Application of the Abuse Exclusion: Recent Developments

Claims of sexual abuse and molestation are devastating to business owners and disconcerting to insurers because they often are made by or on behalf of minors, with whom jurors will sympathize and against whom statutes of limitations often do not apply. Moreover, they frequently contain high-dollar demands. It has been reported that insurers already have paid more than $59 million to defend and settle sexual abuse claims against Penn State University stemming from the abuse perpetrated by Jerry Sandusky. Based upon the complexity and risk, many sexual abuse claims result in coverage disputes.

Most commercial general liability, business owners' and homeowners' policies exclude coverage for the actual abuser under either an intentional acts exclusion or an abuse exclusion. While certain types of physical injury may be argued to be unintentional, sexual abuse or molestation is always considered an intentional wrongdoing. Coverage disputes arising from abuse claims frequently involve claims against persons or organizations other than the alleged abuser and analysis of either or both of the following: 1) applicable policy language separating insureds for purposes of coverage; and/or 2) the scope and wording of the abuse exclusion.

Often, a plaintiff files a lawsuit not only against the alleged abuser, but also against other defendants (churches, hospitals, governmental entities, schools, employers, etc.) who purportedly were negligent in failing to prevent the abuse or in creating a situation where the abuse allegedly was more likely to occur. Common examples of such allegations include negligent hiring, training and/or supervision of an employee who allegedly commits abuses, and negligent protection, supervision of or care for a minor or patient who allegedly has been abused. Such claims may or may not be covered and therefore often lead to declaratory judgment actions.

Homeowners' policies typically contain what is known as an absolute abuse exclusion wherein any claim arising from or related to an abuse claim is excluded regardless of the alleged intent of the insured; i.e., negligence claims against persons other than the abuser are not covered. An example of such language is an exclusion that expressly forecloses coverage for “any and all claims for injury sustained by any person arising out of or resulting from sexual and/or physical abuse.”

'Bodily Injury'

One other way insurers categorically exclude coverage for sexual abuse is to limit the definition of “bodily injury” covered under the policy by expressly carving out sexual abuse as follows:

• “Bodily injury” means any physical harm to the body, including any resulting sickness or disease. This term includes required care, loss of services and death if it is a result of such physical harm, sickness or disease.
• Bodily injury does not include ' the actual, alleged or threatened sexual molestation of a person ' .

Abuse or Molestation

In contrast to most homeowners' policies, abuse exclusions in business owners' policies may be narrowed so as to provide coverage to the business entity for negligence claims. An example of this type of narrowed exclusion is as follows:

“Bodily injury” or “property damage” arising out of:

1. The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or
2. The negligent: a) Employment; b) Investigation; c) Supervision; d) Reporting to the proper authorities, or failure to so report; or e) Retention;

• of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by Paragraph 1) above.

Unless a victim is in the “care, custody or control” of any insured, there is coverage for negligence claims against persons or entities other than the abuser. The application of the phrase “care, custody or control” typically is reserved for organizations such as schools or daycare facilities that act in loco parentis; hospitals or medical care providers required to be licensed for prisons; or other facilities where persons are taken into physical or legal custody.

Last year for the first time, a court held the “care, custody and control” language of an abuse exclusion barred coverage for a hotel because the hotel guests purportedly were in the “care, custody or control” of the hotel. Holiday Hospitality Franchising, Inc. v. AMCO Ins. Co., 983 N.E.2d 574 (Ind. 2013). This holding has not been cited in any other reported opinion to date and expansion of the holding was rejected by a recent Tennessee Chancery Court case wherein the court ruled that a patron at a fast food restaurant is not in the “care, custody or control” of the restaurant. Depositors Ins. Co. and AMCO Ins. Co. v. Great Smoky Mountains Enterprises, LLC d/b/a Krystal's of Pigeon Forge, et al. Sevier County Chancery Court, Case No. 78-CH1-2013-CV-159 (Order entered Dec. 30, 2013).

