Case5:11-cv-00455-LHK Document1 Filed01/28/11 Page1 of 13

1 GAUNTLETT & ASSOCIATES

David A. Gauntlett (SBN 96399)
2

3
Robert Scott Lawrence (SBN 207099)
18400 Von Karman, Suite 300
Irvine, California 92612
ADR Filed
Telephone: (949) 553-1010 ,JAN 2 8 2011
4 Facsimile: (949) 553-2050
i11fo@gauntlettlaw.com RICHARD W. WIEKING
CLERK. U.S. DISTRICT COURT
5 rsl@gauntlettlaw.com NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE

6 Attorneys for Plaintiff E-filing

GAUNTLETT & ASSOCIATES
7

8 UNITED STATES DISTRICT COURT

9 NORTHERN DISTRICT OF CALIFORNIA, SAN JOSE DIVISION

10

11 AVID A. GAUNTLETT d/b/a GAUNTI~rN)

& ASSOCIATES, a sole proprietorship,)
12 )
Plaintiff, ) COMPLAINT FOR DECLARATORY
13 ) JUDGMENT
vs. )
14 )
ILLINOIS UNION INSURANCE COMPANY, )
15 an Illinois corporation, )
)
16 Defendant. )

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169866.1-10008-046-1128/20 II COMPLAINT FOR DECLARATORY JUDGMENT

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1 COMPLAINT FOR DECLARATORY JUDGMENT

2 1. This is an insurance coverage suit seeking to establish that Defendant Illinois Union

3 Insurance Company ("Illinois Union") had a duty to defend Plaintiff David A. Gauntlett d/b/a

4 Gauntlett & Associates. ("G&A") in the underlying litigation styled as Tarzi v. Gauntlett &

5 Associates, et al., Consolidated Superior Courts of California, County of Orange, Central District,

6 Case No. 07-CC-08999 (the "Tarzi action"), and that Illinois Union must reimburse G&A for all

7 defense expenses incurred therein.

8 THE PARTIES

9 2. Plaintiff David A. Gauntlett is, and at all times mentioned herein was, an individual
10 residing in Orange County, California and doing business as a sole proprietor under the business

11· name Gauntlett & Associates ("G&A"). G&A is a law firm with its principal place of business at

12 18400 Von Karman Avenue, Suite 300, Irvine, California.

13 3. Defendant Illinois Union is, and at all times mentioned herein was, an insurance

14 company organized and existing under the laws of the State of Illinois with its principal place of

15 business at 525 Monroe Street, Suite 400, Chicago, Illinois. Illinois Union is a surplus lines insurer

16 and is not licensed to transact business by the State of California.

17 JURISDICTION

18 4. This is an action for declaratory relief pursuant to 28 U.S.C. § 2201. This court has

19 jurisdiction over this action pursuant to 28 U.S.C. § 1332 in that complete diversity exists between

20 the parties. Plaintiff is a citizen of California. Defendant is a citizen of Illinois.

21 5. The amount in controversy exceeds the sum of $75,000 exclusive of interest and

22 costs, and in addition to other and further relief, declaratory relief is sought.

23 VENUE AND APPLICABLE LAW

24 6. Venue is proper in the United States District Court for the Northern District of

25 California pursuant to 28 U.S.C. §§ 139l(a), 139l(c).

26 7. Illinois Union is an insurance company actively selling insurance policies throughout

27 California. Illinois Union has sufficient contacts with the Northern District of California to be

28 subject to personal jurisdiction in this district.

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1 8. Venue is proper in this district because Illinois Union Policy at issue in this matter

2 was applied for, negotiated and issued through plaintiff's insurance broker in Palo Alto, California.

3 Moreover, initial notice of the claims in the underlying action were submitted through plaintiff's

4 insurance broker in Palo Alto, California. Further, the Policy was intended to cover G&A's

5 operations throughout the United States, including the Northern District of California.

