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FIFTH DIVISION
July 11, 2003

JUSTICE HARTIGAN delivered the opinion of the court:

In August 2000, Demetri G. Alexander filed an action fordamages against defendants, 1212 Restaurant Group, L.L.C. (1212),Russell Scalise, and Scott Schwab, related to his employment andsubsequent termination with 1212, including defamation per seagainst Scalise and Schwab. In September 2000, defendantstendered the Alexander action to plaintiff, American AllianceInsurance Company (American Alliance) as defendants' insurancecarrier, and in November 2000, American Alliance denied coverageand refused to provide a defense. American Alliance then filed acomplaint for declaratory judgment as to its duty to defenddefendants in the underlying Alexander action. In November 2001,the trial court, in considering cross-motions for summaryjudgment, found that American Alliance had a duty to defenddefendants in the Alexander action and dismissed defendants'claim under section 155 of the Illinois Insurance Code (215 ILCS5/155 (West 2000)).

American Alliance appeals, arguing that the trial courterred in finding a duty to defend the Alexander action when thealleged defamation fell under the employment-related practices(ERP) exclusion in its policy with defendants. Additionally,defendants appeal, arguing that the trial court improperlydismissed their section 155 claim against American Alliancebecause American Alliance's denial was vexatious andunreasonable. We affirm.

I. BACKGROUND

1212 operates a restaurant called The State Room at 1212North State Street in Chicago. Scalise is a majority owner of1212 and manager. Schwab works as Scalise's designee in chargeof day-to-day operations of the restaurant. In May 1999,Alexander entered into an employment agreement with Scalise towork as creative director and front house manager of therestaurant. The initial period of Alexander's employment wasthree years.

In August 2000, Alexander filed a complaint against 1212,Scalise and Schwab alleging breach of contract, defamation per seagainst Scalise and Schwab individually, and intentionalinfliction of emotional distress against Scalise and Schwabindividually. In his complaint, Alexander alleged that Scalisedropped a piece of equipment on Alexander's left foot thatcrushed his toe and foot. This injury required surgery andAlexander had to wear a brace and use crutches upon his return towork. Alexander alleged that Scalise and Schwab repeatedly toldAlexander to "lose the shoe," meaning not to wear his bracebecause they did not want a "gimp" at the front door of therestaurant.

Alexander further alleged that throughout his employment at1212, Scalise and Schwab repeatedly called Alexander names,including, "gimp," "cokehead," "faggot," "homo," etc., in frontof Alexander and other 1212 employees. These remarks alsoincluded lewd and offensive comments about sexual acts Alexanderwas allegedly engaging in with a male graphic artist consultantof 1212. In June 2000, Alexander alleged that Scalise terminatedhis employment without prior notice. Alexander averred thatScalise handed him a separation agreement and threatenedAlexander in front of another 1212 employee that if Alexander didnot sign the agreement, Scalise would tell people that Alexanderwas "robbing the joint." Alexander further claimed that, oninformation and belief, following his termination, Scalise andSchwab told people that Alexander had his hand in the till andwas robbing "the joint."

In September 2000, defendants tendered their defense in theAlexander action to American Alliance.

American Alliance issued a policy to 1212 as named insured. The policy provided commercial general liability insurance for aneffective policy period from January 25, 2000, to and includingJanuary 25, 2001. Included in the policy was the followingexclusion:

"B. The following exclusion is added toParagraph 2., Exclusions of Section I -Coverage B - Personal and AdvertisingInjury Liability:

This insurance does not apply to:

'Personal and advertising injury':

1. A person arising out of any:

(a) refusal to employ that person;

(b) termination of that person'semployment; or

(c) employment-relatedpractices, polices, actsor omissions, such ascoercion, demotion,evaluation, reassignment,decipline [sic],defamation, harassment,humiliation,discrimination directedat that person."

In November 2000, based on that exclusion, American Alliancedenied coverage and refused to provide any defense fordefendants. Also, in November 2000, American Alliance filed itscomplaint for declaratory judgment seeking a judgment thatAmerican Alliance had no duty to defend the Alexander action.

