The Insurance and Reinsurance Report

Coverage Denied to Diocese for Sex Abuse Claim Based on Failure to Warn Parish of Priest’s History of Molestation

Cincinnati Ins. Co. v. Oblates of St. Francis de Sales, Inc.

(Ohio Ct. App. Sept. 17, 2010)

 

An appellate court in Ohio recently held that an insurer was not obligated to indemnify the Archdiocese of Oklahoma City in an underlying action against a priest for sexual molestation. The court held that the Church’s assigning the priest to a parish without warning that resulted in the parish allowing the priese unsupervised access to minors was substantially certain to result in additional incidents of sexual molestation and, therefore, did not constitute an “occurrence” within the meaning of the policy.

 

The underlying lawsuit arose from the priest’s sexual abuse of a minor whose family belonged to the priest’s parish. Prior to his assignment to that parish, the priest had been accused of and admitted to several incidents of sexually abusing minor boys. The priest underwent psychiatric counseling, a result of which it was determined that his sexual disorder was manageable, but not curable, and that he should not be in the presence of youth without another responsible adult there. Four years after the report was issued, the priest was assigned to a new parish that was given no warning about his sexual propensities. As a result, the parish placed no restrictions on the priest with respect to his dealings with parish youth.

 

After the priest and his Order were sued by the claimant, the Order tendered its defense and indemnity to its primary and excess insurers. The excess insurer denied coverage based on lack of an “occurrence.” The Order ultimately assigned its claim against its excess insurer to the Archdiocese of Oklahoma City, which had funded the settlement in the underlying action.

 

In the ensuring declaratory judgment action, the trial court granted summary judgment to the excess insurer. The appellate court affirmed the ruling, finding that the Order’s knowledge of the priest’s history and his need for supervision and ongoing treatment without warning to the parish was substantially certain to result in additional incidents of sexual molestation of boys. The court held that injury to the priest’s victim was expected from the Order’s perspective and, therefore, did not constitute “occurrences” within the meaning of the policy. The court acknowledged the Ohio Supreme Court’s decision in Doe v. Shaffer, 738 N.E.2d 1243 (2000), which held that allegations of negligent hiring related to sexual molestation could constitute a policy “occurrence” and, therefore, afford coverage. The court distinguished its case on the ground that in Shaffer, there was no evidence that the molester had any history of sexual abuse or that the respective employers knew of the molesters’ potential propensities toward sexual abuse.

 

For a copy of the case, click here

 

Carrie Appler and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Eleventh Circuit Affirms That Crime Insurance Policy Was A Claims-Made Policy Precluding Policyholder From Aggregating Theft Claims Occurring Over Multiple Years and Multiple Policies.

PBSJ Corp. v. Federal Ins. Co.

(United States Court of Appeals, Eleventh Circuit, October 1, 2009)

 

Policyholder, PBSJ Corp., appealed the district court’s grant of summary judgment to insurer regarding the coverage owed under its policy for employee theft over multiple years.  Policyholder purchased an insurance policy from insurer covering criminal acts, including employee theft for each year between 1992 and 2005 in the amount of $2 million.  The policyholder sustained $42 million in losses due to employee theft during his period of time.  However, policyholder only became aware of the loss in March 2005.  As such, the policyholder contended that it was entitled to recover $2 million under each policy in effect during the years on which the employee theft occurred for a total of $17 million. The insurer contended that the policyholder is limited to recover $2 million only once under the 2004-2005 policy in effect at the time the policyholder discovered and reported the loss.  After evaluating the detailed policy provisions, the court held that this and identical crime insurance policies issues by the insurer and interpreted by other courts are not, as the policyholder contends, occurrence policies.  While the policyholder argued that its recovery may be aggregated across policies, the court held that the presence of both a non-accumulation clause and a clause limiting recovery to a stated maximum (i.e., $2 million) supports the conclusion that the insured is limited to the maximum recovery under one policy for an employee theft spanning multiple policies and years.  Thus, the district court did not err in finding that the policyholder was only entitled to recover on $2 million and was not entitled to recover any amount under any of the predecessor policies.

 

For a copy of the decision, click here

 

By Paul Steck and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Download of Personal Information Violates Right of Privacy within Meaning of "Personal and Advertising Injury"

Netscape Communications Corporation v. Federal Insurance Company

(9th Cir. (Ca.) August 27, 2009)

 

Claims were made against AOL alleging that it had intercepted and disemminated private online communications.  The Ninth Circuit concluded the allegations constituted "violatation of a person's right of privacy" within the meaning of "personal and advertising injury."

 

The policy did contain an exclusion for "providing internet access to 3rd parties."  The Court held that the exclusion had to be construed narrowly, and applied only to the supplying literal connection between the computer and the internet, not the software that allowed the download of personal information at issue.  Thus, the exclusion did not apply to the claims against AOL.

