What Church Treasurers Should Know about Subrogation

A Wisconsin court issues an important decision.

Tower Insurance Company, Inc. v. Chang, 601 N.W.2d 848 (Wisc. App. 1999)

Background. Few church treasurers could define the term “subrogation.” Yet, an understanding of this term can be very important, as a recent case demonstrates. This article will summarize this case, explain its importance, and review what church treasurers should know about subrogation.

Two young girls were at their church on a Wednesday night to help serve a pancake supper and attend an evening service. After helping serve the pancake supper, the girls participated in the worship service. Following the service they were directed to go to the educational wing of the building for a religious training class. Instead of going straight to the class, the girls stopped at the ladies restroom lounge in the church basement. While there, they lit a candle and failed to extinguish it when they went to their class. The candle ignited some silk flowers and the fire spread and caused severe damage to the church.

The church’s insurance company paid for the loss. It then filed suit against the two girls and their family’s insurers for subrogation. Under the principle of subrogation an insurance company that pays a loss is entitled to maintain any claims the insured may have had against a third person whose negligence caused the loss. In this case, the church’s insurance company, after paying the extensive fire loss, attempted to assert on behalf of the insured church a negligence claim against the girls.

The girls argued that there could be no subrogation against them since they were “additional insureds” under the church’s insurance policy and an insurance company cannot subrogate against its own insureds. The church insurance policy contained an endorsement extending coverage to church members. It included the following as insureds: “Any of your church members, but only with respect to their liability for your activities or activities they perform on your behalf.”

The insurance company conceded that the girls were church members, but it insisted that they were not insureds under this provision because their negligent acts of lighting a candle in the church restroom, and leaving it unattended, were not done “on behalf” of the church. In addition, the insurance company argued that even if the girls were insureds under the church’s policy, it could still subrogate against them because their actions were criminal.

The girls responded by claiming that the policy language was ambiguous and could be construed to include them as insureds, and therefore the church insurance company could not pursue its subrogation claim against them. Alternatively, they argued that the subrogation claim against them must fail because they were immunized as “volunteers” under a state charitable immunity law that states:

a volunteer is not liable to any person for damages, settlements, fees, fines, penalties or other monetary liabilities arising from any act or omission as a volunteer, unless the person asserting liability proves that the act or omission constitutes any of the following: (a) A violation of criminal law, unless the volunteer had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful. (b) Willful misconduct… . (e) An act or omission for which the volunteer received compensation or anything of substantial value in lieu of compensation. Wisc. Stats. 187.33.

The trial court concluded that the insurance policy was ambiguous. The court reasoned, however, that a reasonable person in the position of the insured “would understand the endorsement language to cover the activity of lighting the candle during the course of the girls’ activities at the church.” Because the trial court dismissed the insurance company’s claim against the girls on the coverage issue, it did not reach their immunity argument. The insurance company appealed.

The court’s ruling. The appeals court began its opinion by observing that “when scrutinizing the policy language, the test is not what the insurer intended the words to mean, but what a reasonable person in the position of the insured would have understood them to mean.” Further, if a term in an insurance policy “is susceptible to more than one reasonable interpretation, it is ambiguous. In that case, we construe the term in favor of coverage. If the policy’s terms are unambiguous, we merely apply them to the facts of the case.”

The court noted that there was no dispute about what the girls did. Rather, “the question is whether their actions were for a church activity or activity performed on behalf of the church, within the meaning of the policy.”

Volunteer coverage

The court clarified that the girls were not insureds under a provision in the church insurance policy that includes volunteers as insureds when they are “acting at the direction of, and within the scope of their duties for you [the church].” The court noted that the girls “lit the candle between service and class, not during their stint as workers at the pancake supper. Thus, cases addressing the scope of duties as a volunteer are inapposite.”

