Jon Davler, Inc. v. Arch Ins. Co.

• Decision Date: 25 August 2014
• Docket Number: B252830
• Citation: 229 Cal.App.4th 1025,178 Cal.Rptr.3d 502
• Court: California Court of Appeals Court of Appeals
• Parties: JON DAVLER, INC., Plaintiff and Appellant, v. ARCH INSURANCE COMPANY, Defendant and Respondent.

229 Cal.App.4th 1025

178 Cal.Rptr.3d 502

JON DAVLER, INC., Plaintiff and Appellant

v.ARCH INSURANCE COMPANY, Defendant and Respondent.

B252830

Court of Appeal, Second District, Division 7, California.

Filed August 25, 2014

As Modified September 15, 2014

Ideal Legal Group, Inc., Alhambra, and Jie Lian for Plaintiff and Appellant.

Musick, Peeler & Garrett LLP, Los Angeles, and Cheryl A. Orr for Defendant and Respondent.

SEGAL, J.^*

INTRODUCTION

A group of employees brought an action against their employer, Jon Davler, Inc., for various employment claims, including sexual harassment, invasion of privacy, and false imprisonment. Jon Davler tendered the action to its insurer, Arch Insurance Company, which denied coverage based on an employment-related practices exclusion. After Jon Davler filed this insurance coverage action against Arch, the trial court sustained Arch's demurrer to the complaint without leave to amend. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Underlying Action

Three female employees of Jon Davler, a cosmetics company, sued their employer, individually and on behalf of all similarly situated employees, for sexual harassment in violation of Government Code section 12940, subdivision (j), failure to prevent sexual harassment in violation of Government Code section 12940, subdivisions (j) and (k), invasion of privacy in violation of article I, section 1 of the California Constitution, intentional infliction of emotional distress, and false imprisonment. The employees also named as a defendant Christina Yang, an owner, manager, or supervisor of Jon Davler.

The employees alleged that Yang became upset one morning “because she found a used sanitary napkin around the toilet area in the women's bathroom and blood around the toilet seat” at the Jon Davler facility where they worked. The employees alleged that Yang was so upset that she went to the department where they were working “and started yelling that they were ‘dirty’ and demanded to know who was on their menstrual period so that she could determine who had left the used sanitary napkin by the toilet and the toilet unclean.” Yang demanded in a loud, angry voice, “ ‘Are you on your period!’ ” The employees denied that they were on their menstrual cycle, but Yang “was not satisfied with the responses she received.” She instructed another female employee, against her will, “to take each of [the employees] into the bathroom, one by one, and check their panties to see who was on their menstrual period, by requiring each to pull down their pants and underwear for an inspection.”

The employees were “shocked and in a state of disbelief” at Yang's instructions. When they asked about the consequences of refusing to participate in the inspection, Yang said that anyone who refused would be fired. Yang then lined up the employees outside the bathroom. While a male supervisor waited with Yang outside the bathroom door, the designated female employee went into the bathroom with each employee, “stood a foot or two away” while the employees “had to pull down their pants and their panties, exposing their vaginal area, so that [the employee] could see if they were wearing a sanitary napkin and therefore on their period.” When the employees exited the bathroom after the inspection, they “found it extremely difficult and embarrassing to face Yang” and the male supervisor, “and quickly went back to their work area while the inspections continued with the other” employees. In their cause of action for false imprisonment, the employees alleged that they “were wrongfully detained and confined by [Jon Davler and Yang] in the bathroom for the purpose of conducting a humiliating and wrongful inspection of their vaginal area to determine if they were on their menstrual period.”

B. The Policy

Arch issued Jon Davler a commercial general liability policy that, among other coverage, provided coverage for “those sums [Jon Davler] becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies.”¹ The policy defined “personal and advertising injury” as “injury, including consequential ‘bodily injury,’ arising out of” seven categories of offenses, one of which was “[f]alse arrest, detention or imprisonment....”

The policy contained an “Employment-Related Practices Exclusion,” which the parties refer to as an ERP exclusion. 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....”