In December 2000, defendants filed an answer and affirmativedefense, as well as a counterclaim alleging that AmericanAlliance acted vexatiously and unreasonably in its refusal todefend defendants in violation of section 155 of the IllinoisInsurance Code (215 ILCS 5/155 (West 2000)). Defendants alsofiled a motion for judgment on the pleadings and AmericanAlliance moved to dismiss defendants' counterclaims. In March2001, the trial court denied defendants' motion for judgment onthe pleadings and granted American Alliance's motion to dismissdefendants' counterclaim, but permitted them to amend if theycame up with additional facts.

The parties filed cross-motions for summary judgment thatthe trial court heard in November 2001. Following oral argument,the court entered judgment in favor of defendants and found thatAmerican Alliance had a duty to defend. The trial court found:

"But in looking at the matter in lightof the summary judgment motion and the veryliberal reading that the Court must give tothe duty to defend, I -- and ambiguities thatI think appear in the complaint which doesn'tmake it clear to the Court when thisdefamation began, *** whether it was acontinuation of the defamation that occurredduring the course of his employment orwhether it was something that took place atsome point in the future but post-employmentand the clarification that counsel hasbrought pursuant to *** what the depositionsaid that this took place a year *** out, atbest it makes this factor ambiguous to theCourt in terms of when the defamationactually occurred.

And since it is not clear *** by thecomplaint when the defamation occurred theCourt cannot make a final determination thatit is *** not outside of the exclusion andthat this behavior may possibly be coveredand in those circumstances the Court underthe duty to defend is required to rule, makethe judgment in light of the insured in thismatter."

The court also granted American Alliance's motion to dismissdefendants' amended counterclaim with prejudice.

This appeal follows.

II. ANALYSIS

On appeal, American Alliance argues that the trial courterred in granting summary judgment in favor of defendants becausethe ERP exclusion precludes coverage of the underlying action. Defendants assert on cross-appeal that the trial court improperlydismissed their counterclaim under section 155 of the IllinoisInsurance Code (215 ILCS 5/155 (West 2000)) because AmericanAlliance's denial was vexatious and unreasonable.

When construing an insurance policy, the court's role is toascertain and enforce the intention of the parties as expressedin the agreement. de los Reyes v. Travelers Insurance Cos., 135Ill. 2d 353, 358, 553 N.E.2d 301, 304 (1990). To ascertain themeaning of the policy's words and the intent of the parties, thecourt must construe the policy as a whole. Outboard Marine Corp.v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 108, 607 N.E.2d1204, 1212 (1992). The construction of an insurance policy and adetermination of the rights and obligations thereunder arequestions of law for the court which are appropriate subjects fordisposition by way of summary judgment. Crum & Forster ManagersCorp. v. Resolution Trust Corp., 156 Ill. 2d 384, 391, 620 N.E.2d1073, 1077 (1993). We review cases involving summary judgment denovo. Ragan v. Columbia Mutual Insurance Co., 183 Ill. 2d 342,349, 701 N.E.2d 493, 496 (1998).

Where a declaratory judgment action is brought to determinean insurer's duty to defend, the court must look only to thecomplaint in the underlying action to see if the allegations setforth therein show that the insured's conduct is within orpotentially within coverage. Bituminous Casualty Corp. v.Fulkerson, 212 Ill. App. 3d 556, 562, 571 N.E.2d 256, 260 (1991). If the facts alleged in the underlying complaint fall within orpotentially within the policy's coverage provisions, then theinsurer has a duty to defend the insured in the underlyingaction. Pekin Insurance Co. v. L.J. Shaw & Co., 291 Ill. App. 3d888, 891-92, 684 N.E.2d 853, 855 (1997). The burden is on theinsurer to show that a claim falls within a provision that limitsor excludes coverage. Pekin, 291 Ill. App. 3d at 892, 684 N.E.2dat 855. Provisions that limit or exclude coverage are to beconstrued liberally in favor of the insured and most stronglyagainst the insurer. National Union Fire Insurance Co. ofPittsburgh, Pennsylvania v. Glenview Park District, 158 Ill. 2d116, 122, 632 N.E.2d 1039, 1042 (1994). The insurer's duty todefend is much broader than its duty to indemnify its insured. Crum, 156 Ill. 2d at 393-94, 620 N.E.2d at 1079. An insurer'srefusal to defend is unjustifiable unless it is clear from theface of the underlying complaint that the stated facts do notfall even potentially within the policy's coverage. U.S. Fidelity& Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 73, 578N.E.2d 926, 930 (1991).

