The California Court of Appeal, Second Appellate District, recently affirmed an order granting an insurer’s demurrer without leave to amend.  The court agreed that an employment-related practices (ERP) exclusion in a commercial general liability (CGL) policy issued to an insured employer barred coverage for employees’ claims that a supervisor falsely imprisoned them in a workplace bathroom for invasive inspection purposes under threat of termination.

In Jon Davler, Inc. v. Arch Insurance Co., three female employees were forced to enter a workplace restroom and have their undergarments inspected to determine whether they had left a sanitary napkin next to the women’s toilet.  They sued their employer John Davler, Inc. (JDI) and the involved supervisor for sexual harassment, invasion of privacy, intentional infliction of emotional distress, and false imprisonment.

JDI tendered its defense to Arch under a CGL policy, which provided coverage for “personal and advertising injury” arising from enumerated offenses, including “[f]alse arrest, detention or imprisonment.”  Arch denied the tender based on the policy’s ERP exclusion, which precludes coverage for injuries arising out of “employment-related practices.”  The exclusion lists a number of specific practices (including demotion, evaluation, reassignment, and discipline), but it does not mention false imprisonment.

JDI filed suit against Arch for breach of contract, breach of the covenant of good faith, and conversion.  The trial court granted Arch’s demurrer without leave to amend, finding the ERP exclusion applied to all of the underlying claims, including false imprisonment.  This appeal followed.

JDI first argued on appeal that the phrases “such as” and “arising out of” make the ERP exclusion ambiguous.  The Court of Appeal disagreed.  The court stated the phrase “such as” reflects that a list is not exhaustive and includes other similar claims.  The court concluded false imprisonment is similar to other enumerated offenses (such as coercion, discipline and harassment) since each involves the use of force or threats. 

The phrase “arising out of” does not create an ambiguity either.  The language broadly links a factual situation with the event creating liability, and the court found a close nexus existed between the plaintiffs’ false imprisonment allegations and their employment relationship with JDI.  The employees allegedly were detained because they were employees, they were following their supervisor’s directive at their place of employment, and the supervisor threatened that they would lose their jobs if they did not comply.  There also was no evidence of a non-employment relationship between the parties.

The court found each of the phrases at issue – “such as,” “employment-related,” and “arising out of employment” – was clear and unambiguous because they use nontechnical terms a layperson can understand.

JDI next argued that the policy’s structure creates an ambiguity because the insuring agreement specifically provides coverage for false imprisonment while the ERP exclusion does not explicitly exclude such claims.  The Court of Appeal again disagreed.     

The court concluded Frank and Freedus v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461 controls.  In that case, the court held a similar ERP exclusion was unambiguous and applied to defamation despite the fact that “employment-related practices” were not defined and the insuring agreement explicitly provided coverage for defamation claims.  The court concluded the fact that the policy generally covers defamation but excludes claims, including defamation, in a particular context does not create a fatal ambiguity.  The result is the same here. 

The Court of Appeal declined to follow a federal court decision, Zurich Ins. Co. v. Smart & Final, Inc. (C.D. Cal. 1998) 996 F.Supp. 979, in which the court held a reference to false imprisonment in the insuring agreement but not in the ERP exclusion did create an ambiguity.  The Court of Appeal also concluded Zurich v. Smart & Final was factually distinguishable as the conduct at issue there (involving alleged interrogation and false imprisonment as a loss-prevention tactic) was not clearly employment-related.

Absent any indication that JDI could amend its complaint to state a claim against Arch, the Court of Appeal affirmed the trial court’s order sustaining the demurrer without leave to amend. 

Click here for the opinion. 

The opinion in Jon Davler, Inc. v. Arch Insurance Company, Case No. B252830 (2014 Cal. App. LEXIS 837), is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.