6 9. The substantive rights of the parties are governed by the law of California because the

7 contract at issue in this case was executed in California, there is no evidence that the parties did not

8 intend to contract pursuant to the laws of the state of California, the underlying case in which a

9 defense was wrongfully denied was filed in California, and the policies and interests of California

10 would be most seriously impaired if its laws were not applied.

11 THE ILLINOIS UNION POLICY

12 10. Illinois Union issued Employment Practices Liability Insurance Policy No. 12 62 65 8

13 to David A. Gauntlett; dba Gauntlett & Associates, as named insured, effective July 10, 2006

14 through July 10, 2007 (the "Illinois Union Policy" or "Policy"). A copy of the Illinois Union Policy

15 is attached as Exhibit "I."

16 11. The Policy has a limit of$l million for each First Party Insured Event.

17 12. The Policy provides in pertinent part the following coverage and defmitions:

18 This policy covers Claims alleging Employment-related

Discrimination, Employment-related Harassment, and Inappropriate
19 Employment Conduct liability ....

20 A. We will pay Loss amounts that the insured is legally obligated

to pay on account of a Claim because of an Insured Event to which this
21 policy applies ....

22 C. Defense. We have the right and duty to defend any Claim

made or brought against any Insured to which this policy applies ....
23
A. Claim(s) means:
24 1. A written demand for monetary damages;
2. A civil proceeding commenced by the service of a
25 complaint or similar pleading;

26 B. Defense Costs mean those reasonable and necessary expenses

that result from the investigation, settlement or defense of a specific
27 Claim including attorney fees and expenses, the cost of legal
proceedings . . . .
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1 F. First Party Insured Event means actual or alleged acts of

Employment-related Discrimination, Employment-related Harassment,
2 or Inappropriate Employment Conduct by an insured against an
Employee ....
3 G. Inappropriate Employment Conduct means any actual or
alleged:
4
3. Employment-related misrepresentation to ... an
5 Employee ....

6 6. Employment-related libel, slander, defamation of

character or any invasion of right of privacy of an Employee ....
7
I. Loss
8
1. Loss means the amount the insureds become legally
9 obligated to pay on account of each Claim ... made against them for
. . . Inappropriate Employment Conduct for which coverage applies,
10 including, but not limited to, damages, back pay and front pay,
judgments, any award of pre-judgment and post-judgment interest,
11 settlements and Defense Costs.

12 (Emphasis added.)

13 13. The Illinois Union Policy fails to define any of the following words and phrases: (1)
14 "any" (2) "privacy" (3) "invasion of privacy" (4) "right of privacy" (5) "invasion of right of privacy"

15 (6) "misrepresent" (7) "misrepresentation" (8) "employee-related misrepresentation."

16 THE UNDERLYING TARZI ACTION

17 14. Miriam Tarzi ("Tarzi") ftled suit against G&A on August 16,2007 in litigation styled

18 as Miriam Tarzi v. David A. Gauntlett dba Gaunt/ett & Associates, et al., Consolidated Superior

19 Courts ofCalifomia, County of Orange, Central District, Case No. 07-CC-08999 (the "Tarzi action"

20 or "Tarzi complaint"). The thrust of the lawsuit was that Tarzi had been misclassified as an
21 "exempt" employee during the period she worked for G&A, that she had been paid as "exempt," and
22 that she was now owed overtime wages and other statutory damages under the California Labor

23 Laws because she was in fact a "non-exempt" employee during that time.

24 15. The Tarzi complaint alleged causes of action for claims including Violations of the

25 Unfair Competition Law. A copy of the Tarzi complaint is attached as Exhibit "2."

26 16. The Tarzi complaint alleges in pertinent part that:

27 5. Plaintiff became employed by defendant as a ftle clerk

in June of 1998. From the onset of her employment, defendant
28 classified her as an "exempt" employee ....

