Minnesota Bankruptcy Court Applies Injury-in-Fact Trigger to Obligate Multiple Policies to Provide Coverage for Sexual Molestation Claims

In Diocese of Duluth v. Liberty Mutual Group, et al., case no. 16-05012 (Mar. 30, 2017), the Bankruptcy Court for the District Court for Minnesota was faced with determining trigger and the number of “occurrences” related to negligence claims asserted against the Diocese of Duluth by victims of priest sexual abuse. These negligence claims drove the Diocese to file for bankruptcy, and as part of that Bankruptcy proceeding, the Diocese filed an adversary proceeding seeking coverage from five of its insurers. These insurers had issued policies covering several decades. The Court ruled in favor of the Diocese, finding that multiple years of coverage could be triggered and that multiple “occurrences” could be found in each policy year as each victim was a separate “occurrence.”

The Diocese successfully argued that each alleged act of abuse constituted a separate “occurrence” under all insurer’s policies, while conceding that the “occurrence” language in the policies (“arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence”) consolidated multiple instances of abuse of the same victim by the same priest in the same year into one “occurrence” for that year.

Most of the insurers argued for the interpretation that there was only one “occurrence” – the ongoing act of negligent supervision by the Diocese in allowing the continuous and repeated exposure of the victims to the abusive priests – regardless of the number of victims or perpetrators involved. The Continental Insurance Company also argued for one occurrence, or at most, one occurrence per priest or per bishop abuser because all the injuries arose from the Diocese’s decision to allow the abusers access to the children.

The policies provided coverage for damages for personal injury caused by an “occurrence” and included similar definitions of “occurrence.” The Court noted that “the word ‘occurrence’ in occurrence based insurance policies ‘is one of the least understood and most misunderstood word in today’s insurance language[.]”

The Court’s decision focused on Minnesota’s use of the actual injury or injury-in-fact trigger rule, which provides that an “occurrence” take place at the time the complaining party as actually injured, not when the wrongful act was committed. Minnesota courts have also held that “an injury can occur even though the injury is not ‘diagnosable,’ ‘compensable’ or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period.”

Considering these precedents, the Court noted that the underlying facts of the cases were not in dispute – numerous victims were abused by several different priests. As the sexual abuse was what caused the victims damage, “under the actual-injury rule, the occurrence is the time when the victims were sexually abused by the priests. “ The Court further determined that the number of occurrences could be both per victim and per priest – “There are separate occurrences for each separate sexual abuse for each victim and each priest. The victims each suffered separate abuse and it is this occurrence that triggers an insurance policy that is at risk at that time.” The Court also clarified if a victim was injured by two priests during one policy period, that would be two occurrences, although if injured repeatedly by the same priest during one policy period, that would be one occurrence.

It’s not evident from the decision what impact the Court’s decision had on each insurer’s coverage obligations, but certainly determining that multiple policies might be triggered and that there might be multiple occurrences in each year broadened the obligation significantly from what the insurers were arguing for.

A Pennsylvania court also recently faced this issue in connection with the Sandusky scandal at Penn State University, but came to the opposite conclusion while discussing many of the same concerns. Pennsylvania utilizes the “manifestation” trigger outside of the asbestos context, and while this trigger led to a similar conclusion as to when the bodily injury first occurred, the court did not permit Penn State to trigger multiple policy periods for subsequent acts of abuse against the same victim. In Pa. State Univ. v. Pa. Manufacturers’ Ass’n Ins. Co., 2016 Phila. Ct. Com. Pl. LEXIS 158 (Pa. Ct. Com. Pl. May 4, 2016), the court noted that:

Unlike environmental pollution or asbestos damage, which can remain hidden for many years before it manifests, the physical violation (bodily injury) arising from child sexual abuse is experienced immediately by the victim, although the harm often continues to be felt long thereafter. To the extent that PSU’s negligence enabled Sandusky to abuse his victims, such bodily injury manifested when the first abuse of each victim occurred.

The court also followed prior Pennsylvania Superior Court authority which held that each victim constitutes only one occurrence, no matter how many separate instances of sexual abuse took place. General Accident Ins. Co. v. Allen, 708 A.2d 828, 834-835 (Pa. Super. 1998) (one occurrence for each child where three children were sexually abused from 1986 to 1988). Pennsylvania does not appear to have addressed a situation with multiple abusers.

Unfortunately this will likely continue to be an area to watch as courts around the country continue to grapple with trigger and number of occurrences in these sexual abuse cases.