 

For a copy of the decision, click here

 

By Sarah J. Delaney and Michael T. Glascott

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/MGlascott.html

Prescription Drug Exception to Controlled Substance Exclusion in Policy Found Inapplicable

Massachusetts Prop. Ins. Underwriting Ass’n v. Gallagher (Mass. Ct. App. Aug. 24, 2009)

An insurer filed suit against a mother whose son committed suicide by ingesting lethal amounts of propoxyphene. In an underlying action, the mother alleged that the policyholder was negligent in leaving the substance, which the policyholder obtained pursuant to a doctor’s prescription, in a place accessible to her son despite knowledge of his fragile emotional state. The issue was whether the claim was excluded by a policy provision barring coverage for bodily injury arising from use of a controlled substance. An exception to the exclusion stated that coverage was not barred for use of a prescription drug by a person following a physician’s orders. In a matter of first impression, the court held that the son’s use of propoxyphene did not fall within the exception to the exclusion because his use of the prescription drug was not pursuant to a physician’s order.

For a copy of the decision, click here

Carrie P. Appler and Joanna M. Roberto

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

NEW YORK APPELLATE COURT STATES THAT STRANGER TO POLICY HAS STANDING TO COMMENCE A DECLARATORY JUDGMENT ACTION WITHOUT NECESSITY OF JUDGMENT AGAINST INSURED

RLI INSURANCE COMPANY v. STEELY

(N.Y.A.D. 2^nd Dept., August 4, 2009)

 

An insured maintained a primary homeowner’s policy and a separate umbrella policy, issued by separate insurers. He was sued in connection with a boating accident.  The primary homeowner’s insurer disclaimed, citing an exclusion relating to the insured’s ownership of the boat.  The umbrella insurer sued, seeking a declaration that the exclusion was inapplicable and that its policy was excess.  The primary homeowner’s insurer moved to dismiss, citing the umbrella insurer’s lack of standing.  New York’s Appellate Division, Second Department, quoting Mortillaro v Public Serv. Mut. Ins. Co., 285 AD2d 586, 587 (N.Y.A.D. 2^nd Dept.2001), held that “‘so long as the plaintiff stands to benefit from the policy’” it had standing to commence declaratory judgment action before a judgment against the insured in the underlying action is entered.  Since the umbrella carrier stood to benefit, it had standing to sue.

For a copy of the RLI Insurance Company v. Steely decision, click here

For a copy of the Mortillaro v. Public Serv. Mut. Ins. Co. decision, click here

 

By Sarah J. Delaney and Richard J. Cohen

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

Second Circuit Allows The Insurer To Assign Policies Originated by Terminated Agent

Legacy Group of America, Inc. v. North American Company For Life And Health Insurance (2d Cir. July 8, 2009)

In an action successfully handled by the authors, the Second Circuit affirmed the district court's decision granting summary judgment in favor of the insurer together with awarding legal fees and expenses.  The action centered on a solicitation agreement executed by the parties in October of 1993 in which the plaintiffs were granted the authority to solicit applications for insurance policies as well as place application with the insurer pursuant to some conditions.  In exchange, the insurer agreed to compensate the plaintiffs with commissions earned on premiums paid on actual policies issued by the insurer.  The agreement contained a provision stating that it could be terminated by either party without cause.

In June of 1998, the insurer terminated the agreement and assigned another to service the policies the plaintiffs had placed. The plaintiffs commenced an action against the insurer for breach of contract, breach of covenant of good faith and fair dealing, unjust enrichment as well as made mention of a conversion claim based on the assignment. 

The insurer moved for summary judgment based on its rights under the terms and conditions of the agreement to terminate the relationship.  The district court agreed and granted summary judgment in its favor.  In addition, the insurer was also awarded attorneys fees as against one of the plaintiffs.

The Second Circuit determined that pursuant to the terms and conditions of the agreement, summary judgment was proper as the agreement clearly provided each party with the ability to terminate the relationship at any time and without cause.  In addition, the Second Circuit determined that the plaintiffs were unable to assert proprietary rights with respect any "book of business."  The Second Circuit concluded that plaintiff "could not prevent [the insurer] from assigning policies [the insurer] owned to protect [the plaintiffs] relationships or customer lists." 