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10. On May 10, 2007, plaintiff provided defendant
2 Gauntlett a letter regarding what she reasonably believed to be his
choice to mis-classify her as an "exempt" employee. She requested
3 payment for her unpaid overtime hours. When plaintiff returned to
work she learned that all of her stored email communications,
4 over 3000, had been deleted from her work computer. Plaintiff
immediately brought this to the attention of defendant's Teclmology
5 Manager who stated that he knew nothing about the missing
documents. He looked at plaintiffs computer and did, however,
6 confmn that someone had changed her settings and deleted of [sic]
her stored e-mails. Plaintiff then advised defendant Gauntlett that
7 someone had logged into her computer, manipulated the settings
and deleted several thousand e-mails. Defendant Gauntlett had no
8 response.
9 (Emphasis added.)
10 G&A'S TENDER OF DEFENSE TO ILLINOIS UNION
AND ILLINOIS UNION'S DENIAL
11
Illinois Union Received Timely Notice of Miriam Tarzi's Claim
12 and Subsequent Lawsuit
13 17. G&A, through its insurance broker, provided timely notice to Illinois Union of the
14 claims made by Tarzi in her May 10, 2007 letter. The claim was reported to Illinois Union on June
15 25, 2007. It was submitted by Socius Insurance Brokers, G&A's wholesale broker on this

16 placement.

17 18. G&A, through counsel, provided notice of the Tarzi action to Illinois Union on
18 September 4, 2007, shortly after being served in that action. Such notice included providing Illinois

19 Union with a copy of the underlying complaint.

20 Illinois Union's Denial of a Defense Provided No Analysis
of the Two Grounds for Coverage Asserted Herein
21

22 19. By letter dated September 27, 2007, Illinois Union denied G&A a defense. In the
23 letter, Illinois Union acknowledged receiving G&A's claim for the Tarzi action and the Tarzi

24 complaint. It then denied a defense, claiming the allegations in the Tarzi action did not fall within
25 the Policy'S definition of covered "Loss" and were also excluded by the Gain or Profit Exclusion,

26 the Compensation Earned or Due Exclusion, and the Employment Contracts Exclusion.

27 20. Illinois Union did not explain in any detail why it felt the exclusions applied. The

28 letter stated in pertinent part:

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1 Claimant's civil complaint alleges failure to pay certain wages

owed. Under the above Policy, Claimant's allegations do not fall
2 within the Policy's definition of covered "Loss." Accordingly, the
Insurer is constrained to advise that there is no coverage for this
3 matter.
4 At [sic1noted above, Claimant is seeking to be reimbursed for
unpaid overtime and other wages that were allegedly withheld. The
5 Exclusions section of the Policy specifically excludes coverage for
wages owed. Accordingly, we again must advise that there is no
6 coverage.

