Connecticut Court Holds Sexual Molestation Limitation Applicable

In its recent decision in Metropolitan Prop. & Cas. Ins. Co. v. Briggs, 2013 U.S. Dist. LEXIS 74885 (D. Conn. May 29, 2013), the United States District Court for the District of Connecticut had occasion to consider a homeowner’s insurer had a duty to defend its insured in connection with an underlying suit alleging sexual molestation.

The insured was alleged to have sexually assaulted a minor, while in the insured’s home, on repeated occasions during a two-year period.  The lawsuit alleged numerous physical and emotional injuries resulting from these incidents.  The insured sought a defense in connection with the suit from his homeowner’s insurer, Metropolitan Property & Casualty.  The Metropolitan policy provided coverage for bodily injury resulting from an occurrence.  The policy’s definition of bodily injury, however, expressly carved-out the following categories of harm:

a.   any of the following which are transmitted by you to any other person: disease, bacteria, parasite, virus or other organism; or

b.   the exposure to any such disease, bacteria, parasite, virus or other organism by you to any other person; or

c.   the actual, alleged or threatened sexual molestation of a person.

Metropolitan denied coverage to its insured on the basis that sexual molestation was an excluded category of bodily harm.  The insured, on the other hand, argued that the definition of bodily injury only excluded coverage for the “act” of sexual molestation, but did not exclude coverage for the harm resulting from molestation.   Specifically, the insured argued that “bodily injuries sustained as a result of sexual molestation should be covered by the policy,” at least for duty to defend purposes.

The court found the insured’s reading of the policy unreasonable, concluding that the insured’s strained interpretation of the policy definition of bodily injury would render moot all of the carved-out categories of harms.  As the court explained:

In addition to sexual molestation, the exclusionary provision excludes from the definition of bodily injury: disease, bacteria, parasite, virus or other organism. If we extend defendant's reasoning to these other excluded categories, insureds would be covered for bodily injury as a result of disease, bacteria, parasite, virus or other organism, despite that disease, bacteria, parasite, virus or other organism themselves, like sexual molestation, are clearly and explicitly excluded from coverage. This would render the exclusionary provision virtually meaningless.

Thus, finding that the only reasonable interpretation of the policy is that bodily injury resulting from sexual molestation is not an insured category of loss, the court granted summary judgment in favor of Metropolitan.

Illinois Supreme Court Holds TCPA Damages Not Punitive

Today the Illinois Supreme Court issued its decision in Standard Mutual v. Lay, 2013 IL 114617 (2013).  Locklear brought a class action claim against Lay under the Telephone Consumer Protection Act of 1991 (TCPA), which resulted in a court-approved settlement orchestrated by Lay and Locklear.  The settlement agreement provided for $500 statutory damages to be distributed to each of the 3,478 class members.  The settlement further restricted Locklear’s ability to satisfy the judgment to only Lay’s insurers.  Lay’s insurer, Standard Mutual, filed a complaint for declaratory judgment arguing that, among other things, the settlement was not covered as the TCPA-prescribed damages of $500 per violation constitute punitive damages, which are uninsurable.

The trial court and Appellate Court ruled that because the $500 statutory damages were disproportionate to the actual damages (loss of toner, paper, etc.), the damages assessed for a violation of the TCPA were punitive in nature and therefore uninsurable.  On appeal, Locklear contended, among other things, that the damages were not punitive given the legislative history underlying the TCPA.  The Supreme Court agreed, holding that the TCPA is “clearly within the class of remedial statutes which are designed to grant remedies for the protection of rights, introduce regulation conducive to the public good, or cure public evils.”  The court found that Congress intended to prevent advertisers from unfairly shifting the cost of advertisements to consumers, and imposed a liquidated sum of $500 to reflect the compensable damages and harms suffered by the recipient of an unsolicited fax.  The court also held that the $500 liquidated damages were available as an incentive for private parties to enforce the statute, and therefore the statute existed for more than punitive or deterrent purposes. Finally, the treble damages available under the TCPA, which are separate from the $500 liquidated damages, demonstrated Congress’ intent that the liquidated damages serve goals other than deterrence and punishment.  The court did not reach the issues of whether TCPA damages fall within an exception to the uninsurability of punitive damages, or Locklear’s argument that all punitive damages should be insurable.

