Insurance

Legal Developments

Church’s Failure to Cooperate Results in Loss of Insurance Coverage for Storm Claim

The church never submitted proof of loss form or other required supporting information.

Richard R. Hammar, Attorney, CPA
Bio

Key point 10-16.07. 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.

A federal court in Missouri ruled that a church’s failure to timely return a proof of loss form and provide other information to its insurance company excused the insurer from any duty to provide the church with coverage for repair costs stemming from damage sustained by a storm.

Background

An insurance company (the “insurer”) issued an insurance policy to a church (the “church”) to insure its properties. The church claimed it sustained substantial property damage after a severe storm on March 27, 2020.

The insurer received the claim on March 31, 2020. On April 2, 2020, and April 13, 2020, the insurer’s third-party adjuster met with the church’s representative to inspect the damage to the property. On May 26, 2020, the adjuster issued an estimate based on the engineering report completed after the inspections.

As a result, the insurer issued two partial payments to the church totaling $237,852.24. Once the payments were issued, a disagreement arose between the parties as to the amount of loss.

On June 3, 2020, the church sent a demand for appraisal to reevaluate the damage to its property. On June 9, 2020, the insurer acknowledged the demand for appraisal and requested that the church submit any documents supporting its claim.

On November 24, 2020, after the church informed its insurer that the appraiser would be reappraising the entire claim, including damages that the insurer had already issued partial payments for, the insurer requested that the church submit a revised demand for appraisal. The church also suggested to the insurer that its appraiser’s estimate would be more than $2 million. On December 3, 2020, the church submitted a revised demand for appraisal.

Insurer: The church didn’t comply with the “cooperation agreement”

On December 4, 2020, the insurer notified the church that to move forward in the appraisal process it would require a proof of loss form, supporting documents, and a representative to submit to an examination under oath (EUO). The insurer reiterated its requests in a letter dated December 10, 2020, after the church did not respond.

On February 18, 2021, the church filed a lawsuit against the insurer, alleging one count of breach of contract and one count of “vexatious refusal.” (Under Missouri law, an insured can bring a vexatious refusal claim if it believes an insurer refused to pay a claim “without reasonable cause or excuse.”)

The insurer alleged that the church failed to comply with the “cooperation agreement” in its policy, and so the court should dismiss the case. The court noted that cooperation clauses in insurance policies are valid and enforceable in most states. Such clauses obligate the insured to cooperate fully with the insurer in its investigation of a claim. An insured’s failure to assist in the investigation “precludes any coverage.”

To deny coverage, an insurer must prove: “(1) a material breach of the cooperation clause; (2) the existence of substantial prejudice as a result of the breach; and (3) the exercise of reasonable diligence to secure the insured’s cooperation.”

The court concluded that all three elements were established.

1. Material breach of the cooperation clause

The court concluded that “the failure to provide, or the untimely submission of, a proof of loss form constitutes a material breach of the [policy’s] cooperation agreement” and so there was “a material breach of the cooperation agreement because [the church] did not submit a proof of loss form within sixty days of [the insurer’s] request.”

The court observed:

On December 4, 2020, [the insurer] requested that [the church] submit a proof of loss form within sixty days. [The insurer] reiterated its request for a proof of loss form on December 10, 2020. … Since [the church] did not submit a proof of loss form within sixty days, there was a material breach of the cooperation agreement. …

[The church] also breached the cooperation agreement when it did not submit to an EUO. [The insurer] requested an EUO in its letters dated December 4, 2020, and December 10, 2020. … [The insurer] stated that it would schedule an EUO after it received [the church’s] proof of loss form. However, [the church] did not submit to an EUO, but filed suit instead. Therefore, there was a material breach of the cooperation agreement when [the church] did not submit to an EUO.

2. The insurer suffered substantial prejudice when the church breached the cooperation agreement

Quoting two different cases, the court stressed:

“Once a material breach has been established, an insurer must prove that it was substantially prejudiced by the insured’s breach in order to be excused from covering the loss.” … “Prejudice can be established when the insured fails to comply with a reasonable examination request because the insured has perhaps the greatest knowledge of the circumstances[.]”

The court continued:

[W]hen [the church] failed to submit the proof of loss form and to an EUO[,] it substantially prejudiced [the insurer]. [The insurer] had finalized its estimate and issued payments for the damages to [the church’s] property. However, [the church] submitted a demand for appraisal, with estimates that its appraiser would be submitting a claim for over $2,000,000. Thus, … ­[the insurer] naturally requested more information to effectively evaluate the demand for appraisal, including the proof of loss form, supporting documents, and an EUO. When [the church] did not comply, it substantially prejudiced [the insurer] because it could not possess all the information needed to investigate the claim.

3. The exercise of reasonable diligence to secure the insured’s cooperation

Lastly, the insurer must prove that it exercised reasonable diligence to secure the cooperation of the insured. The court stated:

Here, [the insurer] … exercised reasonable diligence in attempting to secure [the church’s] cooperation. As soon as [the insurer] received [the church’s] revised demand for appraisal[,] it sent a letter the next day requesting that [the church] submit a proof of loss form, supporting documents and comply with an EUO. [The Insurer] enclosed the proof of loss form in its letter. [The church] did not respond. [The insurer] followed up by sending another letter on December 10, 2020, reiterating its request for a proof of loss form, supporting documents, and an EUO. [The church] once again failed to respond or submit the documents. Instead of responding or submitting documents to [the insurer], [the church] filed suit. Based on these facts, [the insurer] exercised reasonable diligence to secure the cooperation of [the church].

What this means for churches

More on Liability Insurance

Along with the “duty to cooperate,” leaders should be familiar with several other aspects related to church insurance. The “Insurance” section of the Legal Library covers these aspects, along with providing helpful tips, examples, case studies, a checklist to evaluate your church’s coverage, and more.

Most insurance policies impose a “duty to cooperate” on the insured. This means that a church, as the insured, must cooperate with its insurance company in any investigation, or in responding to reasonable requests for information. Church leaders should be aware of this requirement and understand that a failure to cooperate in a timely manner may result in the denial of insurance benefits, including both a legal defense and indemnification (coverage for damages and other costs associated with the claim).

There are limits to the authority of an insurance company to investigate. However, churches should never delay or decline an insurance company’s request for information concerning a potential claim without the advice and counsel of an attorney.

Concord Church, 2021 WL 6095643 (W.D. Mo. 2021)

Legal Developments

A Church’s Insurance Did Not Provide Coverage for Its Pastor’s Sexual Abuse of a Minor

Policy exclusion of criminal and intentional acts superseded its limited coverage of sexual misconduct claims, says court.

