The Consequences of Insurance Fraud

Don’t fill out an insurance application until you understand it.

Zion Christian Church v. Brotherhood Mutual Insurance Company, 126 Fed.Appx. 235 (6th Cir. 2005)

Some church leaders view an insurance application as an annoyance to be completed as quickly, and with as little thought, as possible. Such an approach can be very risky, since a church's insurance policy can be nullified by the insurance company on the basis of fraud if the application contains any material misrepresentations. One church learned this lesson the hard way.


An insurance company issued a policy to a Michigan church that provided coverage in the areas of general liability, personal injury liability, sexual acts liability, sexual harassment liability, directors and officers liability, employment practices liability, workers compensation, and excess liability. The church requested an additional "sexual acts liability coverage endorsement." To get the additional coverage, the church was required to complete a separate application disclosing, among other things, its knowledge of prior incidents involving sexual abuse or misconduct, or allegations of such behavior. This information was required in order to allow the insurance company to evaluate the risk of supplying the additional coverage. For example, the application asked:

  • Has your church ever had an allegation or lawsuit filed against it alleging any type of sexual abuse or misconduct?
  • Are you aware of any past or present situation in your ministry that could produce an allegation or lawsuit claiming any type of sexual abuse or misconduct?
  • Are you aware of any current employee or ministry volunteer who has previously been accused, charged, or convicted of any type of sexual abuse or sexual misconduct?
  • Please describe circumstances of any employee or ministry volunteer who has previously participated in, or been accused, charged, or convicted of, any type of sexual abuse or sexual misconduct. Please do not identify any individuals by name in this explanation.

The application for the additional sexual misconduct coverage was completed by the church's business administrator (Daniel) based on information that he received from the church's senior pastor (Pastor Steve). Daniel's answers indicated "no knowledge" of any prior sexual abuse or misconduct, based on information he had received from Pastor Steve.

Both the basic insurance policy, and the policy for additional sexual misconduct coverage, contained the following "fraud warning":

We do not provide coverage for an insured who has willfully concealed or misrepresented a material fact or circumstance with respect to this insurance … or engaged in fraudulent conduct or sworn falsely with respect to this insurance or the subject thereof.

The insurance company issued the church a policy for additional sexual misconduct coverage based on the information and representations contained in the church's application.

Pastor Steve's two sons were employed as associate pastors at the church. Daniel discovered that one of the sons was using church computers to view, download and transmit pornographic materials. He relayed this information to Pastor Steve who said he would "take care of it." Daniel also alleged that at least two female parishioners complained to him about inappropriate sexual advances by the other son. He promptly relayed this information to Pastor Steve who, again, said he would handle it. Daniel was eventually dismissed from his position, and he sued the church for defamation, breach of contract, and "retaliating" against him for "whistleblowing." Daniel and the church eventually reached an out-of-court settlement of his claim.

The church was sued in a second lawsuit by a former female employee who claimed that one of Pastor Steve's sons sexually harassed her when she was employed by the church. She alleged that the son made several inappropriate sexual advances over the course of two years, that she informed Pastor Steve, and that no corrective action was taken.

The church submitted this lawsuit to its insurance company, seeking a legal defense and the payment of any damages awarded by the court. In response, the insurance company sent the church a lengthy letter denying coverage and refusing to provide a legal defense of the claims brought by the former employee.

The church sought an opinion from the court regarding the availability of coverage under its insurance policies. The court agreed with the insurance company that no coverage was available to the church because of fraudulent responses in the application for insurance. The trial judge noted that the church had executed an application for sexual acts coverage in which it denied ever having had "an allegation or lawsuit filed against you alleging any type of sexual abuse or misconduct," denied being aware of any church employee "who has been previously accused … of any type of sexual abuse or sexual misconduct," and denied being "aware of any past or present situation in [the] ministry that could produce an allegation or lawsuit claiming any type of sexual abuse or misconduct."