Eighth Circuit Addresses Business Risk Exclusions

In its recent decision in Spirtas Co. v. Nautilus Ins. Co., 2013 U.S. App. LEXIS 10031 (8^th Cir. May 20, 2013), the United States Court of Appeals for the Eighth Circuit, applying Missouri law, had occasion to consider application of a general liability policy’s business risk exclusions to the insured’s faulty workmanship.

The insured, Spirtas, was hired to demolish the Seneca Bridge in Illinois. The demolition plan called for explosives to be detonated on the bridge that would allow for the span to fall in one piece into the river below.  Once in the river, workers would cut the span into pieces and remove them by crane.  It was expected that the river portion of the work would take sixteen hours in total, during which time barge traffic on the river would have to be halted.  The explosives, however, did not detonate as planned.  Among other things, the span did not fall into the river in a single piece.  Spirtas was required to employ divers to identify portions of the bridge and remove them from the river.  Ultimately, the entire process took significantly longer than anticipated at a far greater cost than anticipated.  Spirtas sought recovery of those extra costs from Nautilus, its general liability insurer.

Nautilus disclaimed coverage for these costs, relying on its policy’s business risk exclusions, including exclusion j(5) applicable to “property damage” to “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.”  Spirtas argued that its operations were performed on the bridge, not the river, so that any costs relating to work in the river would not be subject to the exclusion.  The Eighth Circuit rejected Spirtas’ characterization of its work, explaining:

Here, however, the work was being performed on both the bridge and the river. According to the plan, the bridge span was supposed to fall into the river. That happened, albeit in a disorganized manner, when the charges detonated. At all times the work occurred on the river and the bridge … Therefore, both the bridge and river were the "particular part of real property" on which Spirtas's operations occurred.

While Nautilus’ policy contained a specific exception to the j(5) exclusion for mistaken demolition of property, the court concluded that this exception applied only to instances where Spirtas demolished the wrong property, not when its planned demolition of intended property was performed negligently.

The court also considered the application of exclusion j(6) applicable to “property damage” to [“t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”  The court summarily agreed that this exclusion applied since Spirtas’ claim involved correction of demolition work to the bridge and river that was incorrectly performed in the first instance. 

Finally, the court agreed that coverage was precluded based on exclusion (m) of the Nautilus policy applicable to:

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy, or dangerous condition in 'your product' or 'your work'; or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

The court agreed that Spirtas’ work encompassed not only the bridge itself, but also the river since a significant portion of Spirtas’ work was intended to be performed in the river.  As such, the court concluded that the bridge and the river qualified as “impaired property” to which the exclusion applied.

Missouri Court Holds Prejudice Requirement Inapplicable to Claims Made Policy

In its recent decision in Secure Energy v. Phila. Indem. Ins. Co., 2013 U.S. Dist. LEXIS 69320 (E.D.Mo. May 15, 2013), the United States District Court for the Eastern District of Missouri had occasion to consider whether under Missouri law, an insurer need demonstrate prejudice in order to disclaim coverage based on an insured’s failure to report a claim within the time allotted under a claims made policy.

Philadelphia Indemnity insured Secure Energy under successive one-year claims made directors and officers policies during the period October 11, 2007 through October 11, 2012.  The policies contained the following reporting provisions:

In the event that a Claim is made against the Insured, the Insured shall, as a condition precedent to the obligations of the Underwriter under this Policy, give written notice to the Underwriter as soon as practicable after any of the directors, officers, governors, trustees, management committee members, or members of the Board of Members first become aware of such Claim, but, no later than 60 days after the expiration of this Policy, Extension Period, or Run-Off Policy, if applicable.

In December 2007, a claim was asserted against Secure Energy’s board of directors by an individual demanding payment of commissions he claimed he was owed.  Suit was filed in 2008 against one of Secure Energy’s directors, and it was later amended in 2009 to add Secure Energy as a direct defendant.  Secure Energy, however, did not provide notice of the suit to Philadelphia until late 2011.  It claimed that it did not do so earlier because it was unsure that the matter would qualify for coverage.   Philadelphia later denied coverage to Secure Energy, and its directors, based on the failure to report the suit in the time required by the applicable policy.

Secure Energy argued that while it did not strictly comply with the policies’ notice requirements, Missouri law required Philadelphia to demonstrate prejudice in order to disclaim coverage, citing to decisions such as the Missouri Supreme Court’s decision in Weaver v. State Farm Mut. Auto. Ins. Co., 936 S.W.2d 818 (Mo. 1997).  The district court noted, however, that in Wittner, Poger, Rosenblum, & Spewak, P.C. v. Bar Plan Mut. Ins. Co., 969 S.W.2d 749 (Mo. 1998), the Missouri Supreme Court held that the prejudice requirement articulated in Weaver did not extend to claims made policies, but instead was limited to occurrence-based policies.   Observing that several lower state courts and Missouri federal courts recognized the distinction stated in Wittner, the court agreed that Philadelphia need not demonstrate that it was prejudiced as a result of Secure Energy’s failure to have provided notice of the claim in the time required by the applicable policy.