Richard R. Hammar, Attorney, CPA
Bio

Key point 10-16.07. 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.

A federal court in Missouri ruled that a church’s insurance company was not obligated to provide a defense or indemnification to the national offices of a church denomination in the event of a sexual misconduct claim because of an exclusion in the policy or intentional acts.

Background

An adult male (the “plaintiff”) sued his pastor, his church, and regional and national denominational offices with which the church was affiliated, claiming that his pastor groomed him for future sexual abuse beginning in late 2008 when he was 13 years old and continuing through 2010. The plaintiff alleged that the pastor groomed him by complimenting and touching him, and by hugging him “for long periods of time.”

Following the grooming, the plaintiff claimed that the pastor engaged in sexual contact with him. The plaintiff claimed that the national church “knew that harm was certain or substantially certain to result from its failure to supervise” the pastor. The national church denied all the plaintiff’s “allegations of knowledge and liability,” and denied that the pastor was its employee.

The plaintiff’s lawsuit alleged that the national church was responsible for the pastor’s acts on the basis of its “intentional failure to supervise clergy.”

The national church turned the lawsuit over to its insurance company (the “insurer”) for both a legal defense and indemnification. The insurer had issued an insurance policy to the national church with multiple coverages. The general commercial liability coverage included additional coverage for sexual acts.

This case centered on the “sexual-acts-liability coverage,” which obligated the insurer to pay

all sums which a covered person becomes legally obligated to pay as damages due to bodily injury, personal injury or emotional injury to which this coverage applies. The event or events causing the bodily injury or emotional injury must constitute a sexual act arising out of the operation of your organization; and must take place in the coverage territory during the policy period.

However, many exclusions applied to this coverage. Some exclusions applied only to the sexual-acts-liability coverage, and these appear on the sexual-acts-liability-coverage form itself, but the coverage form also incorporates various exclusions from other parts of the policy.

The court explained:

For example, the top of the sexual-acts-liability-coverage form includes a text box set off from all of the other text; in that box, a disclaimer appears, stating that the coverage “is subject to the terms of” other coverages, and the text box includes in bold and all caps “PLEASE READ THIS CAREFULLY.”

Similar language appears for a second time at the top of the list of exclusions on the sexual-acts-liability-coverage form:

Each of the exclusions set forth in the Exclusions section of the Commercial Liability Coverage Form (GL-100) and the Liability and Medical Coverage Form (BGL-11) apply to each of the Additional Coverages provided by this endorsement, unless otherwise modified herein.

One of the exclusions listed on form BGL-11 excludes “loss of any kind that is expected by, directed by, or intended by any insured or by any covered person” (italics added). The national church and the insurer referred to this as the “expected-or-intended exclusion,” and they disputed whether the exclusion applies at all to the sexual-acts-liability coverage

The insurer claimed that the insurance policy does not cover acts that are “expected, directed, or intended” by the insured. Since the only claim the plaintiff brought against the national church was an intentional tort, and insurers generally owe no duty to defend when no potential for coverage of the claim asserted against the insured exists, the insurer argued that it had no duty to defend or indemnify the national church.

The court concluded that the text of the policy “plainly and unambiguously provides that the expected-or-intended exclusion applies to the sexual-acts-liability coverage,” and so there was no coverage for the national church under the policy for the pastor’s sexual misconduct.

The court also concluded that while the insurer did not have a duty to indemnify the pastor, it had a limited duty to provide him with a legal defense.

What this means for churches

This case presents important lessons for church leaders regarding insurance coverage for sexual misconduct claims. Note the following.

1. Intentional or criminal acts

Many church insurance policies provide limited coverage for sexual misconduct, although significant conditions and exceptions often apply. In addition, church insurance policies ordinarily exclude coverage for criminal or intentional acts. The coverage of sexual misconduct claims and the exclusion of criminal or intentional misconduct creates a conflict.

The federal court in this case concluded that a church insurance policy’s exclusion of criminal and intentional acts superseded the policy’s limited coverage of sexual misconduct claims. The court reached this conclusion based on a careful reading of the insurance policy.

The takeaway point is that church leaders should not assume that their general liability insurance policy covers sexual misconduct claims, even if there is language in the policy to that effect. In this case, the court noted that the sexual misconduct coverage was subject to the general exclusion in the policy for intentional and criminal acts. The court observed:

[T]he top of the sexual-acts-liability-coverage form included a text box set off from all of the other text; in that box, a disclaimer appears, stating that the coverage “is subject to the terms of” other coverages, and the text box includes in bold and all caps “PLEASE READ THIS CAREFULLY.”

Similar language appears for a second time at the top of the list of exclusions on the sexual-acts-liability-coverage form:

Each of the exclusions set forth in the Exclusions section of the Commercial Liability Coverage Form (GL-100) and the Liability and Medical Coverage Form (BGL-11) apply to each of the Additional Coverages provided by this endorsement, unless otherwise modified herein.

Church leaders whose church is sued as a result of sexual misconduct often assume that the church’s insurance policy will provide a legal defense and pay for any judgment or settlement up to the policy limits. Such an assumption may be incorrect, since most insurance policies exclude coverage for any “intentional” or criminal acts, and some specifically exclude coverage for sexual misconduct.

As a result, some churches, like the one in this case, end up having to retain and compensate their own attorney and pay any judgment or settlement that is rendered against them. The financial impact of such unbudgeted expenses can be substantial.

2. Negligence

Note that the plaintiff in this case only sued the national church for an intentional failure to supervise clergy. In most sexual misconduct cases, plaintiffs sue churches and denominational agencies for negligence (i.e., negligent selection, negligent retention, or negligent supervision).

Such claims are not necessarily barred by an intentional misconduct exclusion in a church’s liability insurance policy, since an argument can be made that since the church is being sued for negligence, and not an intentional act, the policy’s intentional acts exclusion should not apply. After all, it was an individual perpetrator, not the church, that engaged in the intentional or criminal misconduct.

The courts have reached mixed results on the application of an insurance policy’s intentional acts exclusion to negligence claims against a church or denominational agency.

It is important for church leaders to resolve this ambiguity by retaining legal counsel to review all insurance coverages and by seeking clarification from the church’s insurance agent. The agent should be asked, “If our church is sued for negligence in a lawsuit brought by a victim of sexual misconduct, does our general liability insurance policy provide a legal defense and indemnification (up to the policy limits), or is coverage barred by the intentional acts exclusion?” Ask the insurance agent to respond to this question in writing.

3. Policy selection and renewal

Sexual misconduct claims, particularly those involving minor victims, represent one of the most common sources of church litigation.