Insurers Not Bound By Four Corners of Complaint When Determining Duty to Defend Under Illinois Law

In Landmark American Insurance Company v. Peter Hilger, the Seventh Circuit, applying Illinois law, recently clarified that an insurer may introduce extrinsic evidence in a declaratory judgment action regarding the insurer’s duty to defend. 2016 U.S. App. LEXIS 17343 (7th Cir. Sept. 22, 2016). Hilger was sued in two separate lawsuits alleging that he and others had mislead credit unions to fund loans by overstating the life-insurance policies that served as collateral. Hilger tendered his defense to Landmark under a professional liability policy held by a co-defendant. Hilger alleged that he qualified as an insured under the policy as, although he was not named in the policy, the policy provided coverage for “independent contractors” of the named insured provided the liability was related to professional services rendered for the named insured.

Landmark denied coverage for Hilger’s claim and filed a declaratory judgment action. The District Court granted Hilger’s motion for judgment on the pleadings reasoning that the underlying complaints left the relationship between Hilger and Landmark’s insured ambiguous, and that ambiguity had to be resolved in Hilger’s favor.

The Seventh Circuit reversed, stating that Landmark was entitled to conduct discovery into the relationship between Hilger and Landmark’s insured, and to use information obtained to demonstrate that Landmark owed no duty to defend. The Court noted that the District Court was correct that a duty-to-defend analysis was confined to the allegations of the underlying complaint where the insurer denies coverage without seeking a declaratory judgment or defending under a reservation of rights. In contrast, where the insurer has filed a declaratory judgment (or if an insurer was proceeding under a reservations of rights), the insurer may present evidence beyond that in the underlying complaint, as long as that evidence does not determine an ultimate issue in the underlying proceeding. In this instance, the Court found that because Landmark had sought a declaratory judgment, it could offer evidence outside the complaints showing that Hilger did not render the professional services as an independent contractor for Landmark’s insured, so long as that evidence would not decide an ‘ultimate issue’ in the underlying action — and the Court found no indication that it would. Thus the Court reversed and remanded, holding Illinois law “permits Landmark to offer evidence outside the. . .complaints that Hilger isn’t covered as an independent contractor under [the Landmark] policy.”

New Jersey Supreme Court Latest to Weigh In on Insurance Coverage for Faulty Workmanship

Perhaps unsurprisingly to those who enjoy following the trajectory of CGL coverage for faulty workmanship around the country, New Jersey recently joined those states which recognize faulty workmanship as an “occurrence” – at least in certain circumstances.

In Cypress Point, the New Jersey Supreme Court faced the question of “whether rain water damage caused by a subcontractor’s faulty workmanship constitutes ‘property damage’ and an ‘occurrence’” under a property developer’s CGL policy. Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et.al, (A-13/14-15) (076348) (N.J. Aug. 4, 2016).  In Cypress Point, condo owners complained of roof leaks and water intrusion at window jambs and sills, as well as water damage to the common areas and interior structures of the buildings in the new condominium development. The condo association sued the developers, alleging faulty workmanship and consequential damages including damage to steel supports, exterior and interior sheathing, and sheetrock and insulation in both condo units and common areas. The developers’ insurer denied coverage and ultimately two of the developers’ insurers were brought into the case to determine whether the policies should provide defense and indemnity to the developers.

The Court distinguished prior cases on this issue, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979) and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006), primarily by focusing on the fact that both dealt with the 1973 ISO form, not the 1986 ISO form at issue in this case. The Court particularly focused on the fact that, in the 1986 ISO form, there is an exception to the “Your Work” exclusion which allows coverage for faulty workmanship where it is performed by a subcontractor.

After observing that courts across the country were trending toward faulty workmanship as an “occurrence” (although not discussing neighboring Pennsylvania’s fairly recent decisions), the Court turned to the definitions of “property damage” and “occurrence” in the policies at issue. The Court determined that (1) the consequential damages fell within the policies’ definition of “property damage” and (2) that ‘accident’ encompasses unintended and unexpected harms caused by negligently performed work, and thus the consequential water damage was an “occurrence.” Having determined the loss fell within the coverage grant of the policies, the Court then considered the “Your Work” exclusion and its subcontractor exception and determined that, as the work was clearly performed by a subcontractor, this was still a covered loss.

Importantly, while this case addresses a common situation of the property developer’s CGL coverage, it is not necessarily universally applicable to all contexts in which a faulty workmanship claim may arise. It remains to be seen whether New Jersey courts will apply this holding broadly or more narrowly, i.e. whether faulty workmanship be an “occurrence” in the absence of consequential damage, or where no subcontractor was involved.