Unlike most homeowners' policies, business owner policies typically analyze coverage for each insured separately so intentions, knowledge and actions are not imputed between or among insureds. A typical “Separation of Insureds” provision contained in a business owner's policy is as follows:

This insurance applies:

a. As if each Named Insured were the only Named Insured; and

b. Separately to each Insured against whom claim is made or “suit” is brought.

This provision is critical to the analysis of coverage for sexual abuse given that “expected or intended injury” is almost universally excluded. Accordingly, it is important to ascertain whether expectation and intention are imputed for coverage purposes.

The first place to look is the language of Expected or Intended Injury Exclusion, which often excludes coverage via one of the following provisions:

1. “Bodily injury” or “property damage” that is expected or intended by the insured; or
2. “Bodily injury” or “property damage” that is expected or intended by any insured.

The obvious difference between the two is the use of “the insured” as opposed to the much broader phrase “any insured.”

'Any Insured'

Courts are divided on coverage when both the “any insured” language is present in the Expected or Intended Injury Exclusion and the policy contains a Separation of Insureds provision. In Minkler v. Safeco Ins. Co. of Am., the California Supreme Court, faced with these contradictory provisions in a homeowner's policy, found that a mother was not excluded from coverage for a lawsuit alleging that she negligently supervised a minor in her home where the harm from the negligent supervision was directly attributable to her son's sexual molestation of the minor. Minkler v. Safeco Ins. Co. of Am., 232 P.3d 612 (Cal. 2010). The court held that, because the severability clause made the exclusion ambiguous, the clause should be interpreted in favor of the insured. Id. Courts in other jurisdictions have reached similar conclusions. See, e.g., Shapiro v. American Home Assur. Co., 616 F. Supp. 900, 904 (D. Mass. 1984) (applying severability clause to policy exclusion for intentional acts and thus interpreting “any insured” severally); Catholic Diocese of Dodge City v. Rymer, 251 Kan. 689, 840 P.2d 456 (Kan. 1992) (same); Worcester Mut. Ins. Co. v. Marne, 398 Mass. 240, 496 N.E.2d 158 (Mass. 1986) (same).

Other courts have reached a different conclusion. See, e.g., Standard Fire Ins. Co. v. Proctor, 286 F. Supp. 2d 567, 574 (D. Md. 2003) (finding that “any insured” is unambiguous and that, regardless of severability clause, exclusion for the intentional act of “any insured” is collective); Allstate Ins. Co. v. Kim, 121 F. Supp. 2d 1301, 1308 (D. Haw. 2000) (“severability clause does not prevent an intentional acts exclusion from barring coverage for the alleged negligence of an intentional tortfeasor's coinsured”); Co-operative Ins. Cos. v. Woodward, 45 A.3d 89, 94-95 (Vt. 2012) (rejecting Minkler and finding that exclusion of coverage for loss caused by intentional acts of “an insured” applied to both insureds under the policy, despite existence of a severability clause, as the exclusion was unambiguous); BP America, Inc. v. State Auto Prop. & Cas. Ins. Co', 148 P.3d 832, 841 (Okla. 2005) (reviewing cases nationwide and finding that “most courts addressing the issue of whether a severability clause will render a clear and unambiguous exclusionary provision doubtful determine that the clear language of the exclusion must prevail”); Am. Family Mut. Ins. Co. v. White, 65 P.3d 449, 456 (Ariz. 2003) (“Most courts that have construed the phrase 'any insured' in an exclusion have found that it bars coverage for any claim attributable to the excludable acts of any insured, even if the policy contains a severability clause. We join that majority.”); Johnson v. Allstate Ins. Co., 687 A.2d 642, 645 (Me. 1997) (“An unambiguous exclusion is not negated by a severability clause.”); Chacon v. Am. Family Mut. Ins. Co, 788 P.2d 748, 751-52 (Colo. 1990) (“any insured” provision “clearly and unambiguously expresses an intention to deny coverage to all insured when damages is intended or expected as a result of the actions of any insured,” despite presence of severability clause).