Because of the frequency of such claims, and their potential for significant damages, it is imperative for church leaders to know if their church’s insurance policy will provide both legal defense and indemnification in the event of an adverse judgment or settlement. This should be a major consideration when shopping for insurance coverage or deciding whether to renew existing coverage. In fact, what other consideration would be more important?

4. Coverage for the perpetrator

What about the perpetrator? Does the church insurance policy provide for a legal defense? Does it provide for indemnification (payment of a settlement or judgment up to the policy limits)?

The court concluded that while the insurer did not have a duty to indemnify the pastor, it had a limited duty to provide him with a legal defense.

This conclusion, based on the language of the insurance policy, means that the perpetrator was personally responsible to pay any portion of a settlement or judgment applicable to his wrongful acts. Such a result often comes as a shock to perpetrators of sexual misconduct, and, if known, can serve as a useful deterrent to such behavior.

5. Riders

If a church’s insurance policy does not provide coverage, then ask your insurance agent if you can purchase a rider that does.

2021 U.S. Dist. LEXIS 219029, 2021 WL 5279574 (E.D. Mo. 2021)

Legal Developments

Court Rules Church’s Insurance Policy Exclusion Precludes Coverage for Church in Negligence Lawsuit

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.

Richard R. Hammar, Attorney, CPA
Bio


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:

  1. The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or
  2. The negligent:
  3. Employment;
  4. Investigation;
  5. Supervision;
  6. Reporting to the proper authorities, or failure to so report, or
  7. Retention;

    8. of a person for whom any insured is or ever was legally responsible … .

    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).

Legal Developments

The Limitations of Church Insurance

A church’s insurance policy’s exclusion for assaults and batteries precluded coverage, rules a federal appeals court.

Richard R. Hammar, Attorney, CPA
Bio

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.

A federal appeals court ruled that a church's insurance policy's exclusion for assaults and batteries precluded any coverage for both a minister's acts of child molestation and the church itself.

Diocese seeks indemnification

The Roman Catholic Diocese of Phoenix settled four lawsuits for alleged sexual abuse by its priests after which the Diocese filed a declaratory judgment action in a federal district court in Arizona seeking entitlement to indemnification under its excess liability indemnity policy.

The policy excluded coverage for claims that alleged assault and battery:

THIS INSURANCE DOES NOT APPLY—
(a) to liability of any insured for assault and battery committed by or at the direction of such insured except liability for Personal Injury or Death resulting from any act alleged to be assault and battery for purpose of preventing injury to persons or damage to property.

The court construed the insurance policy's assault and battery exclusion to apply only to the offending priest, not the Diocese, and concluded that "the best reading of the assault and battery clause is that 'such insured' means the insured who committed or directed the assault and battery." The district court therefore concluded that the exclusion did not foreclose coverage of the sexual abuse claims against the Diocese.

Coverage excluded both insured and coinsured

On appeal, the insurer argued that because the assault and battery exclusion precluded coverage for "any insured"—and because "such insured" refers back to "any insured"—the assault and battery exclusion categorically excluded coverage for both the insured who committed the assault and battery as well as an innocent coinsured such as the Diocese.

A federal appeals court agreed with the insurer's reading of the exclusion. It concluded that "if any one of the insureds violates the exclusion, no other insureds can recover."

What this means for Churches

Our research shows that sexual abuse of minors remains one of the most common reasons that churches end up in court.

What comes as a shock to many church leaders is that the church's insurance policy may not provide coverage for such claims due to the common exclusion of intentional or criminal acts. To be sure, this exclusion clearly would apply to the perpetrator who has engaged in intentional or criminal acts. But in most of these cases, the church has not committed any intentional or criminal act. It is sued for negligence, either in the selection or supervision of the offender. Does the policy's exclusion for intentional or criminal acts apply to negligence claims against the church?

Incredibly, many courts, like the court in this case, have concluded that it does. Other courts have reached the sensible conclusion that an exclusion for intentional or criminal acts does not apply to a church's alleged negligence.

A church insurance company's interpretation of the application of the intentional and criminal acts exclusion to negligence claims against a church is a question of immense importance. If the insurer takes the position that the exclusion precludes coverage of negligence claims against a church, then the church will be required to retain and compensate legal counsel in the defense of the claim, and pay any settlement or adverse judgment.

The takeaway point is this: Church leaders should seek a clarification from their insurance company regarding the interpretation of an intentional or criminal acts exclusion in the 'church's insurance policy. And, this is one of the most important clarifications that a church should obtain when shopping for insurance. Interstate Fire & Casualty Company v. Roman Catholic Church of Diocese, 761 F.3d 953 (9th Cir. 2014).

Legal Developments

The Limits of Liability Insurance

Key point 10-16.7. A liability insurance policy provides a church with a legal defense to

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.

A New Jersey federal court ruled that a church's insurance policy did not provide payment of defense costs or any settlement or judgment in a lawsuit brought against a minister for a sexual affair with a female member of his church. A minister became acquainted with a married couple in his church. He engaged in an extra-marital affair with the wife, and after several months, she raised thoughts about ending her ten-year marriage. Thereafter, the husband, who knew nothing of the affair, met with the minister for guidance regarding his marriage problems. During the meeting, the minister failed to disclose the affair to the husband, and directed him not to make any further effort to save his marriage and to accept his wife's decision to seek a divorce.

A few weeks after this meeting, the husband discovered the affair, confronted his wife, and informed the minister of his discovery via text message. A year later the husband sued the minister for breach of fiduciary duty and negligent infliction of emotional distress. Specifically, the husband argued that (1) the minister had an irreconcilable conflict of interest in providing marriage counseling to him due to the affair; (2) the minister used the counseling relationship with the wife as a vehicle to "cover up" the affair; and (3) the minister failed to refer the husband to another minister for counseling.

The minister submitted the husband's lawsuit to the church's insurance company with a request that it provide a defense and indemnification for the claims made against him. The insurance company later sent the minister a "no coverage" letter in which it expressed its conclusion that the underlying insurance policy provided no coverage to the husband's claims against the minister. The minister then sought a "declaratory judgment" from a federal district court addressing the issue of coverage.

The relevant "Counseling Professional Liability Coverage" provision in the church's insurance policy provided coverage for injuries (other than sexual misconduct) caused by a "counseling incident" occurring during the policy period (emphasis added). The church purchased a "prior acts" endorsement to its policy that covered a counseling incident prior to the policy period so long as the church was without knowledge of the incident. The court concluded that the sexual affair predated the coverage period of the church's underlying insurance policy, and so there was no coverage for the claims against the minister. Further, the endorsement did not provide for coverage since the affair was known prior to the date the coverage was obtained.

