ERP Exclusion Bars Coverage For Alleged False Imprisonment And Invasive Inspections Of Employees

In Jon Davler, Inc. v. Arch Insurance Company, Case No. B252830 (2014 Cal. App. LEXIS 837), the California Court of Appeal, Second Appellate District, affirmed dismissal of the insured’s coverage action, holding that an Employment-Related Practices (ERP) exclusion in a CGL policy barred coverage for employees’ claims against their employer that a supervisor falsely imprisoned them in a workplace bathroom for invasive inspection purposes under threat of termination.

The complaint alleged that 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 false imprisonment and other causes of action.

JDI’s insurer, Arch, declined to defend under a CGL policy which included an ERP exclusion.  The exclusion listed a number of “employment-related” practices, but it did not mention false imprisonment.  JDI filed suit against Arch based on the coverage denial.  The trial court sustained a demurrer by Arch without leave to amend, and this appeal followed.

The Court of Appeal rejected JDI’s arguments that the phrases “such as” and “arising out of” in the ERP exclusion are ambiguous.  “Such as” is not exhaustive, and the court concluded the allegations clearly “arose out of” employment.  The employees allegedly were detained because they were employees, they were following their supervisor’s directive at their place of employment, and she threatened loss of their jobs if they did not comply.

The court also rejected JDI’s argument that there was a structural ambiguity because the policy’s insuring agreement specifically provided coverage for false imprisonment while the ERP exclusion did not explicitly exclude such claims.  The Court of Appeal based its decision on Frank and Freedus v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461 which held a similar exclusion was unambiguous and applied to defamation even though “employment-related practices” were not defined and the insuring agreement explicitly provided coverage for defamation claims.

The Court of Appeal declined to follow 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 also concluded Zurich v. Smart & Final is factually distinguishable as the conduct alleged there (interrogation and false imprisonment as a loss prevention tactic) was not clearly employment related.