Given the amount of money at stake in sexual abuse claims, carriers have also asserted, and succeeded in, creative arguments outside the policy language to deny coverage. Earlier this year, the Eighth Circuit ruled that a carrier had no duty to indemnify an archdiocese for a settlement payment made pursuant to an agreement between the archdiocese and a man claiming that his son committed suicide because he was sexually abused by a priest within the archdiocese. Chicago Ins. Co. v. Archdiocese of St. Louis, 8th Cir. Ct. of App., Case No. 12 4012.

This holding was not based upon analysis of an abuse exclusion. It was, rather, based upon an analysis of Missouri law under which a religious organization cannot be liable for negligence. See Gibson v. Brewer, 952 S.W.2d 239, 249-50 (Mo. 1997) (negligence-based actions against a religious organization requiring a court to evaluate the reasonableness of religious doctrine, policy and administration offend the First Amendment and cannot be maintained). This, combined with the requirement that an insured show either potential or actual liability for the settlement payment (the court did not reach the question of the legal standard for evidencing liability required to trigger coverage), was the basis for the Eighth Circuit's ruling in favor of the carrier.

Finally, in a recent case, AIG contested coverage for sexual abuse claims brought against Horace Mann School (HMS) by former students, not on the grounds of any exclusion, but instead because AIG contends that HMS failed to cooperate by placing “onerous restrictions” on the use of information obtained at a mediation between HMS and the former students. Horace Mann School v. Granite State Ins. Co., N.Y. S.Ct., Case No. 652752/2013. AIG had agreed to participate in the mediation, but insisted that HMS produce certain sensitive materials from the mediation to assist AIG in its coverage analysis. Given the nature of the claims, most sexual abuse lawsuits involve a lot of sensitive materials the insured would prefer to keep confidential. HMS refused to provide the information unless AIG signed a confidentiality agreement that would preclude the use of the information for claim evaluation or coverage purposes. Thereafter HMS settled with the students without AIG's authorization. HMS is now suing AIG for approximately $1 million for the settlement. The results of this case may provide carriers with additional defenses to coverage and/or additional rights to sensitive materials that may affect coverage determinations.

Jessica F. Pardi is a partner in Morris, Manning & Martin, LLP's Insurance and Reinsurance Department, resident in the Atlanta office.

Claims of sexual abuse and molestation are devastating to business owners and disconcerting to insurers because they often are made by or on behalf of minors, with whom jurors will sympathize and against whom statutes of limitations often do not apply. Moreover, they frequently contain high-dollar demands. It has been reported that insurers already have paid more than $59 million to defend and settle sexual abuse claims against Penn State University stemming from the abuse perpetrated by Jerry Sandusky. Based upon the complexity and risk, many sexual abuse claims result in coverage disputes.

Most commercial general liability, business owners' and homeowners' policies exclude coverage for the actual abuser under either an intentional acts exclusion or an abuse exclusion. While certain types of physical injury may be argued to be unintentional, sexual abuse or molestation is always considered an intentional wrongdoing. Coverage disputes arising from abuse claims frequently involve claims against persons or organizations other than the alleged abuser and analysis of either or both of the following: 1) applicable policy language separating insureds for purposes of coverage; and/or 2) the scope and wording of the abuse exclusion.

Often, a plaintiff files a lawsuit not only against the alleged abuser, but also against other defendants (churches, hospitals, governmental entities, schools, employers, etc.) who purportedly were negligent in failing to prevent the abuse or in creating a situation where the abuse allegedly was more likely to occur. Common examples of such allegations include negligent hiring, training and/or supervision of an employee who allegedly commits abuses, and negligent protection, supervision of or care for a minor or patient who allegedly has been abused. Such claims may or may not be covered and therefore often lead to declaratory judgment actions.

Homeowners' policies typically contain what is known as an absolute abuse exclusion wherein any claim arising from or related to an abuse claim is excluded regardless of the alleged intent of the insured; i.e., negligence claims against persons other than the abuser are not covered. An example of such language is an exclusion that expressly forecloses coverage for “any and all claims for injury sustained by any person arising out of or resulting from sexual and/or physical abuse.”