Jon Davler tendered the underlying action to Arch. Arch declined coverage and refused to provide indemnity or a defense based on the employment-related practices exclusion.

C. This Action

Jon Davler filed this action against Arch for breach of contract, breach of the implied covenant of good faith and fair dealing, and conversion. Jon Davler alleged that the personal and advertising injury coverage included indemnity and defense for “false arrest, detention and imprisonment” and “[o]ral or written publication, in any manner, of material that violates a person's right of privacy.” Jon Davler alleged that Arch's refusal to provide indemnity or a defense breached the terms of the policy and “was unreasonable and in bad faith.” Jon Davler also alleged that Arch “converted [its] Policy benefits and premium payments....”

Arch demurred, arguing that all of the claims in the underlying action alleged “injury to persons ‘arising out of’ ‘[e]mployment-related practices, policies, acts or omissions,’ ” and that therefore the employment-related practices exclusion applied. Arch emphasized that the only relationship between the employees in the underlying action and Arch's insured Jon Davler was an employment relationship, that the employees alleged Yang had told the employees they would be fired if they did not comply with the inspection demand, and that all of the claims were based on allegations of harassment and hostile work environment. Arch also noted that, “[i]n obvious recognition that their claims were based upon employment practices,” the employees alleged that they had “exhausted their administrative remedies by filing a complaint with the California Department of Fair Employment and Housing....” In opposition, Jon Davler argued that the employment-related practices exclusion was ambiguous and did not apply to a claim based on false imprisonment that “occurred in an employment scenario and was for employment purposes.”

The trial court sustained Arch's demurrer without leave to amend. The court noted that because all of the causes of action other than false imprisonment were “clearly the types of actions” covered by the employment-related practices exclusion, it was “really the false imprisonment that we are concentrating on here, and [Jon Davler] is alleging ambiguity as applied in this situation.” The court ruled that all of the claims in the underlying action “fall within [the] exclusion, and, therefore, the demurrer is sustained without leave to amend.” The trial court entered an order of dismissal. Jon Davler appealed.

DISCUSSION

A. Standard of Review and the Duty of an Insurer

“ ‘Because a demurrer both tests the legal sufficiency of the complaint and involves the trial court's discretion, an appellate court employs two separate standards of review on appeal. [Citation.] ... Appellate courts first review the complaint de novo to determine whether ... the ... complaint alleges facts sufficient to state a cause of action under any legal theory, [citation], or in other words, to determine whether ... the trial court erroneously sustained the demurrer as a matter of law. [Citation.]’ [Citation.] ‘Second, if a trial court sustains a demurrer without leave to amend, appellate courts determine whether ... the plaintiff could amend the complaint to state a cause of action. [Citation.]’ [Citation.]” (Das v. Bank of America, N.A. (2010) 186 Cal.App.4th 727, 734, 112 Cal.Rptr.3d 439.) Where an insured has asserted a claim against an insurer for breach of the duty to defend, and the policy and the underlying third party complaint have been incorporated into the insured's complaint against the insurer, “we may properly rely on these documents in assessing whether [the insured's] claims are legally tenable.” (Total Call Intern., Inc. v. Peerless Ins. Co. (2010) 181 Cal.App.4th 161, 166, 104 Cal.Rptr.3d 319.)

“An insurer must defend its insured against claims that create a potential for indemnity under the policy.” (Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal.4th 643, 654, 31 Cal.Rptr.3d 147, 115 P.3d 460.) “ ‘Determination of the duty to defend depends, in the first instance, on a comparison between the allegations of the complaint and the terms of the policy. [Citation.] But the duty also exists where extrinsic facts known to the insurer suggest that the claim may be covered.’ [Citation.] This includes all facts, both disputed and undisputed, that the insurer knows or ‘ “becomes aware of” ’ from any source [citation] ‘if not “at the inception of the third party lawsuit,” then “at the time of tender” ’ [citation]. ‘Moreover, that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.’ [Citation.] Thus, ‘[i]f any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage.’ [Cit...