But in fact, the church and Pastor Steve had been sued in 1992 by a former employee who alleged sexual misconduct by one of Pastor Steve's sons. In addition, Pastor Steve admitted in a deposition that this same son was accused of sexual molestation 16 years before and that the incident was "common knowledge" among his church members. Pastor Steve further testified that he was aware that his other son engaged in extramarital sexual acts over the course of at least five years.

In its defense, the church argued that its answer to the question about whether it had ever had an allegation or a lawsuit against it alleging any type of sexual abuse or sexual misconduct was truthful because the lawsuit brought by the former employee involved claims of wrongful discharge and emotional distress and not sexual misconduct. The court retorted: "You know, this is a Bill Clinton kind of construction of language that is so clear on its face that I find it offensive that you are actually arguing it."

The trial court concluded that the church's failure to disclose this history in its answers to the insurance application constituted fraud and negated any coverage. The church appealed.

the court's ruling

A Michigan appeals court began its opinion by noting:

The general rule is that where a policy of insurance is procured through the insured's intentional misrepresentation of a material fact in the application for insurance, and the person seeking to [obtain coverage under the policy] is the same person who procured the policy of insurance through fraud, an insurer may rescind an insurance policy and declare it void.

The court noted that a misrepresentation or concealment is "material" if the insurer "would not have issued the insurance coverage in the absence of the misrepresentation or concealment." It concluded that the church had engaged in material representations in completing the insurance application. It agreed with the trial judge's ruling, and then added:

The trial judge's references to Pastor Steve's knowledge are accurate. First, the church produced a copy of a complaint filed in 1992, prior to completion of the insurance application, wherein a former employee sued the church and Pastor Steve on behalf of herself and her deceased husband's estate. The complaint alleged wrongful discharge and intentional infliction of emotional distress based, in part, on allegations that the church and Pastor Steve engaged in a campaign to drive her from church employment and church membership solely because of her opposition to the nature in which the allegations of marital infidelity against Pastor Steve, and allegations of sexual misconduct with [female students at a church-run school] by Pastor Steve's son were addressed and handled.

In addition, affidavits were filed by two former associate pastors, a former member of the church's board of trustees, and former ministers and school teachers, each alleging that [one of Pastor Steve's sons] had engaged in sexual intercourse with various minor female students, yet remained an ordained minister gainfully employed by the church.

The court also referred to an excerpt from the minutes of the church board as evidence that Pastor Steve knew of his sons' sexual improprieties at the time the insurance application was completed. The minutes quote Pastor Steve making reference to incidents of sexual misconduct involving his sons prior to the time the insurance applications were submitted.

The court concluded:

There was an abundance of facts in the record before the district court to show that, in 1998 when the application for insurance was completed by Daniel using information supplied by Pastor Steve, it was well-known that there were many claims of sexual improprieties by church employees that should have been, but were not, disclosed. The insurer also filed an affidavit stating that it would never have granted coverage for sexual acts liability had it known this history …. From Pastor Steve's own deposition testimony it is clear that, at the time he applied for the insurance, he knew of information that should have been disclosed to the insurance company and he knew that he was required to disclose it. Instead, he chose to parse the language of the questions in an attempt to avoid disclosure in a way that was downright dishonest.

As a result, the court ruled that the insurance policy was null and void due to the church's material representations. This meant that the church had to obtain and compensate its own attorneys in the defense of the lawsuit, and to pay any adverse verdict or settlement.

The church insisted that even if its fraud nullified the sexual acts liability coverage, it did not invalidate the entire insurance contract and, under the general liability provisions of the contract, the insurance company owed not only coverage but also a duty to defend the underlying lawsuit. The court disagreed. It pointed out that the general liability policy "stated clearly that it did not apply to a loss of any kind arising directly or indirectly out of any actual or alleged sexual act." The policy defines "sexual act" to include:

a. any act which would be considered a criminal act under any applicable federal, state or local statute, ordinance or law relating to sexual offenses;

b. any act or attempted touching of a person by another person for the purpose of obtaining sexual arousal or sexual gratification;

c. any other act undertaken by a person for the purpose of obtaining sexual arousal or sexual gratification;

d. any conduct characterized or interpreted as sexual intimidation or sexual harassment, or as intimidation or harassment based on gender difference; or

e. any conduct characterized or interpreted as being sexual in nature.