Tenth Circuit Holds Underlying Securities Claims Interrelated

In its recent decision in Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate 2003, 2013 U.S. App. LEXIS 9599 (10^th Cir. May 13, 2013), the United States Court of Appeals for the Tenth Circuit, applying New York law, had occasion to consider whether an underlying securities arbitration related back to claims first made prior to the policy’s inception date, and if so, whether the insurer was estopped from denying coverage on this basis.

Lloyds insured Brecek & Young Advisors, Inc. (“BYA”) under a claims-made and reported broker/dealer professional liability policy in effect for the period December 1, 2006 to December 1, 2007.  The policy contained an “Interrelated Wrongful Acts” provision stating that all claims based on the same wrongful act or interrelated wrongful acts would be deemed a single claim.  The policy also contained an exclusion applicable to claims arising out of wrongful acts for which notice had been given under any prior policy or “any other Wrongful Act whenever occurring, which together with a Wrongful Act which has been the subject to such claim or notice, would constitute Interrelated Wrongful Acts.”  The policy defined “Interrelated Wrongful Acts” as wrongful acts that are:

1.   similar, repeated or continuous; or

2.   connected by reason of any common fact, circumstance, situation, transaction, casualty, event, decision or policy or one or more series of facts, circumstances, situations, transactions, casualties, events, decisions or policies.

The Brecek decision addressed the interrelatedness of three underlying proceedings.  The first, referred to as the “Wahl Arbitration” was a claim first made against BYA while the Lloyds policy was in effect.  The claim alleged that BYA sold unsuitable investment products and that BYA and a co-defendant engaged in practices of churning investments during the period 1999 through 2005.   The claim alleged causes of action against BYA for various theories of agency liability and failure to supervise.   The complaint filed in the Wahl Arbitration was subsequently amended to add twenty-five additional claimants who claimed similar injuries as a result of similar misconduct.

Relevant to coverage for the Wahl Arbitration was a claim first made against BYA in September 2005, referred to as the Knotts Arbitration.  The Knotts Arbitration contained similar allegations and causes of action as alleged in the Wahl Arbitration, and identified the same individual defendants as those identified in the Wahl Arbitration.  Also relevant was a claim first made against BYA in June 2006, referred to as the Colaner Arbitration, which also contained allegations of unsuitability and churning over the same time period by the same group of individual defendants. 

Lloyds initially took the position that the Wahl Arbitration was interrelated to the Colaner Arbitration and therefore should be covered under BYA’s prior policy which had been issued by Fireman’s Fund.  Lloyds subsequently advised, however, that it had determined the Wahl and Colaner matters were not interrelated.  Lloyds thereafter agreed to provide BYA with a defense in the Wahl Arbitration, but took the position that each claimant in the proceeding represented an entirely unrelated claim subject to a separate $50,000 self-insured retention.  While BYA eventually settled with each of the claimants in the Wahl Arbitration, Lloyds prorated the defense costs among all claims and paid indemnity on those claims which exceeded the $50,000 retention.  As a result, Lloyds indemnified BYA for only $385,000 of some $932,000 incurred by BYA in legal fees and settlement payments.

The issue of multiple-retentions eventually was briefed to the United States District Court for the District of Kansas, where the declaratory judgment action was filed.  On motion for summary judgment, Lloyds argued that there was not a sufficient factual nexus between the claimants in the Wahl Arbitration such that they could be considered interrelated, notwithstanding the fact that the claimants were part of the same lawsuit.  In a footnote, Lloyds argued that in the alternative, if the claims asserted in the Wahl Arbitration were found to have arisen from interrelated wrongful acts, then they would necessarily relate back to claims made in the Knotts Arbitration or the Colaner Arbitrations, and therefore excluded by the Lloyds policy.  The district court ruled against Lloyds on the number of retentions, but ordered briefing on Lloyds “relation back” theory.  BYA argued that the Wahl Arbitraiton did not relate back to the earlier claims, but that even if they did, Lloyds was precluded from taking this position based on the doctrines of waiver or estoppel.  The district court ruled against BYA on the issues of waiver and estoppel, but ultimately concluded that the three arbitrations were not interrelated for the purpose of the policy’s exclusion.

