Does Your Insurance Policy Cover Sexual Misconduct?

An important ruling illustrates the need to know this answer.

D.E.M. v. Allickson, 555 N.W.2d 596 (N.D. 1996)

Background. Assume that your church is sued because of an incident of sexual misconduct. You immediately notify your insurance company. A few days later, you receive a letter from your insurer informing you that there is no coverage under your insurance policy for such a claim. How would you respond? This was the dilemma that confronted a church in a recent case.

Facts. A woman facing serious medical problems and surgery turned to her pastor for spiritual and emotional guidance. The pastor abused his position of trust by engaging in “grossly inappropriate sexual advances.” The couple ended up having a sexual relationship that lasted for nearly two years.

Though both parties attempted to conceal their relationship, rumors began spreading among church members that the pastor was having an affair. When confronted by a church employee about the rumors, the couple adamantly denied them. The church made no further investigation and took no action.

The affair eventually ended, and the woman claimed that she had suffered “great pain of mind and body” as a result of the pastor’s behavior. She sued her church, claiming that it was responsible for her injuries on the basis of “negligent supervision.” Specifically, she claimed that the church failed to respond adequately to the rumors of sexual misconduct, and its failure to do so caused her injuries.

The insurance company’s response. The church immediately notified its insurer of the claim and requested a defense of the lawsuit. The church’s insurance policy provided coverage for “bodily injury” and “property damage.” The insurer responded with a letter denying any coverage. The letter read, in part:

We must advise that this policy would provide no coverage for a suit charging sexual misconduct of a pastor. You do not give a date of loss as to when the alleged misconduct took place; but the date would not be relevant. The policy your church has with our company … did not at any time provide coverage for this type of claim …. It provides no coverage for damages as a result of sexual misconduct or for your defense of a lawsuit … because of such charges.

In fact, the church’s insurance policy did not exclude coverage for sexual misconduct claims. The church and its attorney repeatedly asked the insurer to reconsider its position, but the insurer refused to do so—despite the fact that the policy did not exclude the woman’s claim.

A few years later, the woman entered into an out-of-court settlement with the church for $300,000. However, the settlement stipulated that it would be collected only against the church’s insurance policy. The woman then sued the insurance company to collect the settlement amount.

The insurer by now conceded that the woman had suffered “bodily injury” as a result of the pastor’s conduct. It also conceded that “bodily injury” includes emotional and psychological injuries. However, for the first time the insurer claimed that the insurance policy did not cover the woman’s claim since the church had never notified it that a claim for “bodily injury” was being made. The insurer further insisted that the settlement was “unreasonable,” and as a result it had no duty to pay it. A court rejected both defenses and ordered the insurer to pay the full amount of the settlement.

The court’s ruling. The court ruled that it was too late for the insurer to claim that the church failed to notify it of a bodily injury claim. It noted that “an insurer which denies liability on specified grounds may not later attempt to deny liability on different grounds,” and then observed:

[The insurer] repeatedly asserted the policy did not provide coverage for sexual misconduct claims, even when asked several times to reconsider its denial of coverage. Not until the church and [the woman] had entered into the settlement agreement … did [the insurer] advise anyone of its reliance on the alleged failure to give notice of a bodily injury claim ….

In essence [the insurer] asks us to sanction the functional equivalent of a “shell game.” [The insurer] denied liability and refused to defend on the basis of a non-existent sexual misconduct exclusion to the policy. The church, abandoned by its insurer, was required to expend sums for attorneys’ fees to settle the claims. When recovery was then sought from [the insurer] it disingenuously asserted it was relying all along upon the lack of notice of a claim for bodily injury, which lack of notice the church could have remedied had it ever been apprised of [its insurer’s] secret theory. Under these facts it would be greatly unjust and unfair to allow [the insurer] to escape liability upon the unasserted lack of notice. Having failed to apprise the church of its reliance upon the bodily injury provision when the church was in a position to correct the alleged lack of notice [the insurer cannot] raise the alleged lack of notice of a bodily injury claim as a defense to coverage or its duty to defend.

The court also rejected the insurer’s claim that the settlement amount was unreasonable. It noted that the church was potentially liable for negligent supervision and that an expert witness had testified that a jury would have reached a verdict in a range between $25,000 and $1.8 million. It also referred to the “increased expenses and publicity had the case gone to trial.” Under these circumstances, a $300,000 settlement was not unreasonable.

Relevance to church treasurers. Consider the following:

1. Review your insurance policy. Now is a good time to review your church insurance policy to see what is covered and what is not. This case illustrates the importance of knowing whether or not sexual misconduct claims are covered. Be sure to pay special attention to the “exclusions” mentioned in your policy. Also note any limitations on the amount of insurance that is available. Some insurance policies exclude any coverage for sexual misconduct claims; some provide coverage, but only for the church (and not for the person engaging in the misconduct); and some limit the dollar amount available for such claims. This case illustrates that a policy covering “bodily injury” should provide the church with coverage for sexual misconduct claims—unless they are specifically excluded.

2. What if your insurer denies coverage? Don’t give up. There still may be coverage, or at least a duty to defend. Ask an attorney to review your policy and provide you with an opinion regarding coverage. If the attorney concludes that coverage exists, have him or her contact the insurance company on your behalf.

3. Settlement agreements. Church members often are reluctant to sue their church. The woman in this case eventually entered into a settlement agreement with the church which stipulated that the settlement amount could be satisfied only out of the insurance proceeds. Such an arrangement relieves the church of any potential liability, minimizes adverse publicity, and relieves the plaintiff of any concern about suing his or her church. It is an approach that church treasurers and other church leaders should keep in mind when facing a potential legal claim by a church member.

4. Notifying your insurer of a loss. This case also illustrates the importance of promptly notifying your insurer of a loss and referring to the specific basis for coverage under your church insurance policy.

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

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