Key point 10-16.7. A liability insurance policy provides a church with a legal defense to lawsuits claiming that the church is responsible for an injury, and it will pay any adverse settlement or judgment up to the limit specified in the policy. Liability insurance policies exclude a number of claims. For example, some policies exclude injuries based on criminal or intentional acts and claims for punitive damages. A church has an obligation to promptly notify its insurer of any potential claim, and to cooperate with the insurer in its investigation of claims.
The Ohio Supreme Court ruled that an exclusion in a church's insurance policy for criminal or intentional acts precluded coverage not only for the person committing the wrongful act, but also for the church, even though it was being sued for negligence.
In May 2006, a married couple (the "plaintiffs") dropped off their 2-year-old son at a church-operated preschool. When the plaintiffs picked up their son that afternoon they noticed bright red marks and abrasions on the boy's rear end, back, and upper thigh areas. The child complained of pain and stated that a teacher had beaten him with a knife. The plaintiffs contacted the church to report the injuries and to request disciplinary action against the teacher. The church responded by sending them a letter, through its headmaster, informing them not to bring their son back to the preschool under threat of trespass charges.
The plaintiffs sued the church and preschool, asserting claims of assault and battery against the teacher, and claims of negligent hiring and supervision, and "vicarious liability" (employer liability for the acts of its agents) against the church. The plaintiffs sought an award of compensatory damages, punitive damages, and attorney fees, plus interest and costs.
At the time of the incident, the church was insured under a commercial policy issued by an insurance company (the "insurer"). In response to the lawsuit, the church submitted a claim to its insurer asking it to provide a legal defense. The insurer agreed to defend the matter, and retained a law firm to do so, but also expressly reserved its right to deny coverage and refuse payment of any claim.
The case proceeded to a trial, and the jury entered a verdict in favor of the plaintiffs and against the church. The jury awarded $764,235 in compensatory damages and $5 million in punitive damages, and attorney fees.
The insurer declined to pay any portion of the jury verdict, prompting the church to sue it for breach of contract and "bad faith." Specifically, the church alleged that the insurer improperly refused to indemnify it for any portion of the judgment awarded to the plaintiffs.
The Ohio Supreme Court, on appeal, focused on an "Abuse or Molestation Exclusion" (the "abuse exclusion"), that stated:
This insurance does not apply to "bodily injury," "property damage" or "personal and advertising injury" arising out of:
- The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or
- The negligent:
- Reporting to the proper authorities, or failure to so report, or
The question to be resolved, the court observed, was whether "a commercial liability policy containing an Abuse or Molestation Exclusion which excludes damages arising out of abuse 'by anyone' of any person in the care, custody or control of any insured, as well as the negligent employment or supervision of an abuser, eliminates coverages of sums awarded based on the insured's vicarious liability for its employee's abuse of a child in the insured's care and custody." The church insisted that only those damages awarded because of the direct liability of a wrongdoer and the direct liability of the employer would be excluded from coverage, not those damages based on the employer's vicarious liability for its employee's abuse.
The court began its opinion by noting that "an exclusion in an insurance policy will be interpreted as applying only to that which is clearly intended to be excluded. Ambiguity in the policy language is construed against the insurer and liberally in favor of the insured, particularly when the ambiguity exists in a provision that purports to limit or qualify coverage under the insurance policy."
The court noted that "the language of the abuse exclusion is broad" and excludes from coverage bodily injury arising out of "the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured." It excludes from coverage actual or threatened abuse or molestation. And it covers actual or threatened abuse or molestation by anyone. Additionally, the abuse exclusion eliminates coverage for "damages awarded for claims of bodily injury arising from the insured's negligence in employing, investigating, supervising, or retaining the bad actor, as well as from negligence in reporting, or failing to report, the abuse or molestation to the authorities."
Significantly, the court did not find "any language in the abuse exclusion that limits its application to damages awarded for an insured's direct liability. The failure to include an express denial of coverage for claims of secondary, or vicarious, liability does not support the interpretation advanced by the church, i.e., that the policy must therefore cover vicarious liability. Nor does it render the exclusion ambiguous … . We find that the abuse exclusion simply does not limit the exclusion to claims for bodily injury arising from direct liability, while failing to exclude claims for bodily injury arising from secondary, or vicarious, liability for the same conduct. Indeed, the language in the exclusion is simple and unambiguous: there is no coverage for any injury arising from abuse or molestation. To hold otherwise, we would have to insert language into the exclusion. We may not do so, particularly when the terms of the policy are clear and unambiguous."
What this means for churches
This case suggests that sexual misconduct exclusions in church insurance policies may apply even though a church is being sued on the basis of vicarious liability, negligence, or some other form of "indirect" liability. While some courts have disagreed with this conclusion, church leaders should examine their insurance policies to see if a sexual misconduct exclusion exists. If so, do not assume that it will not apply to vicarious liability or negligence claims brought against the church resulting from the sexual misconduct of an employee or volunteer.
Church leaders should discuss this coverage issue with their insurance agent. If the policy does not provide coverage in the event the church is sued on the basis of negligence for the sexual misconduct of an employee or volunteer, then this represents a potentially significant uninsured risk that needs to be addressed, either through a separate endorsement with the current insurer, if available, or by switching to another insurer that will insure against this risk. 148 Ohio St.3d 11 (Ohio 2016).