Why it matters

A California appellate court agreed with an insurer that an employment-related practices exclusion acted to preclude coverage for a policyholder facing a lawsuit filed by three employees. The insured argued that the employment-related practices exclusion did not apply to the underlying litigation, possibly because it involved salacious allegations of sexual harassment, invasion of privacy, and false imprisonment based on an incident where a supervisor questioned – and visually checked – female employees about whether or not they were menstruating. The employer insured argued that some of the shocking allegations fell outside the enumerated categories of the employment-related exclusion. However, the appellate panel affirmed summary judgment for the insurer, finding that even though certain allegations were not listed in the exclusion, the exclusion’s listing was not exhaustive, and the claims against the insured arose out of their employment with the employer.

Detailed Discussion

A group of employees brought an action against their employer, Jon Davler, Inc. The workers alleged that a supervisor at the cosmetics company became upset one morning when she found a used sanitary product in the women’s bathroom and blood around the toilet seat. The supervisor reacted by returning to the department and yelling at the “dirty” employees, demanding to know who was on their menstrual period.

When the employees denied it, the supervisor ordered another female employee to take each worker into the bathroom and have them pull down their pants and underwear for an inspection. The employees complied with the supervisor’s orders after being told they would be fired if they refused.

The subsequent lawsuit, a putative class action, charged Jon Davler with sexual harassment, invasion of privacy, and false imprisonment based on the bathroom stall examination. Jon Davler tendered the complaint to Arch Insurance Company. The relevant policy provided coverage for “personal and advertising injury” for seven different categories of offenses, one of which included “[f]alse arrest, detention or imprisonment.”

But the policy also featured an Employment-Related Practices Exclusion that stated the coverage for personal and advertising injury did not apply to an injury arising out of any refusal to employ a person, termination of a person’s employment, or “[e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person.”

Arch declined coverage and refused to provide a defense. Jon Davler then sued the insurer for breach of contract and Arch moved for summary judgment, a motion granted by the trial court.

On appeal, Jon Davler tried to convince the panel that the use of phrases such as “such as” and “arising out of” created an ambiguity in the policy’s terms. The use of the term “such as” limited the scope of the Exclusion, the insured argued, and false imprisonment was “markedly different” from the specific examples listed in the Exclusion.

But the court said the phrase was nonexclusive and not intended to be exhaustive. Further, “[f]alse imprisonment shares general similitude with several of the matters specifically enumerated in the [Exclusion], such as coercion, discipline and harassment,” the panel wrote, as the “unlawful violation of the personal liberty of another.” Workplace harassment can include false imprisonment, and employment actions often involve both claims, the court added.

As for the “arising out of” language, Jon Davler said it created an ambiguity by appearing both in the coverage clause and in the Exclusion. But recognizing that California courts have generally interpreted the phrase very broadly, the panel found it clear that the injuries alleged by the employees arose out of their employment with Jon Davler.

“[T]he nexus between the ‘other tort’ (i.e., false imprisonment) and the employees’ employment with Jon Davler was as close as a nexus can be: the only reason the employees were forced into the bathroom for inspection was that they were employed by Jon Davler, were following a directive from a supervisor at their place of employment, and would lose their jobs if they did not comply with the inspection demand,” the court said. “And there was nothing in the allegations of the complaint in the underlying action suggesting that there was any relationship between Jon Davler and the employees subject to the inspection other than the employer-employee relationship.”

Nor could the policy as a whole be considered ambiguous because the insuring provision specifically provided coverage for false imprisonment and the Exclusion did not specifically exclude false imprisonment. An insurance policy may exclude coverage for particular injuries or damages in certain specific circumstances while providing coverage in other circumstances, the court said.

“To be sure, the exclusion could have been drafted to expressly cover an injury arising out of an employment-related act giving rise to false imprisonment by adding false imprisonment to the list of examples, but the fact that the Exclusion ‘could have been written differently does not necessarily mean . . . it is ambiguous,’” the panel wrote.

The insured’s last effort – a facial challenge to the Exclusion – similarly failed. The panel said the language was “sufficiently plain and clear” and an “average layperson would understand that the exclusion applies a category of claims: those arising in the employment setting. An average person knows what employment is.”

To read the decision in Davler v. Arch Insurance Co., click here.