IRENE M. KEELEY, District Judge.
In this case, the Court must decide whether the plaintiff, Erie Insurance Property & Casualty Company, Inc. ("Erie"), has a duty to defend the defendants, Craig A. Edmond ("Mr. Edmond"), Janet Edmond ("Mrs. Edmond"), and Dreamland Development, LLC, d/b/a Pleasant Day Schools ("Pleasant Day Schools") (collectively, "the underlying defendants"), in a state court action filed by Latasha Henry, Donna Calandrella, Crystal Smith, and Christina Hatcher (collectively, the "underlying plaintiffs"). For the reasons discussed in this opinion, the Court
On August 1, 2008, the underlying plaintiffs sued the underlying defendants in the Circuit Court of Monongalia County, West Virginia, claiming that, during their employment as daycare workers at Pleasant Day Schools, the underlying defendants 1) created a hostile work environment through sexual harassment, 2) engaged in retaliatory discharge, 3) wrongfully discharged them in violation of public policy, 4) intentionally or negligently inflicted emotional distress, 5) committed assault and battery, 6) falsely imprisoned them, 7) invaded their privacy, 8) breached their contracts, and 9) violated the West Virginia Wage Payment and Collection Act.
At all relevant times, Pleasant Day Schools, a limited liability company, was a named insured under a Property & Casualty Company Ultraflex Package Policy # Q39-8050037W ("the Ultraflex Policy") provided by Erie. Under the Ultraflex Policy, when a limited liability company is designated in the declarations, the company's members and managers are also insureds. Pls.' Resp. to Def.s' M.T.D., Ex. 6,
The underlying lawsuit alleges that, during the time the Edmonds owned and managed Pleasant Day Schools, Mr. Edmond subjected the underlying plaintiffs to comments, touching and other inappropriate conduct of a sexually harassing and discriminatory nature. The underlying plaintiffs contend that when they resisted this conduct Mr. and Mrs. Edmond retaliated against them.
Pursuant to Fed.R.Civ.P. 57 and 28 U.S.C. §§ 2201, 2202, et seq., Erie seeks a declaration that it has no duty to defend Pleasant Day Schools or Mr. and Mrs. Edmond in the underlying lawsuit.
The Declaratory Judgment Act authorizes district courts to "declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201. In the Fourth Circuit, "a declaratory judgment action is appropriate `when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and ... when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.'" Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 256 (4th Cir.1996) (citing Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 324 (4th Cir.1937) (internal citation omitted)). Here, because the entry of a declaratory judgment will resolve whether Erie has a duty to defend its insureds in the underlying lawsuit, the Court's exercise of jurisdiction over this matter is proper.
Pursuant to Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), the applicable law in a diversity case such as this is determined by the substantive law of the state in which a district court sits. This includes the forum state's prevailing choice of law rules. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Here, the parties agree that the substantive law of West Virginia governs the interpretation and application of the Ultraflex Policy.
To determine whether Erie owes a duty to defend its insureds under West Virginia law, the Court must compare the pertinent provisions of the Ultraflex Policy with the allegations in the underlying complaint. See Aetna Casualty & Surety Co. v. Pitrolo, 176 W.Va. 190, 342 S.E.2d 156, 160 (1986). Although the Ultraflex Policy was not attached to the complaint, Erie did include it as an exhibit to its brief opposing the motion to dismiss (dkt. no. 37-6), and the parties do not dispute its authenticity.
In pertinent part, the Ultraflex Policy consists of a Commercial General Liability Coverage Form and several endorsements, including an employment-related practices exclusion ("ERP exclusion"). Section I of the Commercial General Liability Coverage Form provides coverage for Bodily Injury and Property Damage Liability ("Coverage A"), and Personal and Advertising Injury Liability ("Coverage B"). The defendants do not assert that Erie's duty to defend arises under any other coverages.
