• 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.
Negligence as a Basis for Liability
* A California court ruled that a “sexual misconduct” exclusion in a school’s liability insurance policy applied not only to a teacher who molested several students, but also to negligent supervision and negligent retention claims brought against the school by victims of the teacher’s acts. A public school sued its liability insurer as a result of its failure to defend and indemnify the school in connection with several lawsuits brought against it by former students and their parents. The lawsuits alleged that a teacher had sexually molested the students over a period of years, and that the school and certain of its employees were liable for the teacher’s acts on the basis of negligent supervision and negligent retention. The insurer claimed that its insurance policy expressly excluded coverage for these claims. The trial court disagreed, finding that the exclusion could be interpreted as allowing coverage for claims brought against the school.
The insurer appealed, a state appeals court ruled that the insurance policy clearly excluded coverage for sexual misconduct claims. The insurance policy’s “Sexual Misconduct Exclusion” reads as follows: “This insurance does not apply to any claims or suits seeking damages, including defense of same, arising directly or indirectly from any actual or alleged participation in any act of sexual misconduct, sexual molestation or sexual abuse, physical or mental, of any person by the insured, any employee of the insured or any volunteer worker.” The school conceded that the policy did not cover the teacher’s wrongful conduct, both because of this exclusion and a state law providing that an insurer “is not liable for a loss caused by the willful act of the insured.” It contended, however, that the exclusion did not cover claims of negligent supervision or retention brought against the teacher’s employer. After all, the school was not guilty of intentional or wrongful conduct, and so the exclusion should not apply to it. The court disagreed. It noted that insurance policy exclusions for sexual misconduct, similar to the one in this case, “commonly are interpreted as excluding from coverage not only claims for damages for injuries inflicted by an employee, such as those inflicted [by the teacher] but also claims for damages for the negligent employment or supervision of employees. The rationale is that these claims ‘arise from’ the improper conduct of the employee.”
The court based its decision on several other cases, including a 1998 ruling by a federal appeals court. American States Insurance Co. v. Bailey, 133 F.3d 363 (5th Cir. 1998). This case involved claims against a church for the negligent hiring and supervision of a minister who engaged in sexual misconduct. The church’s insurance policy excluded damages “arising from sexual action.” The court concluded that the exclusion applied to the claims against the church, and so there was no coverage available under the policy. It concluded that the term “arising out of” meant that a claim need only bear an “incidental relationship” to the minister’s acts of sexual misconduct. “Without [the minister’s] sexual misconduct, the victims of the misconduct would have no claims against the church and the four associate ministers. Every alleged harm caused to the victims by the church and the four associate ministers stems from and is integrally related to the minister’s acts. Therefore … all of the allegations that underlie the victim’s claims against the church and the four associate ministers arise out of the minister’s sexual actions, thereby precluding coverage.”
Application. This case suggests that a sexual acts exclusion in a church’s liability insurance policy precludes coverage not just for those who engage in acts of sexual misconduct, but also for claims of negligent hiring or negligent supervision brought against the church. Obviously, this is a significant issue, since the cost of defending a sexual misconduct claim, and any settlement or judgment, can be substantial. Other courts have rejected the conclusion of the court in this case, and have ruled that sexual misconduct exclusions in church insurance policies do not apply to alleged acts of negligence on the part of a church. The reasoning is that such exclusions should apply only to those who actually commit the sexual offenses, and not to a church that is accused of negligence. Church leaders should seek a clarification from their liability insurer regarding the interpretation of any sexual misconduct exclusion in their insurance policy. Berkeley Unified School District v. United National Insurance Company, 2002 WL 180258 (Cal. App. 2002).
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