For a copy of the decision click here

By Richard J. Cohen and Sarah J. Delaney

http://www.goldbergsegalla.com/attorneys/Cohen.html

http://www.goldbergsegalla.com/attorneys/Delaney.html

           

 

 

 

 

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UK Court Declares That Master Insurance Policy Does Not Drop Down Leaving Insured with A Multi-Million Dollar Gap in Coverage

Flexsys America L.P. and XL Insurance Company Ltd. (2009 EWHC 1115)

 

Flexsys America is an Ohio Corporation and subsidiary of a global company based in Belgium. Flexsys purchased a Public and Products Liability Policy from XL Capital Group, termed “Master Policy,” by the Court, and provided US$25 Million in coverage.  Flexsys was also insured under a XL Capital Group Commercial General Liability policy issued in Ohioand providing US$1 Million in coverage.

The plaintiff “KKPC” filed suit against Flexsys alleging that Flexsys engaged in a range of illegal and improper conduct in an effort to monopolize the American market concerning rubber products. Flexsys incurred legal costs in excess of US$2 Million. XL remitted payment of US$1 Million to cover the defense costs, exhausting the CGL policy. Flexsys then sought payment for the remaining costs and coverage under the Master Policy. The Master Policy contained a number of relevant provisions, including the following:

 

Memorandum D: Difference in Conditions

This policy will provide indemnity where the terms and Conditions hereon are broader than the local policy for an Insured company outside Great Britain Northern Ireland the Channel Islands or the Isle of Manin respect to claims made which are not recoverable under such local policies.

Memorandum E: Drop Down Clause

In the event of partial exhaustion of a local policy this Policy will pay in excess of the reduced underlying Limit of Indemnity.

 

In the event of total exhaustion of a local policy this Policy will continue in force as the underlying insurance subject to the terms Exceptions and Conditions of the particular local Policy. 

 

Flexsys’ contention was simple, the local policy (CGL policy) was exhausted and, under the second sentence of Memorandum E, the Master Policy dropped down to provide further coverage. XL denied the policy operated in this fashion, i.e., essentially as an excess policy for a single loss that exhausts the local policy.

 

Initially, the Court noted that coverage under the Master Policy was narrower then under the local policy, and the claims levied by KKPC would not be covered. Since the policy expressly states it will provide coverage where the terms of the Master Policy are broader then the local policy, the policy would indicate that coverage would be available in a situation such as the instant case – where the claim is outside the scope of coverage under the Master Policy.

 

Regardless, the Court rejected Flexsys’ contention and held that based on the terms of the policy it is unlikely it was intended for the Master Policy to simply provide excess coverage for any claim that exhausts the local limits. In interpreting the coverage provided under the drop down clause the Court stated:

It provided a reinstatement of the local policy to be available to meet subsequent claims, i.e. claims subsequent to that or those which achieve total exhaustion of the local policy. It provides new cover from the ground up, but subject, as is logical to the local terms, conditions and limits. It means that in the case of either partial or total exhaustion there is cover available from the ground up for the next claim. [emphasis added]

 

Accordingly, the drop down provision did not function to create a layer of pure excess coverage where a single claim exhausts the limit of liability for the local policy, rendering Flexsys uninsured for this loss, with respect to the Master Policy.

 

Moreover, the Court held there was no duty to defend as the allegations contained in the complaint were devoid of any claim of negligence and clearly outside the scope of coverage provided.

 

For a copy of this decision click here

 

By Brian R. Biggie and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Claims Made During Extended Reporting Period Deemed Uncovered

James River Insurance Co. v. Alliance Children's Servs., Inc.

(D. Mass. May 8, 2009)

A CGL insurer sued its policyholder, seeking a declaration that it was not obligated to defend or indemnify it in an underlying wrongful death action because the claim was not made during the policy period. The court granted the insurer summary judgment, finding that the policy expressly required that, to be covered, a claim must be made during the policy period, not during the extended reporting period.

 

By Carrie Appler

 

http://www.goldbergsegalla.com/attorneys/Appler.html

 

 

Policyholder’s Withholding Material Information Precludes Recovery

Southern Realty Mgmt, Inc. v. Aspen Specialty Ins. Co., et al.

(N.D. Ga, April 28, 2009)

The insurers contended that the policyholder violated the policy provisions when it concealed the sale of the subject damaged property on the proof of loss and refused to cooperate with insurers by turning over all sale documents. The court noted that under Georgia law, an insurer has a compelling interest in, and right to, an accurate proof of loss. Also, a policyholder may not unilaterally determine that some of its books are not necessary to an investigation, nor may they withhold them on the grounds of confidentiality; nor is an insurer under any obligation to provide an explanation for its requested documents absent policy language requiring it to do so. The court held that the insurers had a right to inspect plaintiffs’ books and records and that the policyholder refused to provide material information to the insurers. Thus, the policyholder breached the terms of its policies and were barred from recovering on its claim.

By Thomas F. Segalla and Paul Steck

http://www.goldbergsegalla.com/attorneys/Segalla.html

http://www.goldbergsegalla.com/attorneys/Steck.html