Church member coverage

The court then addressed the question of whether or not the girls were covered under the endorsement in the insurance policy extending coverage to “[a]ny of your church members, but only with respect to their liability for your activities or activities they perform on your behalf.” The court agreed that this language was ambiguous:

What counts as a church activity? Does the phrase only cover those tasks done at the explicit direction of church officials, as when the girls draped a sash over the cross during the evening’s services? Or does the phrase extend coverage to anything done in conjunction with a church function, such as the child of one church member injuring the child of another while playing between events at a church picnic? Because both interpretations are reasonable, the endorsement language is ambiguous and must be construed to afford coverage. Furthermore, the broader interpretation makes more sense. The girls were only at the church because of their participation in the church dinner, the church service and the confirmation class. A reasonable person in the girls’ position taking a short break in the church building between one church event and another would expect to be covered. [The insurance company] is correct that it is what the girls were doing and not where they were doing it that is important. But what they were doing was spending the evening participating in church events. The girls are additional insureds under the policy endorsement bringing in church members.

“Scope of employment” test rejected

The court rejected the insurance company’s argument that whether or not the girls were performing acts on behalf of the church when they lit the candle should be decided on the basis of the “scope of employment” test in employment law. Generally, an employer is responsible under the principle of “respondeat superior” for the negligent acts of its employees that are committed within the scope of their employment. The court refused to apply this test in deciding whether or not the girls’ acts were done on behalf of the church:

The rule that the master is liable for the servant’s torts is based upon two main considerations. First, the master is benefiting from the servant’s performance of employment duties. Second, within the time of service, the master may exert some control over the servant’s activities. These factors justify the master’s liability for the servant’s wrongs that occur incidental to his or her employment. These same considerations do not, however, justify liability for actions taking place outside the scope of employment. Here, however, we do not have an agency relationship. The girls are members of the church, not its employees. The church has insured its members to protect them while they are participating in church activities. This decision to insure all members reflects the church’s communal status; it is not one authority figure profiting from and able to control the actions of underlings. In the context of this case we do not find the scope of employment cases helpful.

Criminal acts

The insurance company argued that even if the girls were insureds it should be allowed to pursue a subrogation claim against them because the lighting of the candle was a criminal act. It insisted that an insurer may seek subrogation from an insured when it is the insured’s own intentional acts that cause the loss. The court concluded that this principle did not apply in this case, since the girls pled guilty only to the misdemeanor of “negligent handling of burning materials.” This was not an intentional or “criminal” act, the court concluded. “Negligence is all the girls admitted … and negligence is what insurance coverage is all about.”

Relevance to church treasurers. Church treasurers should be familiar with the principle of subrogation since it may expose church members to unexpected liability. Church members whose negligence causes a loss (injury or property damage) that the church insurer pays under the church insurance policy may be sued by the insurer to recover the full amount of the loss that it paid. This case clarifies some important points about subrogation:

(1) Volunteers. Insurance companies cannot subrogate against persons who are “insureds” under the church insurance policy. Volunteers are specifically listed as insureds under many church insurance policies with respect to their volunteer activities. Church treasurers should review their church insurance policy to see if such a provision exists. If not, contact your insurance agent and request an appropriate endorsement.

(2) Church members. Insurance companies cannot subrogate against persons who are “insureds” under the church insurance policy. Church members are specifically listed as insureds under many church insurance policies with respect to actions they perform on behalf of the church. Church treasurers should review their church insurance policy to see if such a provision exists. If not, contact your insurance agent and request an appropriate endorsement.

(3) Interpreting provisions in the church insurance policy. As this case illustrates, the courts generally interpret ambiguous terms and provisions in church insurance policies in favor of the church. In this case, this principle meant that the volunteer and church member coverage provisions in the church’s insurance policy were construed broadly in favor of the church.

(4) Insurance companies generally can subrogate against volunteers or church members who perform criminal acts, even if the perpetrator is otherwise an “insured” under the church insurance policy. Church staff members of volunteers who engage in criminal acts for which the church insurance company pays a loss should understand that they may be sued personally by the insurance company for the full amount of the loss. For example, church members and volunteers who engage in sexual misconduct, embezzlement, or reckless driving of a vehicle may be sued personally by the church insurer to recover any amounts paid out under the church insurance policy as a result of such acts.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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