What This Means For Churches:

Church leaders should be familiar with the terms, conditions, and exclusions in their insurance policies to ensure that they provide adequate coverage and any deficiencies can be addressed. Drew v. Insurance Company, 2014 WL 2436273 (D.N.J. 2014).

Legal Developments

Pollution Exclusion in Insurance Policy Prevents Lawsuit

Pastor killed by carbon monoxide in church parsonage; wife is unable to sue for damages.


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.

A federal appeals court ruled that a pollution exclusion in a church's liability insurance policy prevented the spouse of a pastor who was killed by carbon monoxide poisoning in the church parsonage from recovering any damages against the insurer. A pastor and his wife resided in their church's parsonage. One evening the parsonage's heating system malfunctioned and released carbon monoxide throughout the residence. The pastor died as a result of his exposure to the carbon monoxide, and his wife was seriously injured. The church had a multi-peril insurance policy and an umbrella policy. The multi-peril policy contained a pollution exclusion that excluded coverage for:

"Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants:

(a) At or from any premises, site, or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

The umbrella policy included identical language. "Pollutants" are defined under both policies as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed."

Although it was evident that the carbon monoxide had been emitted from the parsonage's heating system, the exact source and cause of the carbon monoxide leak were not clear. The surviving spouse (the "plaintiff") entered into a consent agreement in which she agreed not to "pursue or collect on any of the church's assets or assets of any members of the church, except for any rights to indemnity under any insurance policies." In exchange, the church assigned to the plaintiff all rights it had under its insurance policies.

A federal district court concluded that the pollution exclusions were unambiguous, that carbon monoxide was a "pollutant" as defined by the policies, and that the plaintiff's claims were not covered under the plain terms of the policies.

A federal appeals court agreed, noting that "as an appellate court reviewing terms of an insurance contract, we cannot say that the language of the pollution exclusion is ambiguous in any way. The language in the instant pollution exclusion is clear and susceptible of only one possible interpretation."

What This Means For Churches:

There are two points worth noting. First, be sure that any church-owned residences are thoroughly inspected periodically, including an inspection of the furnace each fall. Second, be familiar with the exclusions under church insurance policies, and consider obtaining excluded coverages through a special endorsement or separate policy. Clay Center Christian Church, 746 F.3d 375 (8th Cir. 2014).

Legal Developments

Church Insurance: Investigation Cooperation Requirements

Be aware of what your insurance policy requires.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Church Insurance: Investigation Cooperation Requirements

Be aware of what your insurance policy requires.

Richard R. Hammar, J.D., LL.M., CPA

Key point. Most liability insurance policies contain a provision requiring the insured to cooperate with the insurer’s investigation of claims. Such a provision is not necessarily violated by a church’s refusal to turn over personal information having little, if any, relevance to the insurer’s investigation.

A federal court in Indiana ruled that a church did not necessarily breach a requirement in its liability insurance policy that it cooperate with the insurance company in its investigation of claims by refusing to respond to the insurance company’s demand to inspect personal records including the pastor’s tax returns. A church’s pastor and his wife arrived at church on a weekday morning and immediately discovered that there had been a fire on the premises. The local fire department responded to the pastor’s 911 call. Later that morning the pastor contacted the church’s insurance agent to report the fire and make an insurance claim.

The insurance company retained a certified fire investigator to investigate the cause and origin of the fire. The investigator determined that the fire had been intentionally set in the kitchen area of the church building using an accelerant. The fire department’s investigator concurred with this conclusion following his investigation. The insurance company took recorded statements of the pastor and his wife, the couple’s son-in-law (who was the treasurer and a trustee of the church), and the other church trustees. At some point the insurance company began to suspect that the pastor was responsible for the fire and that his motive was to improve the financial situation of the church and himself.

The insurance company, as part of its continuing investigation, asked the pastor to turn over several church corporate and financial records, including contribution records. It also asked the pastor to turn over various personal records, including his W-2 forms and federal income tax returns. The insurance company insisted that these records were needed for it to confirm its theory that the pastor intentionally set the fire or directed the fire to be set and that he was motivated to do so by the financial situation of the church and his own personal financial situation. The pastor refused to turn over his personal records, and some of the records pertaining to the church. As a result, the insurance company determined that it was not obligated to pay anything under the church’s insurance policy.

The insurance company insisted that these records were needed for it to confirm its theory that the pastor intentionally set the fire or directed the fire to be set and that he was motivated to do so by the financial situation of the church and his own personal financial situation.
The church sued the insurance company for breach of the insurance contract and bad faith. The insurance company asked the court to dismiss the lawsuit, citing the following provisions in the insurance policy:

Duties in the Event of Loss. You must see that the following are done in the event of loss to covered property … if requested, permit us to question you under oath at such times as may be reasonably required about any matter relating to this insurance or your claim, including your books and records … cooperate with us in the investigation or settlement of the claim.

No one may bring legal action against us under this insurance unless … there has been full compliance with all of the terms of this insurance.

breach of contract

The court denied the insurance company’s request to dismiss the church’s breach of contract claim. It agreed that the church, as the insured, was obligated under the policy to turn over certain records to assist the insurance company in the investigation of claims. But, it concluded that contribution records and the pastor’s tax returns and W-2 forms were personal records and not “church records,” and as a result, neither the pastor nor the church violated the insurance policy by not producing them.

The court also pointed out that in order for the insurance company to prevail on the basis of the church’s failure to “cooperate” in the investigation of the claim, it had to demonstrate that “it was prejudiced by [the church’s] failure to cooperate, which it does not attempt to do.”

The church turned over all of its financial records requested by the insurance company except for contribution records. The court concluded that this did not justify the insurance company in denying coverage under the policy. It pointed out that “only a material breach by the church would affect [the insurance company’s] obligations under the policy,” and it defined a material breach as one “that goes to the heart of the contract.” The court noted that the church had substantially complied with all of the insurance company’s demand for records, but “balked at providing [contribution records] on the ground that the information was not relevant to the investigation and to produce it would violate the privacy of its contributing members.”

bad faith

The court also refused the request to dismiss the church’s “bad faith” claim against the insurance company. It noted that to prevail on its bad faith claim, the church would have to demonstrate that the insurance company denied its claim “without a rational, principled basis for doing so” and acted with “a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or ill will.” The court conceded that this was a heavy burden, but it concluded that there was enough evidence supporting the church’s bad faith claim to deny the insurance company’s motion to dismiss this claim. 2010 WL 2010464 (S.D. Ind. 2010).

What This Means For Churches:

Churches should be aware of what their insurance policy requires. Does your church have a provision requiring the insured to cooperate with the insurer’s investigation of claims? Finding out the answer to this question and understanding what kind of information is relevant to an insurer’s investigation will help your church comply whenever necessary. If ever you feel uncomfortable with your insurance company’s requests, consult a lawyer before proceeding.