Under West Virginia law, the "`[d]etermination of the proper coverage of an insurance contract when the facts are not in dispute is a question of law.'" Syl. Pt. 2, Tackett v. American Motorists Insurance Company, 213 W.Va. 524, 584 S.E.2d 158, 159 (2003) (quoting Syl. Pt. 1,
"`Where the provisions in an insurance policy contract are clear and unambiguous they are not subject to judicial construction or interpretation, but full effect will be given to the plain meaning intended.'" Glen Falls Insurance Company v. Smith, 217 W.Va. 213, 617 S.E.2d 760, 767-68 (2005) (quoting Syl. Pt. 3, Soliva v. Shand, Morahan & Co., Inc., 176 W.Va. 430, 345 S.E.2d 33 (1986) (internal citation omitted)). On the other hand, a policy provision is ambiguous if it is "`reasonably susceptible of two different meanings or ... of such doubtful meaning that reasonable minds might be uncertain or disagree as to its meaning.'" Id. at 768 (quoting Syl. Pt. 5, Hamric v. Doe, 201 W.Va. 615, 499 S.E.2d 619 (1997) (emphasis in original)). If a policy's provisions are ambiguous, they will be construed in favor of the insured. See Horace Mann Insurance Company v. Leeber, 180 W.Va. 375, 376 S.E.2d 581, 584 (1988). "This principle applies to policy language on the insurer's duty to defend the insured, as well as to policy language on the insurer's duty to pay." Id.
Generally, an insurer's duty to defend is broader than its duty to indemnify. Id. An insurer must defend its insured if a claim against the insured "could, without amendment, impose liability for risks the policy covers." Bowyer v. Hi-Lad, Inc., 216 W.Va. 634, 609 S.E.2d 895, 912 (2004); see also Syl. Pt. 3, Bruceton Bank v. United States Fid. & Guar. Ins. Co., 199 W.Va. 548, 486 S.E.2d 19, 20 (W.Va.1997). For the duty to defend to arise, the underlying complaint need not "specifically and unequivocally make out a claim within the coverage.'" Pitrolo, 342 S.E.2d at 160; see also Leeber, 376 S.E.2d at 584. Rather, the underlying claims must be "reasonably susceptible of an interpretation" that they are covered by the insurance policy. Id.; see also Mylan Laboratories Inc. v. American Motorists Insurance Co., 226 W.Va. 307, 700 S.E.2d 518, 531 n. 21 (2010). If an insurance policy covers some of the claims against an insured, the insurer must defend the covered and uncovered claims alike. Leeber, 376 S.E.2d at 584. Finally, a court must liberally construe any questions regarding the insurer's duty to defend in favor of the insured. Pitrolo, 342 S.E.2d at 160. It is pursuant to these standards that the Court compares the allegations in the underlying complaint with the provisions of the Ultraflex Policy
Erie argues that no coverage is available under Coverage A of the Ultraflex Policy
The relevant terms of Coverage A include:
CGL at 1. The Ultraflex Policy also includes the following definitions:
Id. at 10-11.
In the circumstances of this case, Erie's duty to defend under Coverage A would arise, if at all, only if the allegations in the underlying complaint "are reasonably susceptible of an interpretation that the claim may be covered by the terms of the insurance policies." Syl. Pt. 3, Bruceton Bank, 486 S.E.2d at 20. These allegations, however, do not trigger Erie's duty to defend. Coverage A unambiguously applies only to "bodily injury" and "property damage" caused by an "occurrence." With the possible exception of the underlying claims for hostile work environment and negligent infliction of emotional distress, none of the claims alleged in the underlying complaint resulted from an "occurrence." See Smith v. Animal Urgent Care, Inc., 208 W.Va. 664, 542 S.E.2d 827, 831 (2000) (recognizing that an "occurrence" involves non-volitional and accidental acts).
Furthermore, even if the claims of hostile work environment and negligent infliction of emotional distress in the underlying complaint did result from an "occurrence," neither alleges the requisite "bodily injury" or "property damage." Each seeks relief solely for mental, emotional or economic injuries. See Mylan Laboratories, 700 S.E.2d at 531 (recognizing that purely economic harms do not constitute "bodily injury"); Tackett, 584 S.E.2d at 166 (allegations of mental and emotional injuries do not constitute "bodily injury"). Thus, as the parties acknowledge, no duty to defend the underlying lawsuit arises under Coverage A of Erie's Ultraflex policy.