The court noted that the sexual harassment lawsuit brought by the former employee against one of Pastor Steve's sons involved a "sexual act" as defined by the policy. Therefore, there was no coverage and, as a result, no duty to defend. The court concluded, "When an insurer has specifically and explicitly excluded coverage with unambiguous policy language, the express exclusions will free the insurer from any duty to defend."

The court also rejected the church's defense that the sexual acts recited in the sexual harassment lawsuit were consensual and involved no harm. It noted that "the exclusions of the policy are broad, making no mention of whether the excluded sexual acts are consensual or non-consensual. Loss resulting from sexual acts is simply not covered. For coverage of such loss, an insured must separately purchase the sexual acts liability coverage endorsement." The court continued:

Of course, the church did purchase that endorsement, albeit fraudulently, leading us to declare the endorsement void. However, even if we had not declared the sexual acts liability coverage endorsement void, that endorsement would not supply any relief for the church with respect to the lawsuit in this case because the endorsement itself also contained very specific exclusions which are applicable here. It stated "we do not pay for loss of any kind arising directly or indirectly out of any sexual act if you, your present leaders or your past leaders while in your service, had actual knowledge that an alleged perpetrator employed or appointed by you or representing you has admitted to anyone that he or she participated in any previous molestation act [or] admitted to anyone that he or she had participated in any previous extramarital sexual act."

What this means for churches

This case contains a number of important lessons for church leaders, including the following:

1. Insurance applications. An insurance application is an important legal document that should never be completed or signed without careful consideration. At a minimum, church leaders should:

  • Read the application.
  • If you don't fully understand a provision, call the insurance company. If it is your existing insurance company, call your agent. If you are applying for insurance from another company, then call that company. The application should have contact information (phone numbers and email addresses).
  • Do not make any representations (e.g., about knowledge of prior acts or claims) without discussing your response with other church leaders, including current and former board members and staff members. Be sure that some of the persons assisting with the responses have a long association with the church, and document the persons who were consulted and their responses so that you can refute any suggestion of fraud.
  • Be sure the application is signed by an authorized person or persons.

It is important to communicate these safeguards to church staff so that insurance applications are not signed by persons who fail to abide by them.

2. The legal effect of material misrepresentations. Most insurance policies contain a "fraud" provision that nullifies coverage in the event that an insured obtains coverage on the basis of material misrepresentations in the insurance application. As the church in this case discovered, such a result can have catastrophic consequences since a church may be solely responsible to find and compensate its own attorneys, and pay any adverse verdict or settlement.

3. Board minutes. Church board members should understand that in most cases the minutes of board meetings can be subpoenaed in the event of a lawsuit. This means that minutes may be used against a church in litigation if they contain material or admissions that support liability. This is exactly what happened in this case. The board minutes were subpoenaed by the plaintiff in the underlying sexual harassment lawsuit, and the trial court and appeals court both referred to statements contained in the minutes proving that the church had knowledge of prior incidents of sexual misconduct well before it completed the application of sexual misconduct coverage. As a result, the content of board minutes is very important. They should be worded with care so that they do not needlessly expose the church to an increased risk of liability.

4. Nepotism policies. This case dramatically illustrates why some churches have adopted "anti-nepotism" policies prohibiting the employment of persons who are related to current staff members. Such policies were once common, but in recent years have been used less frequently in part because of state laws that restrict or prohibit them. As a result, a church should not adopt such a policy without the advice of legal counsel.

Hiring employees who are related to current staff members is potentially dangerous, especially when the employees are related to the senior pastor, since accountability may be compromised. Pastor Steve's sons were guilty of numerous acts of sexual misconduct over the course of several years, but the church's response was limited at best. In some churches it is difficult if not impossible to hold the senior pastor's relatives to an acceptable level of accountability. And, as this case demonstrates, this can have tragic effects for a church.

This content 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." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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