This Recent Development first appeared in Church Law and Tax Report, March/April 2012.

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Legal Developments

Church’s Insurance Policy Prevents Coverage

Sexual injuries to three minors at a church preschool aren’t covered by church’s insurance policy.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax Report

Church’s Insurance Policy Prevents Coverage

Sexual injuries to three minors at a church preschool aren’t covered by church’s insurance policy.

Richard R. Hammar

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.

* A federal district court in North Carolina ruled that an insurance company properly denied coverage to a church for sexual injuries to three minors at a church-owned preschool due to a sexual misconduct exclusion in the church’s insurance policy. A guardian of three minor children sued a church, its preschool, and a regional denominational agency (the “church defendants”) after learning that the victims had been sexually assaulted by a 4-year-old preschool enrollee who was “acting out” sexual activity. The lawsuit alleged that the preschool director approved the perpetrator’s enrollment in the preschool, despite being informed that he “had been sexually abused and had a history of acting-out sexually with other children.” The lawsuit further alleged that the church defendants were negligent in their supervision of the perpetrator, thereby allowing him to continue this inappropriate “acting-out sexually” on other members of his preschool class.

A question arose as to the coverage of the victims’ injuries under the church’s liability insurance policy. The parties asked a federal court to issue a “declaratory judgment” addressing the availability of insurance under the church’s policy. The policy contained the following “abuse and molestation” exclusion:

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:
  • Employment;
  • Investigation;
  • Supervision;
  • Reporting to the proper authorities, or failure to so report;
  • Retention of a person whom any insured is or ever was legally responsible and whose conduct would be excluded [by this exclusion].

    • The church defendants claimed that this exclusion was ambiguous because the terms “abuse” and “molestation” were not defined by the policy, and that these terms did not apply to the behavior engaged in by the 4-year-old perpetrator since “to abuse” or “to molest” requires an element of intent that young children do not possess.

    The court concluded that the abuse and molestation exclusion was not ambiguous. It noted that “there is nothing in the language of the exclusion to indicate that the alleged abuse must be sexually motivated or calculated to arouse the person or persons involved in the offending conduct; the [perpetrator’s behavior] falls within the plain meaning of the words ‘abuse’ and ‘molestation’ irrespective of the [his] subjective state of mind.”

    The church defendants also argued that the exclusion did not apply to them since they had not engaged in abuse or molestation. Rather, they were being sued for negligence in the enrollment and supervision of the perpetrator. The court disagreed: “The exclusion applies to the injury at issue, not the pleaded cause of action. In other words, the issue is whether the alleged bodily injury arose from sexual molestation—not whether another individual’s alleged negligence arose out of the sexual molestation …. The exclusion specifically applies to bodily injury arising out of abuse or molestation by anyone of any person. Here, the injuries to minor plaintiffs are a result of molestation, and therefore fall within the exclusion.”

    Application. According to our research, sexual molestation of minors remains one of the leading causes of church litigation. Yet, some church insurance policies exclude these cases from coverage, meaning that the church must retain and compensate its own attorneys, and pay any settlement or judgment. Church leaders should carefully review their general liability policy and determine if it contains such an exclusion. If it does, contact your insurance agent to request that sexual misconduct be added to the policy. This usually requires a separate endorsement and payment of an additional premium. Failure to confirm coverage for sexual misconduct exposes a church to potentially significant defense costs and damages.

    It is also important to note that the court rejected the church defendants’ argument that the exclusion did not apply to them since they were being sued for negligence, not abuse or molestation. Erie Insurance Exchange, 690 F.Supp.2d 410 (W.D.N.C. 2010).

    Church Law & Tax Report is published six times a year by Christianity Today International, 465 Gundersen Dr. Carol Stream, IL 60188. (800) 222-1840.© 2011 Christianity Today International. editor@churchlawandtax.com All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. “From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.” Annual subscription: $69. Subscription correspondence: Church Law & Tax Report, PO Box 37012, Boone, IA 50037-0012.

    Legal Developments

    Church Barred from Suing Insurer

    Obtain legal advice before signing an insurance contract.

    Richard R. Hammar, Attorney, CPA
    Bio

    Church Law & Tax Report

    Church Barred from Suing Insurer

    Obtain legal advice before signing an insurance contract.

    Richard R. Hammar, J.D., LL.M., CPA

    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.

    A Michigan court ruled that a church was barred from suing its insurer for property damage it sustained in a fire on the basis of a release agreement it signed and a two-year limitations period in the insurance contract. A fire damaged a church building and its contents. The church immediately notified its insurer, and the insurer began assessing covered losses. The parties did not entirely agree on what was damaged or what damage was caused by the fire. Among other items at issue were the building’s lead coated copper dome roof, interior iconography or murals, church bells and associated electrical wiring, and chalices and candle stands. The parties exchanged correspondence regarding plaintiff’s claims and a possible settlement. Eventually the insurer informed the church that it would not cover damage to the dome. The same letter offered the church a final opportunity to accept a compromise settlement in exchange for a release. A few weeks later, after some additional analysis of the roof, the church signed a release that covered “all claims for all damages sustained except for any possible damage to the exterior lead coated copper sheathing covering the building dome.”

    Later, the church claimed that the insurer was obligated to pay the balance of the iconography and copper dome roof damage arising out of the fire. The insurer declined, noting that the damage to the iconography was barred by the release, and the damage to the dome was “time barred” since the church presented this claim beyond the deadline specified in the insurance contract. The church filed a lawsuit in which it asked the court to compel the insurer to pay both claims. The court determined that the church’s domed roof claim was time-barred, but ruled that the church’s iconography claim could proceed to trial. Both parties appealed.

    A state appeals court dismissed both of the church’s claims. In dismissing the church’s claim that the insurer was obligated to pay for the damaged iconography, the court stressed that “the plain terms of the release demonstrate that the church discharged ‘all claims and causes of action’ for ‘all damages sustained’ other than possible damage to the exterior of the domed roof. We must give the words used in a contract their plain and ordinary meaning … and there is no broader classification than the word ‘all’ in a release.” The court added that since the iconography was not part of the exterior of the domed roof, “the release bars the church’s claim for damage to its iconography.”

    The court then addressed the church’s claim that the insurer was obligated to pay for the damage to the domed roof. It noted that the insurance contract contained a two-year contractual limitations period, under which claims had to be submitted within two years after a physical loss. Since the church did not submit this claim for more than two years after the loss, it was barred by the contract.