Next, the Court must determine whether Erie has a duty to defend the claims in
Unlike Coverage A, Coverage B does not require an injury resulting from an "occurrence," but rather applies to "personal and advertising injury" arising from several specified offenses. In pertinent part, Coverage B provides:
CGL Form at 4.
The Ultraflex Policy defines "personal and advertising injury" as:
Id. at 11 (emphasis added).
Pertinent to Coverage B, the underlying complaint alleges the following claims of "false imprisonment" and "invasion of privacy":
Underlying Pls.' Compl. at ¶¶ 71, 76 (dkt. no. 3-1).
Counts Eight and Nine adequately plead claims for "personal and advertising injury" pursuant to Coverage B; thus, Erie would be obligated to defend its insureds in the underlying lawsuit unless these claims are excludable under the Ultraflex Policy.
The "knowing violation of rights of another" exclusion of the Ultraflex Policy states:
CGL Form at 4. In other words, this exclusion applies if the insured acted with the knowledge that his acts would violate another's rights, and intended them to cause "personal and advertising injury." Id.
Importantly, under West Virginia law, a defendant's intent to cause injury to another "will be implied as a matter of law in instances of sexual misconduct," including "allegations of sexual harassment." Animal Urgent Care, 542 S.E.2d at 832-33. Thus, if the claims of "false imprisonment" and "invasion of privacy" alleged in the underlying complaint are predicated on instances of sexual misconduct or harassment
Erie emphasizes that the claims of "false imprisonment" and "invasion of privacy" in the underlying complaint incorporate all of the allegations preceding them, which, among others, include:
Underlying Pls.' Compl. at ¶¶ 11, 19 (dkt. no. 3-1). According to Erie, by incorporating these allegations into their claims for "false imprisonment" and "invasion of privacy," the underlying plaintiffs inextricably linked them to Mr. Edmond's alleged sexual misconduct and harassment, and, by implication, such claims establish Mr. Edmond's intent to violate the rights of the underlying plaintiffs. See Animal Urgent Care, 542 S.E.2d at 832-33.
A careful review of the underlying complaint leaves no doubt that the crux of its claims of "false imprisonment" and "invasion of privacy" are based on Mr. Edmond's alleged sexual harassment and misconduct. While, admittedly, that complaint does not delve deeply into the details of the alleged "false imprisonment" and "invasion of privacy," it does unambiguously root them in Mr. Edmond's alleged sexual misconduct and harassment. See id.; accord Gordon v. Hartford Fire Ins. Co., 105 Fed.Appx. 476, 483 (4th Cir.2004) (unpublished); and Markel American Ins. Co. v. Staples, No. 3:09CV435, 2010 WL 370304, at *5 (E.D.Va. Jan. 28, 2010) (unpublished). For example, it alleges that Mr. Edmond engaged in "inappropriate touching, and other inappropriate conduct," made "unwelcome sexual advances," "request[ed] sexual favors," and exhibited "other conduct of a sexual nature." Underlying Pls.' Compl. at ¶¶ 11, 19 (dkt. no. 3-1).
The allegations of "false imprisonment" and "invasion of privacy" are sufficiently based on Mr. Edmond's alleged sexual misconduct and harassment to imply the fact that he acted intentionally and with knowledge that his actions "would violate the rights of another." CGL at 4. Under the "knowing violation of rights of another" exclusion of Coverage B, therefore, Erie has no duty to defend such claims.
Even if the "knowing violation of rights of another" exclusion did not discharge Erie's duty to defend the underlying lawsuit, the ERP exclusion in Erie's policy would do so. According to Erie, the ERP exclusion clearly and unambiguously excludes coverage for the claims of "false imprisonment" and "invasion of privacy" because they arise out of the underlying defendants' employment-related acts, including acts of coercion, sexual harassment and humiliation. The defendants counter that no allegation in the underlying complaint
The ERP exclusion to Coverage B appears in an endorsement to the Commercial General Liability Coverage Part, and provides:
Pls.' Resp. to Def.s' M.T.D., Ex. 6, Employment-Related Practices Exclusion at 1 (dkt. no. 37-6) ("ERP exclusion").