7
A copy of Illinois Union's September 27,2007 denial letter is attached as Exhibit "3."
8
21. Illinois Union's assertion in its denial letter that its Policy provided no coverage for
9
the claims asserted by Tarzi was untrue.
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22. Illinois Union's Policy provides express "Inappropriate Employment Conduct"
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coverage to G&A for, inter alia, "Employment-related misrepresentation ... to an Employee" and
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"invasion of the right of privacy ... of an Employee."
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23. Illinois Union's denial letter failed to acknowledge that the allegations of the Tarzi
14
complaint potentially implicated coverage for both "misrepresentation" and "invasion of right of
15
privacy." Instead, Illinois Union simply ignored the pertinent allegations, and denied coverage with
16
only the most superficial analysis of any of Tarzi' s claims.
17
24. Illinois Union's denial letter failed to identify any specific facts which would
18
substantiate its failure to defend G&A in the underlying action, merely noting that "Claimant's civil
19
complaint alleges failure to pay certain wages owed. Under the above Policy, Claimant's allegations
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do not fall within the Policy's definition of covered 'Loss.' Accordingly, the Insurer is constrained
21
to advise that there is no coverage for this matter."
22
25. Illinois Union has refused and continues to refuse to reimburse G&A for expenses
23
despite its obligation to do so. Because of Illinois Union's failure to defend, G&A has incurred
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expenses defending itself in the Tarzi action and in securing counsel to enforce its rights under the
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insurance Policy issued by Illinois Union.
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26. On or about December 12, 2007, a mediation was held between the parties to the
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Tarzi action. The Tarzi action then settled on terms that were within the Policy limits.
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1 II /
TARZI ALLEGES "INVASION OF PRIVACY" NOT EXCLUDED
2 BY THE POLICY, REQUIRING ILLINOIS UNION
TO DEFEND THE TARZI ACTION
3
Illinois Union's Policy Includes "Any Invasion of Privacy"
4
27. Illinois Union's Policy requires it to defend suits alleging "Inappropriate Employment
5
Conduct," including but not limited to "any invasion of right of privacy of an Employee .... " The
6
Tarzi complaint alleges facts constituting an "invasion of right of privacy of [Tarzi)." Illinois Union
7
thus had, and has, an obligation under the Policy to defend G&A in the Tarzi action.
8
28. The Policy fails to define the words "any" or "privacy."
9
29. The Policy similarly fails to define the phrases "invasion of privacy," "right of
10
privacy," or "invasion of right of privacy."
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30. In the absence of definition, the words and phrases of the Policy are given their
12
ordinary meaning as understood by a reasonable person. The commonly accepted defmition of
13
"invasion of privacy" includes the unauthorized accessing of mail and email, as understood by a
14
reasonable person.
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31. As it fails to define the phrase, the Policy does not limit "invasion of privacy" to its
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common law defmition or to any other meaning. Appending the word "any" in front of "invasion of
17
right of privacy" has the effect of widening its potential range of meanings to the broadest extent
18
imaginable.
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32. The Policy contains no "publication" requirement and thus does not require any
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publication to be made in conjunction with "any invasion of right of privacy." Mere intrusion into
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material that Tarzi wished to keep secret constitutes an invasion of Tarzi's privacy sufficient to
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trigger the duty to defend under the Policy.
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33. The Policy provides no guidance or exemplars as to what constitutes "invasion of
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privacy," and does not require that the allegations of "invasion of privacy" take any discrete form. A
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separate cause of action for "invasion of privacy" is not required to trigger the duty to defend, as
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allegations that are buried in other asserted causes of action or which could give rise to an
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amendment trigger a defense duty.
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COMPLAINT FOR DECLARATORY JUDGMENT

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1 II /
G&A Is Alleged to Have Invaded Tarzi's "Privacy" by Accessing and Deleting
2 3,000 Emails on Her Computer Without Permission

3
34. G&A's alleged conduct, referenced in the Tarzi complaint at paragraph 10, invaded
4
Tarzi's right of privacy by virtue of accessing and deleting "all of her stored email communications,
5
over 3000" from her computer. The alleged accessing of Tarzi's private email implicates the well-
6
established "secrecy" prong of the right of privacy - e.g., the right to keep the contents of one's
7
letters safe from prying eyes.
8
35. Contextually, Tarzi's allegations that G&A "logged onto her computer, manipulated
9
the settings and deleted several thousand e-mails" and then refused to own up to it when she
10
confronted him about it, lead to the reasonable inference that Tarzi is complaining that such actions
11
were undertaken without her permission, consent, or prior knowledge. Reasonable inferences drawn
12
from pled facts are sufficient to trigger Illinois Union's duty to defend.
13
36. The implication from Tarzi's allegations in paragraph 10, that G&A accessed her
14
computer and deleted some 3,000 emails without her permission or consent, falls within the
15
definition of "invasion of privacy" as expressed by the Restatement (Second) of Torts, which states
16
that invasion of privacy consists of things such as "examination into one's private concerns, as by
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opening private and personal mail."
18
37. Tarzi's accusation of improper accessing of her personal stored email implicates the
19
"invasion of privacy" coverage of the Policy, which is unlimited by definition or stricture, and
20
covers "any invasion of privacy of an Employee."
21
No Policy Exclusion Bars a Defense for Any "Invasion of Privacy" Claims
22
38. No Policy exclusions bar a defense.
23
39. The Gain or Profit Exclusion of the Policy does not apply because G&A's potential
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liability for unpaid wages is independent of the invasion of privacy conduct alleged against G&A.
25
40. The Compensation Earned or Due Exclusion of the Policy does not apply because,
26
again, G&A's potential liability for unpaid wages is independent of the invasion of privacy conduct
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alleged against G&A.
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I 41. The Employment Contracts Exclusion of the Policy does not apply because G&A's