With this in mind, we review the allegations of theAlexander complaint along with the American Alliance insurancepolicy. Specifically, we consider the underlying complaint inlight of the ERP exclusion.

Illinois courts have not yet addressed the ERP exclusion. However, other jurisdictions, including California and Louisiana,have interpreted this exclusion.

California has considered the ERP exclusion in five cases. The rationale in the cases is consistent, but the outcomes turnon facts specific to each case. The first case, Loyola MarymountUniversity v. Hartford Accident & Indemnity Co., 219 Cal. App. 3d1217, 1220-21, 271 Cal. Rptr. 528, 529 (1990), addressed the ERPexclusion when the insured university was sued by two formeremployees, one a tenured professor dismissed after marryinganother faculty member while still a Jesuit priest and the seconda baseball coach terminated on a vague charge of negligence. Both alleged wrongful termination while the professor furtherclaimed invasion of privacy and the coach argued defamation. Loyola, 219 Cal. App. 3d at 1221, 271 Cal. Rptr. at 529-30.

The reviewing court found that the offenses claimed in theunderlying complaints, "occurring as part and parcel of allegedlywrongful termination of the plaintiffs' employment," directlyrelated to the insured's employment of the plaintiffs, and thuswas under the purview of the ERP exclusion. Loyola, 219 Cal.App. 3d at 1223, 271 Cal. Rptr. at 531. The court further heldthat the mere fact that events in the underlying suits occurredafter termination did not render the ERP exclusion inapplicable,and such a reading is "semantically unreasonable andunacceptable." Loyola, 219 Cal. App. 3d at 1223, 271 Cal. Rptr.at 531.

The next case to consider the ERP exclusion expanded on theLoyola decision. In Frank & Freedus v. Allstate Insurance Co.,45 Cal. App. 4th 461, 465, 52 Cal. Rptr. 2d 678, 680 (1996), aformer associate filed a defamation complaint following apartner's statements to the office administrator that theattorney was dismissed because he is "likely gay and probably hasAIDS," but the administrator was told to inform the staff thatthe "real reason" for the associate's termination was "failure toperform and develop as an associate."

The appellate court held that the term "employment-relatedpractices" is not ambiguous and "is used in its ordinary sense,i.e., related to employment." Frank & Freedus, 45 Cal. App. 4that 471, 52 Cal. Rptr. 2d at 684. The court found that thedefamation was clearly employment-related because it "was made incontext of [the associate's] employment and its content isdirected to [his] performance during employment." Frank &Freedus, 45 Cal. App. 4th at 471-72, 52 Cal. Rptr. 2d at 684. The Frank & Freedus court also rejected the insured's attempts todistinguish the policy language and held that a "difference inpolicy language does not compel a different result." Frank &Freedus, 45 Cal. App. 4th at 473, 52 Cal. Rptr. 2d at 685.

The next case, HS Services, Inc. v. Nationwide MutualInsurance Co., 109 F.3d 642, 644 (9^th Cir. 1997), was decided bythe Ninth Circuit Court of Appeals arising as a diversity caseand applying California law. In HS Services, the president ofthe insured was terminated and filed a wrongful discharge suit. HS Services, 109 F.3d at 643-44. Shortly after his termination,the former president formed a competing company and the insureddiscovered that he told competing vendors the insured wasexperiencing financial distress and facing bankruptcy. HSServices, 109 F.3d at 644. In response to these statements madeby the former president, the insured circulated a memo toemployees on how to respond to inquiries by vendors, and listedthe reason for the former president's termination as dishonesty. HS Services, 109 F.3d at 644. Upon hearing of this memo, theformer president amended his complaint to include defamation. HSServices, 109 F.3d at 644.