'Bodily Injury'

One other way insurers categorically exclude coverage for sexual abuse is to limit the definition of “bodily injury” covered under the policy by expressly carving out sexual abuse as follows:

• “Bodily injury” means any physical harm to the body, including any resulting sickness or disease. This term includes required care, loss of services and death if it is a result of such physical harm, sickness or disease.
• Bodily injury does not include ' the actual, alleged or threatened sexual molestation of a person ' .

Abuse or Molestation

In contrast to most homeowners' policies, abuse exclusions in business owners' policies may be narrowed so as to provide coverage to the business entity for negligence claims. An example of this type of narrowed exclusion is as follows:

“Bodily injury” or “property damage” arising out of:

1. The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or
2. The negligent: a) Employment; b) Investigation; c) Supervision; d) Reporting to the proper authorities, or failure to so report; or e) Retention;

• of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by Paragraph 1) above.

Unless a victim is in the “care, custody or control” of any insured, there is coverage for negligence claims against persons or entities other than the abuser. The application of the phrase “care, custody or control” typically is reserved for organizations such as schools or daycare facilities that act in loco parentis; hospitals or medical care providers required to be licensed for prisons; or other facilities where persons are taken into physical or legal custody.

Last year for the first time, a court held the “care, custody and control” language of an abuse exclusion barred coverage for a hotel because the hotel guests purportedly were in the “care, custody or control” of the hotel. Holiday Hospitality Franchising, Inc. v. AMCO Ins. Co. , 983 N.E.2d 574 (Ind. 2013). This holding has not been cited in any other reported opinion to date and expansion of the holding was rejected by a recent Tennessee Chancery Court case wherein the court ruled that a patron at a fast food restaurant is not in the “care, custody or control” of the restaurant. Depositors Ins. Co. and AMCO Ins. Co. v. Great Smoky Mountains Enterprises, LLC d/b/a Krystal's of Pigeon Forge, et al. Sevier County Chancery Court, Case No. 78-CH1-2013-CV-159 (Order entered Dec. 30, 2013).

Unlike most homeowners' policies, business owner policies typically analyze coverage for each insured separately so intentions, knowledge and actions are not imputed between or among insureds. A typical “Separation of Insureds” provision contained in a business owner's policy is as follows:

This insurance applies:

a. As if each Named Insured were the only Named Insured; and

b. Separately to each Insured against whom claim is made or “suit” is brought.

This provision is critical to the analysis of coverage for sexual abuse given that “expected or intended injury” is almost universally excluded. Accordingly, it is important to ascertain whether expectation and intention are imputed for coverage purposes.

The first place to look is the language of Expected or Intended Injury Exclusion, which often excludes coverage via one of the following provisions:

1. “Bodily injury” or “property damage” that is expected or intended by the insured; or
2. “Bodily injury” or “property damage” that is expected or intended by any insured.

The obvious difference between the two is the use of “the insured” as opposed to the much broader phrase “any insured.”

'Any Insured'

Courts are divided on coverage when both the “any insured” language is present in the Expected or Intended Injury Exclusion and the policy contains a Separation of Insureds provision. In Minkler v. Safeco Ins. Co. of Am., the California Supreme Court, faced with these contradictory provisions in a homeowner's policy, found that a mother was not excluded from coverage for a lawsuit alleging that she negligently supervised a minor in her home where the harm from the negligent supervision was directly attributable to her son's sexual molestation of the minor. Minkler v. Safeco Ins. Co. of Am ., 232 P.3d 612 (Cal. 2010). The court held that, because the severability clause made the exclusion ambiguous, the clause should be interpreted in favor of the insured. Id. Courts in other jurisdictions have reached similar conclusions. See, e.g., Shapiro v. American Home Assur. Co. , 616 F. Supp. 900, 904 (D. Mass. 1984) (applying severability clause to policy exclusion for intentional acts and thus interpreting “any insured” severally); Catholic Diocese of Dodge City v. Rymer , 251 Kan. 689, 840 P.2d 456 (Kan. 1992) (same); Worcester Mut. Ins. Co. v. Marne , 398 Mass. 240, 496 N.E.2d 158 (Mass. 1986) (same).