2 potential liability for breach of any written employment agreement is independent of the invasion of

3 privacy conduct alleged against G&A.

4 42. Paragraph 10 of Tarzi's complaint contextually makes clear that the accessing of her

5 computer and deletion of all her emails - some 3,000 collected over the course of her employment-

6 was done in direct retaliation for Tarzi's making a written demand on G&A for payment of her

7 unpaid overtime hours based on her claim that she had been misclassified as an "exempt" employee.

8 TARZI ALLEGES EMPLOYMENT-RELATED MISREPRESENTATIONS NOT

EXCLUDED BY THE POLICY, REQUIRING ILLINOIS UNION
9 TO DEFEND THE TARZI ACTION
10 Illinois Union's Policy Covers An Employer's Misrepresentations

11 43. The Tarzi complaint alleges facts constituting an "employment-related

12 misrepresentation" to Tarzi. Illinois Union thus had and has an obligation under the Policy to defend

13 G&A in the Tarzi action.

14 44. Illinois Union's Policy requires it to defend suits alleging "Inappropriate Employment

15 Conduct," including but not limited to "Employment-related misrepresentation to ... an Employee."

16 45. The Policy does not define "misrepresentation" or "employment-related

17 misrepresentation." Thus, under well-established principles of contract construction, the court must

18 look to the ordinary definition of "misrepresentation" as understood by a reasonable person.

19 46. An ordinary understanding of "misrepresentation" is that its meaning includes the

20 "presentation of information in a way that is inconsistent with the truth."

21 Alleged Misclassification of Tarzi as an Exempt Employee Is an Employment-Related

Misrepresentation to an Employee
22

23 47. G&A's alleged "choice" to "mis-classifY" Tarzi as an "exempt" employee, referenced

24 in the underlying complaint at paragraphs 5 and 10, constitutes a "misrepresentation" under existing

25 case law.

26 48. The Tarzi complaint's allegations that G&A owed and had failed to pay Tarzi

27 overtime wages and other statutory penalties under existing California Labor Laws give rise to the

28 reasonable inference that Tarzi was told.that she was paid as "exempt" and disputed the truth of that

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I assertion.

2 49. Tarzi's allegations of "mis-classification" demonstrate her knowledge of her

3 employment status, which - although hardly remarkable given that she worked for G&A for

4 approximately 10 years - provides circumstantial evidence that an alleged "misstatement" regarding

5 her status had been made to Tarzi during that time.

6 50. Tarzi's allegations of "mis-classification" are consistent with one accepted definition

7 of "misrepresentation" - as a representation of facts which is inconsistent with the truth. Tarzi' s

8 allegations of "misrepresentation" in the underlying Tarzi action are thus sufficient to trigger Illinois

9 Union's duty to defend even when buried in the language of the underlying complaint.

10 51. The fact that the underlying complaint does not assert any cause of action for

II negligent "misrepresentation" or fraudulent "misrepresentation" is irrelevant, as California's liberal

12 pleading policy makes clear that where the claim "possibly" or "potentially" could be asserted, or

13 where the complaint could be amended to assert a discrete claim covered by the policy, the duty to

14 defend is triggered.