    Application. This case is important for two reasons. First, it demonstrates the importance of being familiar with the terms of release agreements. Given the potential significance of such agreements, they should never be signed by church leaders without first obtaining legal advice. Second, this case illustrates the importance of being aware of any limitations periods in a church’s insurance contracts. Most insurance contracts contain such provisions, which require the insured to bring any legal claims within a specified period following a loss. Unfamiliarity with such provisions can result in the denial of otherwise valid claims. Assumption Greek Orthodox Church, 2008 WL 5046311 (Mich. App. 2008).

    This Recent Development first appeared in Church Law & Tax Report, July/August 2009.

    Legal Developments

    Reservations of Rights Letters

    What do these letters mean?

    Richard R. Hammar, Attorney, CPA
    Bio

    Background. Churches sometimes will receive a "reservation of rights" letter from their insurer when they are sued. A reservation of rights letter usually informs the insured that the insurer will provide a legal defense of a lawsuit, but under a "reservation of rights," meaning that it reserves the right not to "indemnify" (pay damages) on behalf of the insured if it later determines that the claims are not covered under the insurance policy. A recent federal appeals court ruling addressed a church's response to a reservation of rights letter.

    A church was sued by a minor who alleged that he had been molested on six occasions by two ministers. The church notified its liability insurance company of the lawsuit. The insurer agreed to defend the church, subject to a "reservation of rights." In its reservation of rights letter, the insurer indicated that it was reserving the right not to indemnify the church on the ground that the ministers' acts may fall under a policy exclusion for "intentional acts." The church later entered into an out-of-court settlement with the victim, and submitted the settlement to its insurer for payment. The insurer declined on the ground that the theory of liability was not covered under the church's insurance policy.

    The church asked a court to rule that the insurer had a duty to defend and indemnify it up to the policy limits for damages incurred in the underlying lawsuit. A trial court ruled that the insured did have a duty to indemnify the church based on its duty to defend the lawsuit. The insurer appealed, claiming that the duty to defend is broader than the duty to indemnify, and that an insurer's decision to provide a defense to a lawsuit does not necessarily mean that it has a duty to indemnify (pay damages) based on a settlement or judgment. It relied on an earlier case in which a court ruled that "the duty to defend is measured against the allegations in the lawsuit but the duty to pay is determined by the actual basis for the insured's liability to a third person."

    The appeals court concluded that the trial court erred by incorrectly assuming that the insurer had a duty to indemnify the church based solely on its duty to defend. Instead, the trial court "should have determined whether the church had shown that the settled claim was a covered loss under the insurance policy." The court was unable to determine whether the church's claim was a covered loss under the policy because of the lack of evidence regarding the dates of the molestation of the minor. The church argued that there was no doubt that the minor was molested during the policy period based on the fact that the ministers both pleaded guilty to molesting the minor during the summer of 1997, which is within the policy period. The insurer disagreed. The appeals court sent the case back to the trial court to determine whether or not the claim was covered under the policy. If it was, then the insurer was obligated to pay the settlement amount on behalf of the church.

    Relevance to church treasurers. If your church is sued, and you submit the lawsuit to your insurer, you should not be surprised to receive a reservation of rights letter in return. The insurer agrees to provide your church with a legal defense of the lawsuit, but reserves the right not to pay any damages based on a theory of liability that is not covered under the insurance policy.

    In many cases, a lawsuit will recite several theories of liability (the "shotgun" approach), only some of which are covered under the church's insurance policy. If a court awards damages based on a theory of liability that is not covered under the policy, then the insurer is not obligated to pay the judgment even though it has paid for the defense of the case. This is not a common occurrence, but it does happen.

    When it does, it comes as a surprise to church leaders who assume that the insurer's defense of the lawsuit meant that it would indemnify the church against any damages. This case illustrates that an insurer will not be required to indemnify a church against a judgment or settlement based solely on its decision to provide a legal defense of the case. Rather, the insurer's duty to indemnify is based solely on proof that the claim "was a covered loss under the insurance policy."

    American States Insurance Company v. Synod of the Russian Orthodox Church, 335 F.3d 493 (5th Cir. 2003).

    Related Topics: Posted:

    Legal Developments

    Paying Insurance and Retirement Benefits to a Former Spouse

    Supreme Court weighs in on this issue.

    Richard R. Hammar, Attorney, CPA
    Bio

    Many churches have adopted life insurance and retirement plans requiring employees to designate beneficiaries in the event of their death. What if an employee is divorced, and the insurance or retirement plan still lists a former spouse as beneficiary at the time of the employee's death?

    Must the insurance proceeds or retirement benefits be paid to the former spouse instead of the deceased employee's children or heirs?

    The United States Supreme Court addressed this issue in a recent case, ruling that a divorced wife was entitled to all of the benefits payable under a life insurance policy and pension plan maintained by her former husband's employer because she was still listed as the beneficiary at the time of his death.

    What this means for churches

    This case illustrates an important point. Churches that maintain life insurance or retirement plans should ask employees to periodically review their beneficiary designations to be sure that benefits are paid to the desired person or persons.

    Egelhoff v. Egelhoff, ___ U.S. ___ (2001)

    Legal Developments

    Insurance Coverage of Acts of Molestation

    An offender’s homeowner’s insurance policy will not cover such acts.

    Richard R. Hammar, Attorney, CPA
    Bio

    Church Law and Tax 1997-11-01

    Insurance

    Richard R. Hammar, J.D., LL.M., CPA

    • Key point. The homeowner’s insurance policy of a child molester cannot be tapped to pay for victims’ injuries or the molester’s legal fees.

    ! The Supreme Court of Ohio ruled that a convicted child molester’s homeowner’s insurance policy did not cover acts of child molestation. Three minor girls were molested by a former neighbor and friend they called “grandpa.” The incidents occurred on several occasions over a period of three years. The victims sued the molester, who referred the lawsuit to his homeowner’s insurance company. The insurer claimed that the molester’s actions were not covered under the homeowner’s policy because of an exclusion for “intentional injuries.” The molester admitted that he abused the girls, and that his actions were considered morally wrong by his church. He insisted, however, that at the time of his actions he did not know that his acts would cause emotional injuries to the girls, and that he never intended to harm them. The state supreme court rejected the molester’s argument, concluding that “intent to harm is properly inferred as a matter of law from deliberate acts of sexual molestation of a minor.” The court added that “a person who sexually manipulates a minor cannot expect his insurer to cover his misconduct and cannot obtain such coverage simply by saying that he did not mean any harm.”