Other courts have reached a different conclusion. See, e.g., Standard Fire Ins. Co. v. Proctor , 286 F. Supp. 2d 567, 574 (D. Md. 2003) (finding that “any insured” is unambiguous and that, regardless of severability clause, exclusion for the intentional act of “any insured” is collective); Allstate Ins. Co. v. Kim , 121 F. Supp. 2d 1301, 1308 (D. Haw. 2000) (“severability clause does not prevent an intentional acts exclusion from barring coverage for the alleged negligence of an intentional tortfeasor's coinsured”); Co-operative Ins. Cos. v. Woodward , 45 A.3d 89, 94-95 (Vt. 2012) (rejecting Minkler and finding that exclusion of coverage for loss caused by intentional acts of “an insured” applied to both insureds under the policy, despite existence of a severability clause, as the exclusion was unambiguous); BP America, Inc. v. State Auto Prop. & Cas. Ins. Co', 148 P.3d 832, 841 (Okla. 2005) (reviewing cases nationwide and finding that “most courts addressing the issue of whether a severability clause will render a clear and unambiguous exclusionary provision doubtful determine that the clear language of the exclusion must prevail”); Am. Family Mut. Ins. Co. v. White , 65 P.3d 449, 456 (Ariz. 2003) (“Most courts that have construed the phrase 'any insured' in an exclusion have found that it bars coverage for any claim attributable to the excludable acts of any insured, even if the policy contains a severability clause. We join that majority.”); Johnson v. Allstate Ins. Co. , 687 A.2d 642, 645 (Me. 1997) (“An unambiguous exclusion is not negated by a severability clause.”); Chacon v. Am. Family Mut. Ins. Co , 788 P.2d 748, 751-52 (Colo. 1990) (“any insured” provision “clearly and unambiguously expresses an intention to deny coverage to all insured when damages is intended or expected as a result of the actions of any insured,” despite presence of severability clause).

Given the amount of money at stake in sexual abuse claims, carriers have also asserted, and succeeded in, creative arguments outside the policy language to deny coverage. Earlier this year, the Eighth Circuit ruled that a carrier had no duty to indemnify an archdiocese for a settlement payment made pursuant to an agreement between the archdiocese and a man claiming that his son committed suicide because he was sexually abused by a priest within the archdiocese. Chicago Ins. Co. v. Archdiocese of St. Louis, 8th Cir. Ct. of App., Case No. 12 4012.

This holding was not based upon analysis of an abuse exclusion. It was, rather, based upon an analysis of Missouri law under which a religious organization cannot be liable for negligence. See Gibson v. Brewer , 952 S.W.2d 239, 249-50 (Mo. 1997) (negligence-based actions against a religious organization requiring a court to evaluate the reasonableness of religious doctrine, policy and administration offend the First Amendment and cannot be maintained). This, combined with the requirement that an insured show either potential or actual liability for the settlement payment (the court did not reach the question of the legal standard for evidencing liability required to trigger coverage), was the basis for the Eighth Circuit's ruling in favor of the carrier.

Finally, in a recent case, AIG contested coverage for sexual abuse claims brought against Horace Mann School (HMS) by former students, not on the grounds of any exclusion, but instead because AIG contends that HMS failed to cooperate by placing “onerous restrictions” on the use of information obtained at a mediation between HMS and the former students. Horace Mann School v. Granite State Ins. Co., N.Y. S.Ct., Case No. 652752/2013. AIG had agreed to participate in the mediation, but insisted that HMS produce certain sensitive materials from the mediation to assist AIG in its coverage analysis. Given the nature of the claims, most sexual abuse lawsuits involve a lot of sensitive materials the insured would prefer to keep confidential. HMS refused to provide the information unless AIG signed a confidentiality agreement that would preclude the use of the information for claim evaluation or coverage purposes. Thereafter HMS settled with the students without AIG's authorization. HMS is now suing AIG for approximately $1 million for the settlement. The results of this case may provide carriers with additional defenses to coverage and/or additional rights to sensitive materials that may affect coverage determinations.

Jessica F. Pardi is a partner in Morris, Manning & Martin, LLP's Insurance and Reinsurance Department, resident in the Atlanta office.