The Ninth Circuit reversed, but declined to adopt theinsured's argument that the passage of time between terminationand defamation make the exclusion inapplicable. HS Services, 109F.3d at 645. The Ninth Circuit found that the possibility existsthat posttermination acts or omissions could arise directly andproximately from the termination and be so related. HS Services,109 F.3d at 645. In reversing, the majority found that unlikeFrank & Freedus, the comments were not made in the context of theformer president's employment, but instead the purpose was toprotect the insured in the marketplace and related to thecompetition between the insured and its former president. HSServices, 109 F.3d at 646. The court held that to "arise out of"a termination of employment, the defamatory remark at issue musthave been a part of or directly and proximately resulted from thetermination. HS Services, 109 F.3d at 647. Since the defamatoryremarks were not part of the former president's termination but,rather, in response to his comments as a competitor, "the chainof causation between the termination and the remarks was broken." HS Services, 109 F.3d at 647.

The fourth decision, in Golden Eagle Insurance Corp. v.Rocky Cola Café, Inc., 94 Cal. App. 4th 120, 123, 114 Cal.Rptr.2d 16, 17-18 (2001), involved a former waitress who filedsuit against the insured restaurant seeking damages forharassment, defamation, and other causes of action. She claimedthat she had become sexually involved with her shift supervisorand that after the relationship ended, he continued to pursue herand "humiliated her with coarse and abusive remarks about herbody." Rocky Cola, 94 Cal. App. 4th at 123, 114 Cal. Rptr. 2d at18.

In its decision, the Rocky Cola court concluded that thefact that the defamatory statement arose out of Rocky Cola'sbusiness does not necessarily mean it is an employment-relatedact within the meaning of the exclusion. Rocky Cola, 94 Cal.App. 4th at 126, 114 Cal. Rptr. 2d at 20. The court found itdifficult to see how the shift supervisor's alleged statementthat the former waitress was a "sexually promiscuous andcalculating bitch" was employment-related. Rocky Cola, 94 Cal.App. 4th at 126, 114 Cal. Rptr. 2d at 21. The Rocky Cola courtagreed with HS Services and found that the defamatory statementwas not made in the context of the former waitress's employmentnor was it related to her work performance. Rocky Cola, 94 Cal.App. 4th at 128-29, 114 Cal. Rptr. 2d at 22. Thus, the allegeddefamation was outside the scope of the ERP exclusion. RockyCola, 94 Cal. App. 4th at 129, 114 Cal. Rptr. 2d at 23.

Most recently in Low v. Golden Eagle Insurance Co., 104 Cal.App. 4th 306, 314, 128 Cal. Rptr. 2d 423, 428 (2002), theCalifornia Court of Appeals found that an "underlying rationalereconciles" the prior decisions. In that case, the insured'spresident appeared on a radio program to discuss an employee'sallegation of sexual harassment by a supervisor. Low, 104 Cal.App. 4th at 308, 128 Cal. Rptr. 2d at 424. The radio broadcastincited the supervisor to file a defamation claim against theinsured and its president. Low, 104 Cal. App. 4th at 308-09, 128Cal. Rptr. 2d at 424. The insurer refused coverage under the ERPexclusion. Low, 104 Cal. App. 4th at 309, 128 Cal. Rptr. 2d at424.

In its analysis, the Low court considered the four priorcases to guide its outcome. First, the court agreed that themere fact the alleged tort sued on arose after the employmentrelationship had ended cannot remove the case from the scope ofthe ERP exclusion. Low, 104 Cal. App. 4th at 314, 128 Cal. Rptr.2d at 428. Second, based on an examination of the case law, thefollowing factors appear relevant to the ultimate determinationthat events were, or were not, within the reach of the exclusion:(1) the nexus between the allegedly defamatory statement (orother tort) at issue and the third party plaintiff's employmentby the insured, and (2) the existence (or nonexistence) of arelationship between the employer and the third-party plaintiffoutside the employment relationship. Low, 104 Cal. App. 4th at314, 128 Cal. Rptr. 2d at 429-29.