On appeal, the Tenth Circuit reasoned that the matters would be deemed interrelated if they shared a “sufficient factual nexus,” which is the standard articulated by New York courts in considering similar “interrelated wrongful act” provisions.  Applying this standard, the court found sufficient common facts to establish interrelatedness.  As the court explained:

Several common facts connect the Wahl, Knotts, and Colaner Arbitrations. All named as respondents BYA, B&G Financial Network, Gergel, and Snyder. Further, both the Wahl and Colaner arbitrations included claims against broker/agents Brandt and Farrar. All of the misconduct was alleged to have taken place during roughly the same time period-from the late 1990s to the mid 2000s. All claims allege the respondents sold unsuitable investment products including various types of annuities. Further, all claims involved allegations of churning or flipping of investment accounts in order to enrich the broker/agents at the expense of account holders. Finally, BYA's liability was predicated on theories of vicarious liability and failure to supervise its broker/agents in each of the claims.

The court concluded that the three arbitrations were connected by common facts, circumstances, decisions and policies such that they were “interrelated” for the purpose of the exclusion in the Lloyds policy.

The court, however, also concluded that Lloyds was potentially estopped from relying on the exclusion as a defense to coverage since it undertook BYA’s defense in the Wahl Arbitration with knowledge of the coverage defense, but only asserted the defense for the first time late in the coverage litigation.  The court agreed BYA was potentially prejudiced in the form of detrimental reliance as a result of Lloyd’s control of BYA’s defense without having properly reserved rights on the “relation back” coverage defense.  The Tenth Circuit, therefore, remanded the proceedings for further consideration of whether BYA detrimentally relied on Lloyds’ conduct, and if so, whether it was entitled to further recovery under the policy notwithstanding the otherwise applicable coverage defense.

New York Court Holds Incidents of Sexual Molestation Separate Occurrences

In its recent decision in Roman Catholic Diocese of Brooklyn v National Union Fire Ins. Co. of Pittsburgh, PA, 2013 NY Slip Op 3264 (N.Y. May 7, 2013), the New York Court of Appeals – New York’s highest court – had occasion to consider whether repeated incidents of sexual molestation involving a single victim constituted multiple occurrences triggering multiple self-insured retentions.

The underlying suit alleged that a single priest molested a minor on numerous occasions during the period 1996 through 2002.  These incidents happened in several locations, including the rectory, office and other areas of a church in Queens, New York, the priest’s car, the plaintiff’s home, and another home.  The underlying action was settled for $2 million.  National Union issued three consecutive general liability policies to the Diocese that were potentially triggered by the underlying suit.  Each of the policies had a limit of liability of $750,000 and a per occurrence self-insured retention of $250,000.  National Union disclaimed coverage to the Diocese on the basis of a sexual abuse exclusion, and the application of the exclusion has not yet been determined by the lower court.  At issue before the Court of Appeals was the issue of whether the alleged acts of molestation could be considered a single occurrence triggering only a single retention, or multiple occurrences triggering multiple retentions.  The National Union policies defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Further, each policy only provided coverage for bodily injury that occurred during the policy period.

The court acknowledged that the issue of whether several acts of sexual molestation constitute multiple occurrences was an issue of first impression for it.  The court nevertheless found guidance in its prior decisions involving number of occurrence questions, in particular its decisions in Arthur A. Johnson Corp. v Indemnity Ins. Co. of N. Am., 196 N.Y.S.2d 678 (N.Y. 1959); Appalachian Ins. Co. v General Elec. Co., 831 N.Y.S.2d 742 (N.Y. 2007). These decisions, explained the court, relied on the “unfortunate event” test to determine the number of occurrences, as opposed to simply looking at the proximate cause of the injuries or the number of injured parties.  This test, explained the court, looks to “whether there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.” 

Applying this test to the alleged underlying incidents of molestation, the court concluded that there was no “close temporal and spatial relationship” among these incidents from which it could conclude there was only a single occurrence.  As the court explained:

Applying the unfortunate event test we conclude that the incidents of sexual abuse within the underlying action constituted multiple occurrences. Clearly, incidents of sexual abuse that spanned a six-year period and transpired in multiple locations lack the requisite temporal and spatial closeness to join the incidents … While the incidents share an identity of actors, it cannot be said that an instance of sexual abuse that took place in the rectory of the church in 1995 shares the same temporal and spatial characteristics as one that occurred in 2002 in, for example, the priest's automobile.