    Application. This case illustrates an important point-church workers who molest minors should not assume that their homeowner’s insurance policy will cover their wrongs. This means that their homeowner’s insurer will not provide them with a legal defense if they are sued, and will not pay any portion of a judgment rendered against them. Church workers who molest children sometimes look to their homeowner’s policy after learning that the church’s insurance policy does not cover them. Gearing v. Nationwide Insurance Company, 665 N.E.2d 1115 (Ohio 1996). [ Negligence as a Basis for Liability—Defenses]

    Retirement plans

    • Key point. The civil courts are prohibited by the first amendment guaranty of religious freedom from resolving lawsuits brought by dismissed clergy challenging a loss of their retirement benefits based on their dismissed status, especially if the resolution of such a dispute would require consideration of ecclesiastical matters.

    ! The South Carolina Supreme Court ruled that the civil courts could resolve a dispute over a dismissed minister’s right to pension benefits. A minister served from 1952 until he retired in 1986 in churches of the Church of God (the Church). During his 33—year active ministry, he made the required monthly contribution to the Aged Ministers Pension Plan Fund of 4 percent of his gross income from the ministry. Following his retirement, he began receiving payments from the Fund. Payments from the Fund are governed by the Minutes of the Church of God, which provide that “any aged minister receiving benefit from the Aged Ministers’ Fund whose ministry has been revoked shall cease to draw compensation from the fund.” The Minutes further provide that “the license of a minister must be revoked when found guilty of adultery or fornication.” In 1989 the Church revoked the minister’s license after he confessed to adultery, and he stopped receiving pension payments. The minister sued the Church claiming that although the Church revoked his pastoral “license,” the Church did not thereby effectively revoke his “ministry.” He also argued that the Church could not have revoked his ministry by revoking his license because once he retired he had no “ministry” to revoke. A trial court agreed with the minister that his pension benefits had been wrongfully terminated by the Church, and awarded him $71,000 in damages. The state supreme court disagreed. It began its opinion by identifying the following three principles that emerge from a reading of decisions by the United States Supreme Court:

    (1) courts may not engage in resolving disputes as to religious law, principle, doctrine, discipline, custom, or administration; (2) courts cannot avoid resolving rights growing out of civil law; and (3) in resolving such civil law disputes, courts must accept as final and binding the decisions of the highest religious judicatories as to religious law, principle, doctrine, discipline, custom, and administration.

    The court concluded that the first amendment did not prevent it from resolving this case, since it was not being asked to adjudicate a matter of religious law, principle, doctrine, discipline, custom, or administration.” Rather, it was being asked to resolve a contractual dispute: “The issue here is the effect of the revocation of [the pastor’s] ministry on the pension agreement he had with the Church. This case simply requires the application of neutral principles of contract law and very little inquiry into religious law.” The court noted that the Church’s Minutes were “very clear” that if the pastor’s ministry was revoked he was not entitled to draw compensation from the Aged Ministers’ Fund. The court refused to address the former pastor’s claims that as a retired minister he had no ministry to “revoke,” and that revocation of a license to preach is not the same as revocation of ministry. These claims were “foreclosed by the fact that a court must accept the doctrinal and administrative determinations of the highest ecclesiastical body of the Church.” The court concluded that “because the [Minutes] unambiguously allowed the Church to discontinue [the former pastor’s] pension payments as a result of the revocation of his ministry, the trial court should have directed a verdict in favor of the Church.” Pearson v. Church of God, 478 S.E.2d 849 (S.C. App. 1995). [ Termination, Judicial Resolution of Church Disputes]

    Sexual harassment

    • Key point. Churches may be liable for sexual harassment if they do not respond promptly and effectively to employee allegations of sexual harassment.

    ! A federal appeals court ruled that a church—operated school was guilty of sexual harassment as a result of its failure to address its principal’s offensive behavior with several female employees. A denominational agency operated a residential school for emotionally and physically impaired children. Over the course of several years, the principal of the school was accused on many occasions of sexual harassment by female employees. There was substantial evidence that school officials were aware of many of these complaints. In 1993, school officials launched an investigation into the sexual harassment charges. They found that there was a significant basis to the harassment complaints. The school suspended the principal for five days without pay, ordered him to submit to a psychological assessment and placed him on three months’ probation. It also invited an outside consultant to conduct several days of seminars on sexual harassment. Even after this corrective action, there were several instances of inappropriate behavior involving the principal. During this same year, the principal was given a satisfactory performance evaluation and a raise. Several female employees who had been harassed by the principal sued the denominational agency on the ground that it was legally responsible for the principal’s acts because of its failure to respond adequately to the accusations against him. The women claimed that school officials “moved slowly” in dealing with the principal because he was African—American, and they were concerned about being sued for racial discrimination. In fact, the principal threatened on numerous occasions to file a discrimination complaint with the Equal Employment Opportunity Commission. A trial court ruled in favor of the women, and awarded them $300,000 in damages.

    A federal appeals court upheld this ruling. It referred to the “long—term, ostrich—like failure” by denominational and school officials to “deal forthrightly with [the principal’s] treatment of female employees.” The court observed that “the jury was entitled to conclude that [the agency] not only looked the other way for many years but that its corrective action was woefully inadequate, as demonstrated by [the principal’s] later conduct.”

    Application. This case illustrates the importance dealing promptly with complaints of sexual harassment. Letting years pass without addressing complaints of harassment will only increase significantly a church’s risk of liability. The agency finally acted in 1993-by suspending the principal for five days, ordering a psychological assessment, imposing a three—month probationary period, and inviting consultants to conduct sexual harassment training. These acts may seem thorough and adequate, but the court concluded that they were not sufficient to avoid liability for sexual harassment, because (1) the complaints against the principal had occurred over so many years; (2) the principal’s acts of harassment were so pervasive; (3) the agency waited years before acting; (4) the agency’s response was insufficient, since the principal continued to engage in harassment even after he was disciplined; and (5) the principal received a satisfactory employee evaluation and a raise during the same year that he was disciplined for harassment. These are “warning signals” that church leaders should heed. Also, note that the court acknowledged that the agency had “moved slowly” in responding to the complaints against the principal out of a fear of being sued for racial discrimination. However, the court not only rejected the relevance of such a concern, but suggested that it helped prove the victims’ claims of harassment. The lesson is clear-employers should not delay responding to allegations of sexual harassment on the ground that the alleged offender is a member of a protected group. Jonasson v. Lutheran Child and Family Services, 115 F.3d 436 (7th Cir. 1997). [Title VII of the Civil Rights Act of 1964, Application of Federal Labor and Discrimination Laws to Private Schools]

    © Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m50 m10 c0697

    Legal Developments

    Release Forms for Contractors

    Courts are often reluctant to enforce releases.

    Richard R. Hammar, Attorney, CPA
    Bio

    Church Law and Tax 1994-07-01 Recent Developments

    Releases from Liability

    Richard R. Hammar, J.D., LL.M., CPA

    • Key point: A release form that attempts to relieve a church from liability for personal injuries will be strictly construed against the church and will not be enforceable against persons not specifically released by the agreement.