Considering the prior cases, the Low court found that theextra-employment relationship of business competition in HSServices and the sexual relationship in Rocky Cola provoked thedefamation, and not the employment relationship itself. Low, 104Cal. App. 4th at 314, 128 Cal. Rptr. 2d at 429. On the otherside, in Loyola and Frank & Freedus, the defamation followed theemployee's termination and related to the reasons for thetermination; additionally, neither case involved a relationshipbetween the insured employer and the third-party plaintiff beyondthe employment relationship. Low, 104 Cal. App. 4th at 314-15,128 Cal. Rptr. 2d at 429. Based on this precedent, the Low courtheld that the statement by the insured's president qualified asemployment-related and no indication appeared in the record thatany relationship beyond employer and employee existed, and,therefore, the insurer had no duty to defend. Low, 104 Cal. App.4th at 315, 128 Cal. Rptr. 2d at 429-30.

The United States District Court in Louisiana considered theCalifornia cases in Adams v. Pro Sources, Inc., 231 F. Supp. 2d499 (M.D. La. 2002), when the court considered an ERP exclusion. The Adams court outlined the following conclusions: (1) thephrase "employment-related practices" even though undefined in acommercial general liability policy is not per se ambiguous; (2)an alleged defamatory statement made after an employmentrelationship has ended can be excluded under an"employment-related practices exclusion"; and (3) whether such astatement is excluded depends on whether the statement is made inthe context of employment and describes a former employee'sperformance. Adams, 231 F. Supp. 2d at 505.

Adams filed a complaint that he was subject to a hostilework environment and that in retaliation for his complaints, hisemployer defamed him in an online database in the truckingindustry. Adams, 231 F. Supp. 2d at 500-01. The court foundthat statement clearly defamed him and is covered by the ERPexclusion. Adams, 231 F. Supp. 2d at 505.

After considering the above cases, under the facts in thiscase, we find that much of the defamation alleged in theAlexander complaint is outside the scope of the ERP exclusion,and that American Alliance does have a duty to defend.

Initially, we agree with the cases discussed above thatwhether or not the defamation occurred posttermination is notsufficient to remove it from the reach of the ERP exclusion. Posttermination acts of defamation or other employment-relatedpractices can reasonably arise directly and proximately from thetermination. See HS Services, 109 F.3d at 645. Additionally, weagree with Loyola and find that such a narrow interpretation is"semantically unreasonable and unacceptable." Loyola, 219 Cal.App. 3d at 1223, 271 Cal. Rptr. at 531. Here, the mere fact thatScalise and Schwab's defamation continued after Alexander'stermination is not sufficient to render the exclusioninapplicable. Consequently, we agree with the appellant that thetrial court was in error when it held that the ERP exclusion wasnot applicable because some of the alleged statements were madeafter Alexander's employment was terminated. However, we mayaffirm the judgment of the trial court on any basis in therecord. Gunthorp v. Golan, 184 Ill. 2d 432, 438, 704 N.E.2d 370,373 (1998).

Following the logic under Adams and Low, the salientquestion is whether the alleged defamatory statements were madein the context of Alexander's employment and related to hisemployment performance. We find that some of them were not. Like the court in Rocky Cola reasoned, the fact that thedefamatory statements arose out of 1212's business does notnecessarily mean they were an employment-related act within themeaning of the exclusion. Not all of the harassment by Scaliseand Schwab related to Alexander's work performance. Alexander'scomplaint alleges that both during and subsequent to histermination, Schwab and Scalise referred to Alexander's sexualactivities and they said Alexander was a "drunk" and a "cokehead." These statements constituted personal insults and lewdcomments separate from his employment.

