement fund is apportioned between class claims and PAGA penalties.
(c) Avoid components attributable to "willful" conduct. The settlement should not include any allocation, admission, or characterization that could be interpreted as attributing any portion of the settlement to "willful" violations of the Labor Code. As noted above, settlement documents should include standard "no admission of liability" language, and AMA should not stipulate to willfulness for any purpose.
We will coordinate with plaintiffs' counsel during any mediation or settlement negotiations to ensure that the settlement structure is consistent with these coverage objectives. We anticipate that the first mediation session will take place in the second quarter of 2023, and we will prepare a detailed settlement structuring memorandum in advance of that session.
3. Aldrich Self-Funding
AMA should budget for the full cost of the Aldrich defense and any settlement or judgment as a self-funded matter. Based on our preliminary case assessment, we estimate the following:
• Defense costs (through trial): $750,000 – $1,200,000
• Settlement range: $1,500,000 – $3,000,000
• Combined exposure (defense + settlement): $2,250,000 – $4,200,000
No EPL contribution from Pemberton is anticipated for the Aldrich dispute. AMA should account for this exposure in its litigation reserve and budget planning for fiscal year 2023. We will provide updated exposure estimates as discovery progresses and the case develops.
4. D&O Policy Monitoring
AMA should continue to monitor the Aldrich Action for potential D&O implications. As discussed above, the most significant trigger for D&O coverage would be an amendment of Mr. Aldrich's complaint to add individual officer defendants — specifically Jonathan Mercer and Dwayne Prescott, who participated directly in the termination decision and are identified by name in the existing complaint.
A precautionary notice of circumstances was sent to Redcliffe Specialty Insurance Ltd. on November 8, 2022, and acknowledged by Redcliffe on November 21, 2022. This notice preserves AMA's ability to seek D&O coverage in the event the dispute gives rise to individual officer claims.
We recommend the following ongoing actions:
(a) Monitor Mr. Aldrich's discovery requests and deposition testimony for any indication that he intends to pursue individual officer claims;
(b) Monitor any amendment to Mr. Aldrich's complaint;
(c) Coordinate with Kestrel Risk Advisors on any developments that may require supplemental notice to Redcliffe or Ashford Re; and
(d) In the event individual officers are named, immediately tender the defense of such claims to Redcliffe under the D&O policy and engage coverage counsel as necessary.
IV. Conclusion
Pemberton's reservation of rights, as set forth in the ROR Letter dated December 22, 2022, is within expected parameters for EPL coverage of wage-and-hour class actions and related PAGA proceedings. The principal takeaways are as follows:
Favorable outcomes. The batch-clause treatment of the Fuentes class action, the consolidated Halloran Action, and the PAGA claims as a single "Claim" under the Policy is a materially favorable result for AMA, as it limits AMA's SIR exposure to a single $5,000,000 retention across all three matters. This treatment was not guaranteed and reflects a reasonable interpretation of the Policy's batch clause by Pemberton.
Manageable reservations. The PAGA penalty reservation and the willful-conduct reservation are standard reservations that are routinely asserted by EPL carriers. Neither reservation presents an insurmountable obstacle to coverage. Both can be effectively managed through careful settlement structuring, as described in Sections II.B, II.C, and III.2 above.
Self-funded Aldrich matter. The denial of coverage for the Aldrich executive dispute requires AMA to self-fund that matter in its entirety. While certain elements of Mr. Aldrich's claims might arguably fall within the scope of EPL coverage, the cost and risk of challenging Pemberton's denial outweigh the potential benefit. AMA should preserve its D&O policy rights as a precautionary measure.
Coverage coordination. Going forward, Bernard Crawford of Calderwood & Harkness LLP will serve as the primary point of contact for all insurance coordination on this matter, including communications with Pemberton, Kestrel Risk Advisors, and, as necessary, Redcliffe Specialty Insurance Ltd. and Ashford Re Ltd.
All inquiries regarding coverage, billing submissions, and SIR erosion tracking should be directed to:
Bernard Crawford Calderwood & Harkness LLP Telephone: (213) 555-7214
Email: bcrawford@calderwoodharkness.com
We will continue to update the addressees as developments warrant, and we will circulate a revised coverage analysis if and when Pemberton issues any supplemental reservation of rights or changes its coverage position on any of the matters discussed herein.
This memorandum is intended for informational purposes only and does not constitute legal advice regarding the interpretation of the Policy or any other insurance contract. The analysis set forth herein is based on the terms of the ROR Letter and the Policy as currently understood and is subject to revision as additional information becomes available.
Component | Amount
Severance (per § 7.3 of Employment Agreement) | $970,000
Pro-rata annual bonus | $168,750
RSU acceleration (per Equity Award Agreement) | ~$332,200
COBRA continuation (18 months) | ~$50,400
Unreimbursed business expenses (Lab. Code § 2802) | $28,400
Emotional distress damages | $500,000
Lost future compensation | $1,200,000
Attorneys' fees | $750,000
Punitive damages | $200,000
Total | ~$4,150,000
Attorney | Role | Approved Rate
Renata Vasquez | Partner (Lead Trial Counsel) | $1,125/hr
Bernard Crawford | Partner (Coverage & Strategy) | $1,075/hr
Devon Archer | Senior Associate | $785/hr
Nadia Petrov | Associate | $625/hr

CALDERWOOD & HARKNESS LLP

MEMORANDUM

Record

Parties

Dates

Amounts