    • A New York appeals court ruled that a church could not avoid liability for personal injuries suffered by a construction worker on church premises on the basis of a release form that did not specifically release the worker. A church hired a contractor to repair its bell tower and spire, and had the contractor sign an agreement that contained the following “hold harmless” agreement:

    The contractor agrees that he undertakes all repairs and renovations as detailed in the proposal at his how risk and he agrees to indemnify and save the church and all it’s [sic] members and officers for damage to property or injury to, or the death of any person, including employees, of any actions arising out of the acts of the contractor and at his own cost and expense, defend any action brought against either the contractor or the church; and promptly pay any adverse judgment in any such action, and hold the church and its members and officers harmless from and against any loss or damage and expense claimed by the church and its members and officers by reason of such claim.

    The contractor hired a worker who was seriously injured when he fell nearly 30 feet when the scaffolding on which he was working collapsed. The worker sued the church, and the church defended itself by citing the “hold harmless” agreement quoted above. A court ruled that the church could not escape liability on this basis. It noted that New York law imposes absolute liability upon owners and contractors for a failure to furnish and erect safe scaffolding, and that this liability was not avoided by the hold harmless agreement since only the contractor (and not the worker he hired) agreed to release the church from liability. The court observed that there was no “shred of evidence … from which one might infer that [the victim] was a ‘contractor’ as that term is generally understood.” Further, “[j]udicial recognition of this contract as an effective waiver would eviscerate the statute [imposing an absolute duty upon owners and contractor to maintain safe scaffolding] rendering its protection a mere sham.” This case illustrates the reluctance courts often express in enforcing release agreements. It is essential for such agreements to specify clearly the persons who will be bound by the agreement. In this case, the release agreement relieved the church from liability only against the contractor. Since the contractor’s worker was not specifically contemplated by the agreement, he was not bound by it. Bain v. First Presbyterian Church and Society, 601 N.Y.S.2d 535 (Sup. 1993).

    See Also: Negligence as a Basis for Liability – Defenses

    © Copyright 1994, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m62 m58 m86 m35 c0494

    Legal Developments

    Insurance

    Can a church-established health insurance plan that suffers huge losses sue its CPA firm for malpractice?

    Richard R. Hammar, Attorney, CPA
    Bio

    Can a church-established health insurance plan that suffers huge losses sue its CPA firm for malpractice? That was the question before a Florida state appeals court in a recent case. In 1968, the Catholic Archdiocese of Miami established a health insurance plan for the clergy and lay employees of the archdiocese.

    A board of trustees was created to oversee the plan, and an administrator was appointed. Each year, the trustees and administrator determined the level of premiums that had to be made to the plan in order to cover anticipated medical expenses. In 1969, the trustees purchased a "stop-loss" insurance policy from Lloyd's of London which would insure against the risk that in any year the amount of claims paid by the plan would exceed the premiums received.

    Each year before issuing the stop-loss policy, Lloyd's required the trustees to submit detailed information about the types and amounts of benefits to be provided by the plan, the number of workers covered, and the amount of premiums charged. The plan was audited by a large CPA firm each year from 1969 through 1981.

    The CPA firm's "audit program" required it to obtain a copy of the current stop-loss policy each year to ensure that such coverage was available. However, after 1971, the CPA firm neither obtained a copy of the stop-loss policy nor verified the existence of such insurance. Nevertheless, it repeatedly informed the trustees that the Lloyd's stop-loss policy remained in effect.

    In reality, Lloyd's cancelled the policy in 1980 due to the administrator's failure to pay premiums in a timely manner. In 1980, the trustees—unaware of the loss of coverage—significantly increased benefits to the plan members. As a result, claims exceeded premiums by $320,000 for the year. When the trustees discovered that the Lloyd's policy was no longer in effect, they sued the CPA firm (that had assured the trustees of the availability of the stop-loss policy).

    A jury ordered the CPA firm to pay the whole $320,000 deficit, and the firm appealed. The state appeals court agreed that the CPA firm had been negligent in advising the trustees that the stop-loss policy was still in effect for 1980, but it concluded that the firm could not be liable for the entire $320,000 deficit for the year.

    The court emphasized that there was no guaranty that Lloyd's would even have renewed the stop-loss policy for 1980—the year in which the trustees greatly expanded benefits under the plan. The court observed: "The trustees presented no evidence that Lloyd's, or any other carrier, would have issued a stop-loss policy that would have covered the deficit in the fund.

    It is also uncertain whether the trustees and plan participants would have agreed to increased premiums which Lloyd's was likely to demand in light of the expanded benefits offered by the trustees. [The CPA firm] was negligent [and] the trustees' plan suffered losses. However, because there is no causal link between [the CPA firm's] negligence and the deficit in the plan, the deficit was improperly charged to [the firm].

    Where policy coverage is merely speculative, as here, we hold that an accounting firm which negligently fails to discover the lack of insurance cannot be charged with benefit payments which might have been covered had the policy been in force."

    Coopers & Lybrand v. Archdiocese of Miami, 536 So.2d 278 (Fla. App. 1989).

    Posted:

    Legal Developments

    Court Ruled That a Quadriplegic Student Could Not Sue Church Officials for Failing to Obtain Adequate Insurance

    The Kansas Supreme Court ruled that a student who was rendered a permanent quadriplegic as

    Richard R. Hammar, Attorney, CPA
    Bio

    The Kansas Supreme Court ruled that a student who was rendered a permanent quadriplegic as a result of injuries sustained while playing football for a church-operated high school could not sue church officials for failing to obtain adequate insurance coverage.

    The victim alleged that the school and church officials had been negligent in "failing to properly insure students for injury incurred as a result of school activities and in failing to properly advise and inform students and their parents … of the insurance protection provided to students."

    In rejecting this claim, the court cited a state law making the purchase of liability insurance coverage by public schools discretionary rather than mandatory. Such a law, reasoned the court, applied "by implication" to private schools as well. Since private schools were not required to purchase insurance, they could not be liable for failure to have enough coverage to cover catastrophic losses.

    "We feel sympathy for the severe injuries suffered by this plaintiff," concluded the court. "However, there are dangers and risks inherent in the game of football and those who play the game encounter these risks voluntarily. It is fundamental that before there can be any recovery in tort there must be a violation of a duty owed by one party to the person seeking recovery …. It is clear under the facts of this case that no … duty existed to properly insure or to advise the plaintiff regarding medical insurance purchased by the defendants for the plaintiff." Wicina v. Strecker, 747 P.2d 167 (Kan. 1987)

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