In so concluding, the court rejected the Diocese’s argument that the incidents of molestation could be considered part of a “single continuum” resulting from the single occurrence of the Diocese’s failure to supervise.  The unfortunate events test, explained the court, required that the focus be on the nature of the incidents giving rise to the alleged harm.  Likewise, the court rejected the Diocese’s argument that the incidents could be considered “continuous or repeated exposure to substantially the same general harmful conditions.”  As the court explained:

In our view, sexual abuse does not fit neatly into the policies' definition of "continuous or repeated exposure" to "conditions". This "'sounds like language designed to deal with asbestos fibers in the air, or lead-based paint on the walls, rather than with priests and choirboys. A priest is not a 'condition' but a sentient being" … The settlement in the underlying claim addresses harms for acts by a person employed by the Diocese. The Diocese's argument that the parties intended to treat numerous, discrete sexual assaults as an accident constituting a single occurrence involving "conditions" is simply untenable.  (Internal citations omitted.)

In light of its holding regarding the number of occurrences, the court concluded that the Diocese was required to satisfy a separate $250,000 self-insured retention for each occurrence transpiring within each of the National Union policies, but only to the extent the occurrence resulted in “bodily injury” in that policy year.

Alabama Supreme Court Addresses Coverage for Faulty Workmanship Claim

In its recent decision in Shane Traylor Cabinetmaker, L.L.C. v. American Resources Ins. Co., Inc., 2013 Ala. LEXIS 42 (Ala. May 3, 2013), the Supreme Court of Alabama had occasion to consider whether a general liability policy was triggered by an underlying claim arising out of alleged faulty workmanship.

The insured, Shane Traylor Cabinetmaker, L.L.C. (“STC”) was hired to perform cabinetry and woodworking on several homes.  STC later sued the developer/owner of the homes for amounts due under the contract and the suit included a claim for foreclosure on a lien.  The lawsuit also involved issues of whether the developer was a partner in STC.  The developed counterclaimed on several theories, including breach of contract, slander of title, and mental-anguish arising out of the slander of title.  Among other things, the counterclaim alleged that STC’s work was defective and had to be repaired or replaced.  The counterclaim, however, contained no allegation of specific damage resulting from the defective work.  STC’s general liability insurer, American Resources, denied coverage for the counterclaim on several grounds, including lack of bodily injury or property damage resulting from an occurrence.

Looking to its prior decisions concerning insurance coverage for faulty workmanship, in particular its decisions in Town & Country Property, LLC v. Amerisure Insurance Co., 2011 Ala. LEXIS 183, (Ala. 2011), United States Fidelity & Guarantee Co. v. Warwick Development Co., 446 So. 2d 1021 (Ala. 1984), and Moss v. Champion Insurance Co., 442 So. 2d 26 (Ala. 1983), the Alabama Supreme Court observed the general rule that faulty workmanship, in and of itself, is not an occurrence as that term is defined by a standard general liability policy.  The court observed that faulty workmanship can lead to an occurrence if it “subjects personal property or other parts of the structure” to some form of damage.  Applying this standard to the underlying counterclaim, the court agreed that there was no occurrence, because the counterclaimant alleged only defective work, but no physical damage or loss of use of property resulting from the defective work. 

In reaching its holding, the court considered STC’s argument that loss of use could be reasonably inferred from the counterclaim.  Specifically, STC argued that since the kitchen cabinets it installed had to be repaired, this aspect of the kitchens were rendered unusable to the claimant while the remedial work was underway.  The court rejected this argument, explaining:

Barbee's counterclaim alleged that STC and Traylor's defective work "requir[ed] Robert L. Barbee to repair and/or replace the work performed by Traylor and STC." It did not allege damage to other property resulting from that work. …  we decline to infer loss of use or other injuries based on speculation as to damage that was not alleged in the counterclaim or the amended counterclaim.

The court also considered STC’s argument that the counterclaim for mental anguish arising out of slander of title constituted a claim for bodily injury.  Without ruling on whether a mental anguish claim constitutes bodily injury in the first instance, the court concluded that the claim for mental anguish did not arise out of an occurrence because the mental anguish did not arise out of the alleged faulty workmanship.  Rather, the alleged anguish arose out of the business dispute between STC and the counterclaimant, and the intentional placement of a lien on the property which gave rise to the alleged slander of title.  Such acts, concluded the court, did not qualify as an occurrence.