15 The FLSA Exclusion Does Not Bar a Defense for

Employment-Related Misrepresentation to Tarzi
16

17 52. The Fair Labor Standards Act Exclusion ("FLSA Exclusion") of the Policy does not

18 apply.

19 53. Allegations of misclassification of an employee as "exempt" and a corresponding

20 failure to pay overtime and provide other required benefits under the California Labor Code evince a

21 potential for coverage notwithstanding the FLSA Exclusion.

22 54. Courts construing similar FLSA exclusions III EPL policies have ruled that

23 allegations of misrepresentations about an employee's status are sufficient to state a claim for

24 potential coverage which is not negated by the existence of the FLSA exclusion.

25 55. The FLSA Exclusion does not apply here because Tarzi's allegations of G&A's

26 misrepresentation of her employment status give rise to potential claims under common law theories

27 of intentional misrepresentation, negligent misrepresentation, and fraudulent concealment, among

28 other theories, which can be maintained independently of any statutory remedy for unpaid wages to

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1 which the FLSA Exclusion might apply.

2 FIRST CAUSE OF ACTION

3 Declaratory Relief - Duty to Defend

4 56. G&A, by this reference, incorporates each and every allegation set forth in the above

5 paragraphs of this Complaint as though fully alleged herein.

6 57. By issuing and delivering the Policy, Illinois Union agreed to provide a defense for

7 suits alleging "any invasion of right of privacy of an Employee."

8 58. By issuing and delivering the Policy, Illinois Union agreed to provide a defense for

9 suits alleging any "Employment-related misrepresentation ... to an Employee."

10 59. Illinois Union is obligated under the Policy to pay attorneys' fees and costs incurred

11 in the defense of the Tarzi action. Illinois Union breached its duty to G&A by failing to provide a

12 defense in the Tarzi action.

13 60. G&A has fully performed all of the obligations and conditions to be performed by it

14 under the Illinois Union Policy and/or has been excused from performing same as a result of Illinois

15 Union's breach of its duty to defend.

16 61. An actual, bona fide controversy exists between G&A, on the one hand, and Illinois

17 Union, on the other hand, that requires judicial declaration by this Court of the parties' rights and

18 duties. Namely, the parties disagree about whether Illinois Union had and has a duty to defend G&A

19 in the Tarzi action and an obligation to pay all of the attorneys' fees and related costs it has incurred

20 to defend that action.

21 PRAYER FOR RELIEF

22 WHEREFORE, Plaintiff G&A prays for judgment against Defendant Illinois Union as

23 follows:

24 I. That the Court issue judgment declaring Illinois Union has and had a duty to defend

25 G&A under the Policy it issued to G&A against claims asserted in the Tarzi complaint;

26 2. That the Court issue judgment declaring Illinois Union must promptly pay to G&A all

27 attorneys' fees and costs incurred by G&A in defense of the Tarzi complaint, including settlement

28 costs and pre-judgment interest accrning thereon at the statutory rate;

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I 3. For G&A's attorneys' fees incurred herein plus interest on said fees at the highest rate

2 allowed by law from the date of entry of judgment until paid in full;

3 4. For total costs of the suit herein; and

4 5. For such other and further relief as the Court may deem just and proper.

6 Dated: January 28, 2011 GAUNTLETT & ASSOCIATES

8
BY:~ Robert Scott Lawrence

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COMPLAINT FOR DECLARATORY JUDGMENT

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1 LIST OF EXHIBITS

2 Exhibit "1" Employment Practices Liability Insurance Policy No. 12 62 65 8 issue to David A.
Gauntlett; dba Gauntlett & Associates, as named insured, effective July 10, 2006
3 through July 10, 2007

4 Exhibit "2" Complaint filed August 16, 2007 styled as Miriam Tarzi v. David A. Gaunt/eft dba
Gauntlett & Associates, et al., Consolidated Superior Courts of California, County of
5 Orange, Central District, Case No. 07-CC-08999

6 Exhibit "3" Illinois Union's September 27, 2007 denial letter

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