As noted earlier, Coverage B defines "personal and advertising injury" as injury arising from offenses, including "false imprisonment" and "[t]he ... invasion of the right of private occupancy of a room, ... or premises that a person occupies." CGL at 11. The ERP exclusion, however, states that the policy does not apply to "`personal and advertising injury' [] to a person arising out of any ... [e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person." ERP Exclusion at 1.
Within the context of the ERP exclusion, therefore, even when an insured commits an offense giving rise to "personal and advertising injury," coverage is not available if the acts giving rise to such an offense qualify as an "employment-related" practice, policy, act or omission.
Courts addressing policies containing this exclusion are divided about whether the language of the exclusion is ambiguous when applied to claims for false imprisonment, false arrest or invasion of privacy.
Courts adopting a narrow reading of this phrase have concluded that, although the term "employment-related" could be read broadly to apply to every act related to an employee, the better view is to read it more narrowly as applying only to personnel-related acts. In Peterborough Oil Company, Inc. v. Great American Insurance Company, for example, that court held that the text of the exclusion suggests the phrase refers "to matters that directly concern the employment relationship itself, such as the demotion, promotion, or discipline of employees by employers, and tortious acts that may accompany such personnel decisions, such as discrimination, harassment, or defamation." 397 F.Supp.2d at 238. The court also noted that "[a] corporate employer can only act through human agents, principally its employees," and that "[i]f every injury arising out of an act that somehow related to an employee were to be excluded, the exclusion would effectively swallow the coverage. The term is therefore necessarily narrower." Id. at 238.
Similarly, in Acuity v. North Central Video, LLLP, the court reasoned that, had the drafters of the exclusion intended to "exclude coverage for employer acts or omissions directed to an employee and occurring during the course of employment," they could have used more general language exempting all injuries suffered by employees arising out of the insured's acts. 2007 WL 1356919, at *14, 2007 U.S. Dist. LEXIS 33540, at *38-*39. Instead, the ERP exclusion at issue contained only a narrow range of personnel-related acts. Id. at *14, 2007 U.S. Dist. LEXIS 33540, at *40 (citing Peterborough Oil, 397 F.Supp.2d at 238-39).
Because the exclusions at issue in Peterborough Oil and Acuity plausibly supported either a broad or narrow reading, the courts reviewing those exclusions concluded that they were ambiguous and rejected the broad reading urged by the insurers. Peterborough Oil., 397 F.Supp.2d at 243; Acuity, 2007 WL 1356919, at *17-*18, 2007 U.S. Dist. LEXIS 33540, at *53-*57.
Significantly, in Cornett Management Company, LLC v. Fireman's Fund Insurance Company, a case that arose under West Virginia law, the Fourth Circuit read an ERP exclusion broadly. 332 Fed.Appx. at 148. In Cornett, the manager of a Hooters franchise in Charleston, West Virginia, informed two female employees that a customer had reported a theft and told them to receive instructions from a male police officer on the telephone. The male voice then "commanded the women to strip naked in front of the manager, threatening them with a humiliating arrest if they failed to comply." Id. The women followed these instructions and only later learned that the telephone call was a prank.
As a result, seven female employees filed a lawsuit alleging sexual harassment against Cornett Management Company, LLC ("Cornett"), the owner of the Charleston Hooters franchise. Id. at 147. Their amended complaint included a claim of false imprisonment based on the strip searches. Cornett settled the lawsuit and received reimbursement for defense and settlement costs from Lexington Insurance Company up to the available coverage limits. Id. It then sought additional reimbursement from a second insurer, the Fireman's Fund Insurance Company ("Fireman's Fund"). Id.
When Fireman's Fund declined to cover the claim, Cornett sued it in state court. Fireman's Fund then removed the case to federal court and sought summary judgment on the basis that the policy's ERP exclusion excluded coverage for all the claims filed by Cornett's employees. Judge Stamp of this Court agreed and granted summary judgment. See Cornett Management Co., LLC v. Lexington Ins. Co., et al., No. 5:04CV22, 2006 WL 898109, at *10 (N.D.W.Va. Mar. 31, 2006) (unpublished) (Stamp, J.).
