• Key point.Negligence as a Basis for Liability 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 Texas court ruled that a national church’s insurance policy covered a lawsuit brought against it by the executor of an estate who accused the church of wrongfully pressuring an elderly woman into establishing trusts and annuities for the benefit of the church, offering financial and estate-planning advice that it was not qualified to give, and then mismanaging the assets the woman transferred to the church’s control. In 1988, a woman (“Louise”) established a living trust and named the foundation of her church denomination (the “national church”) as trustee. In 1990, she created a charitable remainder unitrust and again named the foundation as trustee. National church ministries were named remainder beneficiaries of both trusts upon Louise’s death. At the urging of certain national church officials, Louise executed other legal documents transferring property (including two homes and eleven other tracts of real property) to the trusts. The national church also allegedly induced Louise to purchase two $100,000 charitable annuities from the foundation, the remainders of both to pass to national church ministries upon her death.
In 1994, the national church notified its insurer that it had been sued in state court by the executor of Louise’s estate. The lawsuit alleged that the national church and its foundation had insinuated itself into the confidence of Louise when she was elderly, and wrongfully pressured her into transferring control of her estimated $2 million estate to the church. In doing so, the national church and its foundation allegedly offered financial and estate-planning advice that they were not qualified to give. The church had an “executive protection insurance” policy that contained a “fiduciary liability coverage” section providing $10 million coverage to the national church and its various ministries, plus a duty to defend the church in the event of a lawsuit involving claims covered under the policy. The policy also contained an “executive liability and indemnification coverage” section providing up to $10 million coverage on behalf of the national church, its regional offices, and its foundation for acts and omissions of certain officers and directors, but did not include a duty to defend against such claims. The insurer denied coverage and refused to defend the church in the litigation. The national church retained its own attorneys, and eventually reached an out-of-court settlement with the estate. It then sued its insurer for reimbursement of its legal fees and the cost of the settlement on the ground that the insurer’s denial of coverage constituted a breach of contract.
A trial court ruled in favor of the insurer since the alleged wrongs committed by the national church (1) were not “wrongful acts” under the fiduciary liability policy, and (2) were excluded from coverage under the executive liability coverage policy. The national church appealed on the ground that the policy language was ambiguous and should therefore be construed in favor of coverage.
Fiduciary Liability Coverage
This policy covered several specified “wrongful acts” all associated with the administration of employee benefit plans. While the definition of a “wrongful act” did include “any matter claimed against [the church] solely because of [its] service as a fiduciary,” the court concluded that this language was not ambiguous, and was clearly limited to acts of the national church in its capacity as a fiduciary of an employee benefit plan. Since the church was not being sued in this capacity, there was no insurance coverage under this policy. It concluded, “The rest of the fiduciary liability [policy] is devoid of reference to any breach of fiduciary duty other than with respect to employee benefit plans, and most of the defined terms relate to employee benefit plans.”
Executive Liability Coverage
The court noted that the executive liability coverage provision contained a definition of “wrongful act” that was much broader than that used in the fiduciary liability section. The insurer insisted, however, that there was a broad exclusion to this coverage for any wrongful act “arising from the insured’s conduct of business as an investment company, investment advisor, trust company, commercial bank, insurance company, insurance agent, securities broker, securities dealer, mutual fund manager, financial planner or estate planner.” The insurer argued that the only reasonable interpretation of this exclusion would be to define the term “as” to mean “like,” so that coverage is not available if the national church conducted business “like” an investment company, trust company, financial planner, etc. The insurer noted that the lawsuit accused the church of wrongfully pressuring Louise into establishing trusts and annuities for the benefit of the church, offering financial and estate-planning advice that it was not qualified to give, and then mismanaging the assets she transferred to the church’s control. Each of these allegations, the insurer asserted, fit within the policy’s exclusion.
The national church claimed that the term “as” should be construed to mean “in the capacity” of. And, since the church was not licensed in the capacities of an investment company, trust company, insurance company, or similar enterprise, the exclusion should not apply. The court agreed with the national church’s interpretation. It concluded, “It is undisputed that [the national church] never operated as any of the enumerated business forms in the exclusion, nor did it purport to be licensed to do so. Construing the exclusionary language narrowly, as we are required to do, we find reasonable [the church’s] interpretation that, whatever activities they are accused of engaging in, they never conducted business as any of the kinds of businesses listed in the exclusion. Because [it has] offered a reasonable interpretation of the exclusionary language, the presumption in favor of coverage applies and [the church is] entitled to coverage under the executive liability section of the policy.”
Application. This case illustrates two important points:
1. Financial planning. Many denominational agencies, and local churches, engage in financial or estate planning for their members. This case demonstrates that such activities may result in litigation by disgruntled members (or their heirs or executors) on the basis of a number of theories of liability. Three of these theories were asserted by the executor in this case: (1) Louise was unduly pressured into establishing trusts and annuities for the benefit of the church; (2) the church offered financial and estate-planning advice that it was not qualified to give; and (3) the church mismanaged the assets that Louise transferred to the church’s control. This is a good checklist of risks to minimize or avoid by any denominational agency or church that provides financial or estate planning to its members.
2. The settlement. The court did not exonerate the national church and foundation. In fact, it never addressed the merits of the executor’s claims. Instead, it ruled that the national church’s insurer was obligated to pay for the church’s legal fees and the cost of the settlement. This illustrates that the resolution of claims, no matter how frivolous, can be costly. Denominational agencies and churches that engage in financial or estate planning for members should bear this in mind when selecting insurance coverage.
3. Insurance coverage. The court noted that an insurance policy generally is construed against the insurer that drafted it. Despite this presumption, the national church was not able to persuade the court that its fiduciary liability policy covered the executor’s claims. However, it was able to demonstrate that the exclusion in the executive liability policy did not apply to its allegedly wrongful activities, and therefore the insurer should have paid for the legal defense and settlement of the case. Denominational agencies and local churches that provide financial or estate planning to members should carefully review their insurance coverage to see if it extends to the kinds of claims made by the executor in this case. If no coverage exists, then the agency or church is facing a potentially large uninsured risk. Texas District v. Federal Insurance Company, 2000 WL 632648 (Tex. App. 2000).
© Copyright 2001 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: m80 m50 c0501