California Federal Court Embraces Narrow Construction of “Arising out of” Exclusions
By David A. Gauntlett*
Introduction
In a recent ruling from the federal district court for the Central District of California,[1] the court determined that RLI Insurance Company (“RLI”) improperly denied a defense from its insured Statewide Enterprises, Inc. (“Statewide”). The lengthy opinion addresses several aspects of California coverage law while focusing on the potential applicability of two exclusions raised by RLI. In the end, the court determined that neither exclusion applied, thereby concluding that Statewide was entitled to reimbursement of its defense and settlement expenses, as well as prejudgment interest.
Facts of the Case
Statewide is a property management company primarily for owners of residential apartment buildings. A number of similar lawsuits were filed against Statewide for alleged violations of the Investigative Consumer Reporting Agencies Act (“ICRAA”). Specifically, tenants of the apartments alleged that Statewide failed to provide them with a copy of any report prepared in connection with their rental applications. Under ICRAA, such a violation would carry a minimum penalty of $10,000 owed to the aggrieved party.
Statewide notified RLI of the claims, but the insurer denied any obligation to defend or indemnify. After a brief period of litigation, Statewide elected to settle the claims. In the ensuing coverage case, RLI first argued that there was no “publication” to satisfy the initial coverage requirements. It also asserted two exclusions as applicable: (1) the “Consumer Protection Exclusion”[2] and (2) the “Privacy Breach Exclusion.”[3]
Court Rejected RLI’s “Publication” Argument
In briefing, RLI argued that the underlying claims “do not allege an oral or written publication of anything . . . and no publication of any plaintiff's personal information took place.”[4] The court disagreed: “[B]y commissioning and obtaining investigative consumer reports about the plaintiffs, Statewide caused the ‘publication . . . of material that violates a person's right of privacy.’”[5]
“Consumer Protection Exclusion” Did Not Encompass ICRAA Claims
Before analyzing either exclusion, the court noted that it would be “[c]onstruing the Policy’s exclusions narrowly,” despite each exclusion containing the term “arising out of.”[6] In doing so, the court implicitly affirmed the conclusion of My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., 823 F. App'x. 510, 512 (9th Cir. (Cal.) Aug. 19, 2020) and the authority cited therein that California law requires a narrow construction of the phrase “arising out of” when used in exclusions.
Turning to the “Consumer Protection Exclusion,” the court concluded there was ambiguity in whether ICRAA would be considered a “consumer protection[] or similar law.”[7] It highlighted the full list of laws in the exclusion— “securities, antitrust, restraint of trade, unfair trade practices, consumer protection, or other similar law”—and noted that the average insured may not interpret ICRAA as falling within that scope.
Given this context in which the words "consumer protection[] or other similar law" appear, a reasonable layperson construing the Policy as a whole could thus understand that "consumer protection[] or other similar law" refers only to laws that protect consumers from anti-competitive or unfair trade practices, but does not include the ICRAA, which, among other things, purports to protect consumers' "right to privacy."[8]
Because of this ambiguity, the court determined the exclusion could not relieve RLI of its duty to defend Statewide.
“Privacy Breach Exclusion” Deemed Similarly Inapplicable
The court’s analysis of the second exclusion focused on a “disconnect between the ICRAA's regulatory subject matter and the definition of ‘Personal Information’ in the Policy.”[9] It began with calling attention to specific portions of ICRAA’s definition of “investigative consumer reports”:
The term "investigative consumer report" means a consumer report in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through any means. The term does not include a consumer report or other compilation of information that is limited to specific factual information relating to a consumer's credit record or manner of obtaining credit obtained directly from a creditor of the consumer or from a consumer reporting agency when that information was obtained directly from a potential or existing creditor of the consumer or from the consumer.[10]
By contrast, the policy definition of “Personal Information” (quoted in footnote 3) does not include any terms that could potentially capture the “information on a consumer’s character, general reputation, personal characteristics, or mode of living” portions of the ICRAA definition. Because of this discrepancy between the scope of ICRAA and the list of items defining “Personal Information” in the policy, the court determined it was reasonable for Statewide to conclude that ICRAA was not a “Privacy Regulation.” Under California law, the insured is entitled to any reasonable interpretation in its favor.[11]
Legal Uncertainty Did Not Void Insured’s Right to Prejudgment Interest
RLI argued that prejudgment interest was unwarranted because “the amount of damages is either disputed or cannot be determined from information available [to RLI].”[12] Again, the court disagreed. While there was some uncertainty in damages owed to Statewide due to potential equitable contribution claims from other parties, the court nevertheless determined that RLI had to “pay prejudgment interest on all expenses reasonably incurred by Statewide in defending itself against the Underlying Actions and Claims from the date the expense was incurred.”[13]
Conclusion
The Statewide court’s sound rejection of RLI’s arguments is illustrative of how claims should be handled when the principles of coverage law are properly applied. Too often, courts are eager to accept the simple, “common sense” arguments presented by insurers. For example, it would be easy to assume that the “Consumer Protection Exclusion” encompasses ICRAA claims, given that other courts have described the statutory scheme as “a consumer protection measure.”[14] Only through careful analysis was the court able to uncover an alternative reasonable interpretation.
*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.
[1]Statewide Enters., Inc. v. RLI Ins. Co., No. 2:25-cv-08038-CAS-Ex, 2026 U.S. Dist. LEXIS 158120 (C.D. Cal. July 15, 2026).
[2] This exclusion precluded coverage for “any Claim arising out of, directly or indirectly resulting from or in consequence of or in any way involving . . . any actual or alleged violation of any securities, antitrust, restraint of trade, unfair trade practices, consumer protection, or other similar law by any person, including but not limited to any Insured.” Id. at *6.
[3] This exclusion precluded coverage for “any Claim arising out of, directly or indirectly resulting from or in consequence of or in any way involving . . . Privacy Breach.” “Privacy Breach” was defined as “violation of a Privacy Regulation.” “Privacy Regulation” was defined as “statutes or regulations regulating the use and protection of Personal Information.” Finally, “Personal Information” was defined as “a. an individual's name, address, telephone number, or email address; b. medical or healthcare data; c. a social security number; d. a driver's license number or any other state identification number; e. a financial account number in combination with any required password, access code or other security code that would permit access to the financial account; f. a credit or debit card number; or g. non-public individually identifiable information, as defined in any applicable Privacy Regulation.” Id. at *6–7.
[4]Id. at *22.
[5]Id. at *29.
[6]Id. at *30.
[7]Id. at *31.
[8]Id. at *32.
[9]Id. at *37.
[10]Id. (emphasis added by the court).
[11]Atl. Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1039 (2002) ("[A]n insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds.") (emphasis added)
[12]Statewide Enterprises, Inc., 2026 U.S. Dist. LEXIS 158120 at *48.
[13]Id. at *50.
[14]Bernuy v. Bridge Prop. Mgmt. Co., 89 Cal. App. 5th 1174, 1178 (2023).