On appeal, the Fourth Circuit affirmed, reasoning that the underlying complaint "clearly allege[d] acts by a Hooters manager that involved intentional coercion, harassment, and humiliation of two female employees who were strip searched." Cornett Management, 332 Fed.Appx. at 149 (emphasis in original). Because those acts would "clearly have an effect on the employment relationship," they qualified as "employment-related" acts under the ERP exclusion. Id. In so ruling, however, the Fourth Circuit also noted that, under West Virginia law, the ERP exclusion would only apply where an employer "intends to cause coercion, humiliation, or harassment." Id. at 149 n. 3 (citing Bowyer, 609 S.E.2d at 913).
The scope of the ERP exclusion in Erie's policy is broad enough to include acts clearly having an effect on the employment relationship:
ERP Exclusion at 1 (dkt. no. 37-6).
In the underlying lawsuit, the claim of "false imprisonment" alleges that Mr. Edmond
See Underlying Pls.' Compl. at ¶ 72 (dkt. no. 3-1). Similarly, the claim of "invasion of privacy" alleges that the
Id. at ¶ 77. Importantly, both claims allege that
See Underlying Pls.' Compl. at ¶¶ 73, 78 (dkt. no. 3-1). Because these offenses allegedly occurred during the course of Mr. Edmond's employment with Pleasant Day Schools, they undoubtedly arose out of employment-related acts that affected the employment relationship, and therefore would fall within the broad scope of the ERP exclusion.
That conclusion does not end the analysis under West Virginia law, however. Erie also must establish that its insureds intended to commit the employment-related acts giving rise to the personal or advertising injury offenses. Cornett Management, 332 Fed.Appx. at 149 n. 3 (citing Bowyer, 609 S.E.2d at 913). This limitation "prevents the exclusion from applying to all acts done by an employer or impacting an employee, a broad interpretation that has led some courts to find the provision ambiguous." Id. (citing Acuity, 2007 WL 1356919, at *14-15, *19; and Peterborough Oil, 397 F.Supp.2d at 238-39).
As pleaded, the claims in the underlying complaint for "false imprisonment" and "invasion of privacy" are reasonably susceptible to the interpretation that they resulted from Mr. Edmond's alleged sexual misconduct and harassment. Thus, as a matter of law, Mr. Edmond impliedly knew that his acts violated the rights of the underlying plaintiffs, and therefore committed them intentionally. See Animal Urgent Care, 542 S.E.2d at 832-33.
Even if such intent and knowledge were not implied, however, by its very nature a claim for "false imprisonment" is intentional under West Virginia law. See Allen v. Smith, 179 W.Va. 360, 368 S.E.2d 924, 927 (1988); Harless v. First Nat. Bank in Fairmont, 169 W.Va. 673, 289 S.E.2d 692 (1982) (citing Jones v. Hebdo, 88 W.Va. 386, 106 S.E. 898 (1921)); and Riffe v. Armstrong, 197 W.Va. 626, 477 S.E.2d 535, 552 (1996) (recognizing that, to state a claim for false imprisonment under West Virginia law, a plaintiff must establish "(1) the detention of the person, and (2) the unlawfulness of the detention and restraint."). Thus, to prevail on such a claim, the underlying plaintiffs must establish that Mr. Edmond's acts were intentional.
Inasmuch as the acts of Mr. Edmond allegedly giving rise to the underlying claims of "false imprisonment" and "invasion of privacy" were "employment-related" and intentional in nature, they fall within the ambit of the ERP exclusion of Erie's Ultraflex Policy.
For the reasons discussed, the Court
It is so
The Court directs the Clerk to enter a separate judgment order in favor of the plaintiff, Erie Insurance Property & Casualty Company, Inc., and to transmit copies of both orders to counsel of record.
No duty to defend arises under those amended pleadings, however, because none of the additional claims alleges "bodily injury" or "property damage" and none include claims for "personal or advertising injury." The Court's analysis, therefore, refers to the allegations of the first underlying complaint. See Underlying Pls.' Compl. (dkt. no. 3-1).
