Jon Davler, Inc. v. Arch Insurance Company

(Employment related practices exclusion applied to bar coverage of lawsuit filed by employees for sexual harassment, invasion of privacy and false imprisonment)

In Jon Davler, Inc. v. Arch Ins. Co., 229 Cal.App.4th 1025 (August 25, 2014), the Second District Court of Appeal affirmed the trial court’s order dismissing a complaint for breach of contract and bad faith filed by Jon Davler, Inc. (“Jon Davler”) against Arch Insurance Company (“Arch”) arising out of plaintiff’s tender of defense of an underlying sexual harassment lawsuit filed by three employees of Jon Davler. A coverage dispute arose out of an underlying lawsuit alleging that a supervisor at Jon Davler had sexually harassed three female employees, and invaded their privacy and falsely imprisoned them in an attempt to determine which employee had allegedly left a sanitary napkin in the toilet area of a women’s restroom with blood surrounding the subject toilet. The supervisor required the plaintiffs to line up against the wall and then to enter the bathroom under the supervision of a female attendant and to take down their pants for the purpose of determining if they were wearing a sanitary napkin. If the employees failed to comply, the supervisor threatened to fire them.

Subsequently, the employees filed a complaint for sexual harassment, invasion of privacy and false imprisonment against Jon Davler. In return, Jon Davler tendered the defense of such action to Arch. In response, Arch denied Jon Davler’s tender of defense based on the “employment related practices” exclusion in its policy (“ERP exclusion”). Such exclusion stated as follows:

This exclusion stated that 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 filed a demurrer requesting the trial court to dismiss Jon Davler’s complaint for bad faith. The trial court agreed and issued an order dismissing Jon Davler’s complaint without leave to amend. Subsequently, Jon Davler filed an appeal arguing that the ERP exclusion was ambiguous such that it did not bar coverage of the underlying sexual harassment lawsuit.

In affirming the trial court’s decision, the Court of Appeal reasoned as follows in connection with the three main arguments advanced by Jon Davler arguing why the ERP exclusion was ambiguous:

Jon Davler argues that the employment-related practices exclusion “is ambiguous as applied to false imprisonment claims” because the exclusion's use of “the term ‘such as’ limits the scope of the general exclusionary phrase ‘employment-related practices’ to sharing having the same or similar characteristics or qualities as ‘coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution.’” Jon Davler contends that “[f]alse imprisonment is markedly dissimilar to the specific examples restricting the general exclusionary phrase.”

The phrase “such as” is “not intended to be exhaustive” (Harper & Row v. Nation Enterprises (1985) 471 U.S. 539, 561 [105 S.Ct. 2218, 85 L.Ed.2d 588]) and is “‘illustrative and not limitative’” (Campbell v. Acuff-Rose Music, Inc. (1994) 510 U.S. 569, 577 [114 S.Ct. 1164, 127 L.Ed.2d 500]). The use of the phrase “such as” in an exclusion is “nonexclusive” and “‘“is not a phrase of strict limitation, but is a phrase of general similitude indicating that there are includable other matters of the same kind which are not specifically enumerated.”’” (Aroa Marketing, Inc. v. Hartford Ins. Co. of Midwest (2011) 198 Cal.App.4th 781, 788–789 [130 Cal. Rptr. 3d 466], quoting Shaddox v. Bertani (2003) 110 Cal.App.4th 1406, 1414 [2 Cal. Rptr. 3d 808]; see U.S. v. Aisenberg (M.D.Fla. 2003) 247 F.Supp.2d 1272, 1308 [“if nothing else, the phrase ‘such as’ reveals unmistakably that other examples exist”], revd. in part on other grounds in U.S. v. Aisenberg (11th Cir. 2004) 358 F.3d 1327.)

False imprisonment shares general similitude with several of the matters specifically enumerated in the employment-related practices exclusion, such as coercion, discipline, and harassment. False imprisonment is the “‘unlawful violation of the personal liberty of another,’” where the restraint required “may be effectuated by means of physical force into his office against her will, shut the door, and told her she was committing ‘career suicide’”].)2 Thus, false imprisonment is similar to the examples of employment-related acts listed in the exclusion. Even under Jon Davler's theory, the exclusion applies to false imprisonment claims.

2. “Arising out of”

Jon Davler argues that use of the “the broad term ‘arising out of’” creates an ambiguity because it appears both in the coverage clause and in the employment-related practices exclusion. As Jon Davler recognizes, however, courts generally have “interpreted the phrase ‘arising out of’ very broadly,” even where the phrase appears in an exclusion.

“‘California courts have consistently given a broad interpretation to the terms “arising out of” or “arising from” in various kinds of insurance provisions. It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.’” (St. Paul Mercury Ins. Co. v. Mountain West Farm Bureau Mutual Ins. Co. (2012) 210 Cal.App.4th 645, 658 [“… California courts generally have given the terms ‘arising out of’ or ‘arising from’ their commonsense meaning, concluding that they connote more than mere causation.”].)

. . .

Here, the 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. 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. Indeed, cases involving strip searches of employees have held that the employment-related practices exclusion applies to bar coverage. (See, e.g., Cornett Management Co., LLC v. Fireman's Fund Ins. Co. (4th Cir. 2009) 332 Fed. Appx. 146, 147, 149 exclusion”].)4

3. “False imprisonment”

Jon Davler also argues that there is ambiguity in “the structure of the policy as a whole” because the insuring provision “specifically provides coverage for injury ‘arising out of … [f]alse arrest, detention or imprisonment,’” and the employment-related practices exclusion “does not specifically exclude false imprisonment.” Jon Davler's description of the language of the policy is correct, but its assertion that this language creates an ambiguity is not.

. . .

The conduct giving rise to the false imprisonment claims by the Jon Davler employees was employment related, and the employees' injuries arose out of their employment. (See Regional Steel Corp. v. Liberty Surplus Ins. Corp. (2014) 226 Cal.App.4th 1377, 1394 [“[a]lthough insuring clauses normally are interpreted broadly … and exclusions are strictly construed … , ‘where an exclusion is clear and unambiguous, it is given its literal effect’” (citations omitted)].) 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 … .” (Carolina Casualty Ins. Co. v. L.M. Ross Law Group, LLP (2010) 184 Cal.App.4th 196, 207 [108 Cal. Rptr. 3d 701].) The employment-related practices exclusion barred coverage for the false imprisonment claims.