Even though, unlike in Rocky Cola and HS Services, norelationship existed outside of the employment relationship toprovoke the defamation, the nexus between the above-mentioneddefamatory statements and Alexander's employment is missing. SeeLow, 104 Cal. App. 4th at 314, 128 Cal. Rptr. 2d at 429. Thecontent of these statements was not about Alexander's workperformance, and, therefore, they do not fall under the purviewof the exclusion. See Frank & Freedus, 45 Cal. App. 4th at 471-72, 42 Cal. Rptr. 2d at 684.

It is well settled that if one claim in a complaint fallswithin or potentially within a policy's coverage, then theinsurer has a duty to defend the insured as to the entirecomplaint. Pekin, 291 Ill. App. 3d at 891-92, 684 N.E.2d at 855.

Based on the duty to defend public policy in Illinois andthe guidance of the California cases, we hold that the exclusiondoes not apply and that American Alliance has a duty to defendthe Alexander complaint.

B. Whether the Trial Court Erred in Dismissing Defendants' ClaimUnder Section 155 of the Illinois Insurance Code

On cross-appeal, defendants argue that the trial court erredin dismissing their claim for penalties under section 155 of theIllinois Insurance Code (215 ILCS 5/155 (West 2000)). Wedisagree.

Section 155 provides, in pertinent part:

"(1) In any action by or against a companywherein there is in issue the liability of acompany on a policy or policies of insuranceor the amount of the loss payable thereunder,or for an unreasonable delay in settling aclaim, and it appears to the court that suchaction or delay is vexatious andunreasonable, the court may allow as part ofthe taxable costs in the action reasonableattorney fees, other costs, plus an amountnot to exceed any one of the followingamounts:

(a) 25% of the amount which the court orjury finds such party is entitled to recoveragainst the company, exclusive of all costs;

(b) $25,000;

(c) the excess of the amount which thecourt or jury finds such party is entitled torecover, exclusive of costs, over the amount,if any, which the company offered to pay insettlement of the claim prior to the action." 215 ILCS 5/155 (West 2000).

When the trial court dismissed defendants' originalcounterclaim under section 155, defendants were permitted toamend if additional facts supported vexatious and unreasonableconduct. Defendants' amended counterclaim merely attached thetender and denial letters, but did not present any new facts. Ifthe insured merely states that the insurer committed vexatiousand unreasonable delay without some modicum of factual support,the insured will not have stated a cause of action under section155. Bedoya v. Illinois Founders Insurance Co., 293 Ill. App. 3d668, 679, 688 N.E.2d 757, 764 (1997). The trial court properlydismissed defendants' section 155 claim.

Even considering the facts of this case, it is clear thatAmerican Alliance did not act vexatiously and unreasonably indenying coverage. The determination of whether an insurer'sactions are vexatious and unreasonable must be determined afterexamining the totality of circumstances. Mobil Oil Corp. v.Maryland Casualty Co., 288 Ill. App. 3d 743, 752, 681 N.E.2d 552,558 (1997). Absent vexatious behavior by the insurer, an insuredcannot recover attorney fees incurred in bringing a declaratoryjudgment action against the insurer to establish coverage. Westchester Fire Insurance Co. v. G. Heileman Brewing Co., 321Ill. App. 3d 622, 637, 747 N.E.2d 955, 968 (2000).

Since the ERP exclusion had not been addressed by Illinoiscourts, American Alliance's denial was not vexatious andunreasonable, even though we find that it does have a duty todefend the underlying Alexander complaint.

C. Motions Taken With the Case

1. Appellant's motion to strike cross-appeal is deniedbecause the original notice of appeal was served by mail onNovember 26, 2001, and under Supreme Court Rule 12(c) (145 Ill.2d R. 12(c)), service by mail is effective four days aftermailing, here November 30, 2001; therefore, defendants' notice ofcross-appeal was timely filed on December 10, 2001.

2. Appellees' motion for sanctions is denied.

III. CONCLUSION

For the foregoing reasons, we affirm the decision of thecircuit court of Cook County.

AFFIRMED.

CAMPBELL, P.J. and QUINN, J., concur.