A Travelers Cos. Inc. unit is obligated to defend an investment fund being sued by Dov Charney, the controversial former chief executive of American Apparel Inc., in a defamation case, says a federal court, in holding its policies’ employment-related practices exclusion does not apply.

The litigation in Standard General L.L.P. v. The Travelers Indemnity Co. of Connecticut in U.S. District Court in New York stems from a $30 million defamation lawsuit filed against the New York hedge fund, which had invested in the company, by Mr. Charney in California state court.

 Mr. Charney was suspended by Los Angeles-based American Apparel in 2014 because of his alleged misuse of company funds and failure to stop a subordinate from posting false blog entries about former employees. 

Mr. Charney charged Standard General with defamation in connection with a December 2014 statement in which it allegedly falsely claimed that American Apparel’s board of directors had terminated Mr. Charney’s employment based on an independent, third-party investigation into his alleged misconduct, according to the ruling.

The California court ruled against Mr. Charney in October 2015, and the case is now on appeal, according to Friday’s ruling.

Hartford, Connecticut-based Travelers had issued to Standard General a commercial general insurance policy with a $1 million limit that provided coverage for losses from personal and advertising injury plus an excess policy that provided up to $5 million in coverage, according to the ruling.

Stanford General’s lawsuit seeks damages for Travelers’ alleged breach of its obligations under its policies and seeks a declaratory judgment it is obligated to defend it in the lawsuit.

In denying coverage, Travelers said “employment-related practices” exclusions in the policies applied. But the court disagreed. The exclusion states the insurance does not apply to personal injury arising out of refusal to employ a person, termination of that person’s employment or employment-related practices, said ruling.

“Travelers has not satisfied its burden to demonstrate” that the exclusion applies, said the ruling. The policies do not define the term “person,” it said.

However, it could be reasonably construed “to refer to only those who have some former, current or prospective employment relationship with the insured.”

That other courts have construed identical exclusions to apply only to claims by former, current or prospective employees of the insured is “persuasive in finding that Standard General’s interpretation is reasonable,” said the ruling.

Exclusions “must be interpreted narrowly, and ambiguities as to the scope of the exclusion construed against the insurer,” said the ruling, in granting Standard General’s motion for summary judgment in the case.