diff --git a/README.md b/README.md
index ab84a8ef..4820de8a 100644
--- a/README.md
+++ b/README.md
@@ -350,10 +350,12 @@ injected into the current policy file in the exact location of the `#include`
 directive. An example include:
 
 ```
-#include 'policies/includes/untrusted-networks-blocking.inc'
+#include 'includes/untrusted-networks-blocking.inc'
 ```
+NOTE: Includes are only read from the subdirectories of your base_directory,
+all other directories will error out.
 
-The `.inc` file extension and the `includes` folder is not required but it is
+The `.inc` file extension and the `includes/` folder is not required but it is
 recommended to be used as a best practice and for easier readability.
 
 ### Example
diff --git a/capirca/lib/policy.py b/capirca/lib/policy.py
index b306fc7e..ac9a035c 100644
--- a/capirca/lib/policy.py
+++ b/capirca/lib/policy.py
@@ -62,6 +62,8 @@ class FileReadError(Error):
 class RecursionTooDeepError(Error):
   """Included files exceed maximum recursion depth."""
 
+class InvalidIncludeDirectoryError(Error):
+  """Included files are from invalid directories."""
 
 class ParseError(Error):
   """ParseError in the input."""
@@ -2632,6 +2634,23 @@ def _ReadFile(filename):
     raise FileNotFoundError('Unable to open policy file %s' % filename)
 
 
+def _SubDirectory(child, parent):
+  """Returns if the child is a subdirectory of the parent.
+
+  Resolves relative paths, but does not resolve symbolic links.
+
+  Args:
+    child: A presumed child file path string.
+    parent: Base parent path string.
+
+  Returns:
+    A boolean, true if the child is a subdirectory of the parent.
+  """
+  child_path = os.path.abspath(child)
+  parent_path = os.path.abspath(parent)
+  return os.path.commonpath([parent_path, child_path]) == os.path.commonpath([
+      parent_path])
+
 def _Preprocess(data, max_depth=5, base_dir=''):
   """Search input for include statements and import specified include file.
 
@@ -2648,6 +2667,7 @@ def _Preprocess(data, max_depth=5, base_dir=''):
 
   Raises:
     RecursionTooDeepError: nested include files exceed maximum
+    InvalidIncludeDirectoryError: nested include files from invalid directories
   """
   if not max_depth:
     raise RecursionTooDeepError('%s' % (
@@ -2658,7 +2678,13 @@ def _Preprocess(data, max_depth=5, base_dir=''):
     if len(words) > 1 and words[0] == '#include':
       # remove any quotes around included filename
       include_file = words[1].strip('\'"')
-      data = _ReadFile(os.path.join(base_dir, include_file))
+      include_file_path = os.path.join(base_dir, include_file)
+      if not _SubDirectory(include_file_path, base_dir):
+        raise InvalidIncludeDirectoryError(
+            '%s'
+            % ('Included file is from invalid directory: %s.' % include_file)
+        )
+      data = _ReadFile(include_file_path)
       # recursively handle includes in included data
       inc_data = _Preprocess(data, max_depth - 1, base_dir=base_dir)
       rval.extend(inc_data)
diff --git a/tests/lib/policy_test.py b/tests/lib/policy_test.py
index a77f4d05..699ca0b3 100644
--- a/tests/lib/policy_test.py
+++ b/tests/lib/policy_test.py
@@ -91,15 +91,40 @@
 """
 
 INCLUDE_STATEMENT = """
-#include "/tmp/y.inc"
+#include "includes/y.inc"
 """
 INCLUDED_Y_FILE = """
 term included-term-1 {
   protocol:: tcp
   action:: accept
 }
+#include "includes/z.inc"
+"""
+
+BAD_INCLUDED_FILE = """
+term included-term-1 {
+  protocol:: tcp
+  action:: accept
+}
 #include "/tmp/z.inc"
 """
+
+BAD_INCLUDED_FILE_1 = """
+term included-term-1 {
+  protocol:: tcp
+  action:: accept
+}
+#include "includes/../../etc/passwd.inc"
+"""
+
+GOOD_INCLUDED_FILE_1 = """
+term good-included-term-1 {
+  protocol:: tcp
+  action:: accept
+}
+#include "includes/../pol/z.inc"
+"""
+
 GOOD_TERM_0 = """
 term good-term-0 {
   protocol:: icmp
@@ -625,9 +650,46 @@ def testIncludes(self, mock_file):
     # ensure good-term-1 shows up as the second term
     self.assertEqual(terms[2].name, 'good-term-1')
 
-    mock_file.assert_has_calls([
-        mock.call('/tmp/y.inc'),
-        mock.call('/tmp/z.inc')])
+    mock_file.assert_has_calls(
+        [mock.call('includes/y.inc'), mock.call('includes/z.inc')]
+    )
+
+  @mock.patch.object(policy, '_ReadFile')
+  def testBadIncludes(self, mock_file):
+    """Ensure nested includes error handling works."""
+    mock_file.side_effect = [BAD_INCLUDED_FILE, GOOD_TERM_5]
+
+    # contents of our base policy (which has a bad included file)
+    pol = HEADER + INCLUDE_STATEMENT + GOOD_TERM_1
+    self.assertRaises(
+        policy.InvalidIncludeDirectoryError,
+        policy.ParsePolicy,
+        pol,
+        self.naming,
+    )
+    # Ensuring relative paths don't bypass invalid directory checks
+    mock_file.side_effect = [BAD_INCLUDED_FILE_1, GOOD_TERM_5]
+    pol = HEADER + BAD_INCLUDED_FILE_1 + GOOD_TERM_1
+    self.assertRaises(
+        policy.InvalidIncludeDirectoryError,
+        policy.ParsePolicy,
+        pol,
+        self.naming,
+    )
+
+  @mock.patch.object(policy, '_ReadFile')
+  def testGoodIncludesWithRelativePaths(self, mock_file):
+    """Ensure nested includes error handling works for valid files."""
+    mock_file.side_effect = [GOOD_TERM_5]
+    # base policy has a good included file, with relative paths
+    pol = HEADER + GOOD_INCLUDED_FILE_1 + GOOD_TERM_1
+    p = policy.ParsePolicy(pol, self.naming)
+    _, terms = p.filters[0]
+    # ensure include worked and we now have 3 terms in this policy
+    self.assertEqual(len(terms), 3)
+    self.assertEqual(terms[0].name, 'good-included-term-1')
+    self.assertEqual(terms[1].name, 'good-term-5')
+    self.assertEqual(terms[2].name, 'good-term-1')
 
   def testGoodPol(self):
     pol = HEADER + GOOD_TERM_1 + GOOD_TERM_2
@@ -1211,7 +1273,7 @@ def testTermAddressByteLength(self):
     self.assertEqual(8, term.AddressesByteLength([6]))
     self.assertEqual(10, term.AddressesByteLength())
 
-# pylint: enable=maybe-no-member
+  # pylint: enable=maybe-no-member
 
   def testICMPCodes(self):
     pol = HEADER + GOOD_TERM_42