Fourth Circuit Rules That Separation of Insureds Clause Does Not Prevent Intent From Being Imputed to Insured Principal

The Fourth Circuit Court of Appeals recently held that an insurer had no duty to defend the insured university in a suit by a mother alleging that the university and its employees participated in kidnapping her daughter. The court ruled that the policy’s “Separation of Insureds” clause did not prevent the intent of the university’s agents from being imputed to the university. Liberty University Inc. v. Citizens Ins. Co. of America et al., No. 14-2254, 2015 U.S. App. LEXIS 11888 (4th Cir. Va. July 10, 2015).

In a unique, complex and rather disturbing set of facts, the underlying plaintiff sued Liberty University and numerous individuals involved in the alleged kidnapping of the her daughter. The University, certain employees and various affiliated entities allegedly conspired with the plaintiff’s former domestic partner to violate court-ordered custody and visitation orders to prevent the plaintiff from having contact with the couple’s young daughter. In her suit against the university and its employees, the plaintiff alleged that the university “was directly liable for conspiring to ‘commit the intentional tort of kidnapping’” and violating RICO by “conspiring ‘through [a] pattern of racketeering’ to kidnap the child.’” Id. at 4. The plaintiff also alleged that the university was vicariously liable for its agents’ racketeering, participation in kidnapping and conspiring to violate the plaintiff’s parent-child relationship. Id. at 5. Specifically, the plaintiff contended that the university’s law school dean and professor assisted the partner in violating court orders and solicited donations to help her abscond to Nicaragua with the child. Id. at 5. A law school employee also allegedly had her father drive the partner and child to the Canadian border in disguise, using university phone lines. Id. at 6.

After the insurer refused to defend the underlying lawsuit, the university sought declaratory judgment. The United States District Court for the Western District of Virginia found for the university on summary judgment. Id. at 11. The liability policy at issue covered occurrences and suits alleging personal and advertising injury. It had exclusions for expected or intended injuries, criminal acts and knowing violations of others’ rights. Id. at 7-10. Critically, the policy also contained a separation of insureds clause, which bound the insurer “to evaluate the claims against each named insured individually…so that excluded conduct by one insured does not preclude claims brought by other insureds.” Id. at 10-11.

The district court ruled that the separation of insureds clause “forbade the court from imputing to [the university] the intent of its agents.” Id. at 13. The court determined that under the clause, it was required to separate the intent of the university from those of its individual agents. Id. at 12. Here, the district court focused on the fact that the underlying complaint did not allege that the university “individually expected or intended the alleged kidnapping.” Id. at 13. The district court also held that the complaint did not “sufficiently allege” the university’s vicarious liability, providing “only conclusory allegations that tie [the university] to the actions of its alleged agents and employees.” Id. at 14.

The Fourth Circuit Court of Appeals disagreed and reversed, based largely on its different reading of the separation of insureds clause. The clause did not “displace Virginia’s rule that an agent’s intentionally tortious act cannot be ‘unexpected’ by the principal who is vicariously liable for the act.” Id. at 19-20. There was “ample reason” to anticipate that Virginia would impute the intent of the university’s agents to the university. Id. at 20. Also, one such agent who acted with intent (the law school employee) was a named defendant. Id. Because she was either an employee or volunteer worker under the policy, she “would qualify as a named insured” such that the university was not “the only insured requesting a defense under the policy.” Id. at 20. Further, the complaint explicitly alleged that the university was “directly liable for harm arising from its intentional participation in conspiracies and vicariously liable for the intentional acts of its agents.” Id. at 24. In other words, the complaint did not allege the university’s liability for its agents’ intentional acts on a negligence theory. Id. at 22-24. The court thereby found that the separation of insureds clause “unambiguously would not displace the ordinary rule …that a complaint alleging a principal’s liability solely in respondeat superior for the acts of its agent does not state an ‘occurrence.’” Id. at 24. In addition, the court found the clause unambiguous and that even if it were ambiguous, the court could not “entertain an absurd result” and enlarge coverage. Id. Lastly, the court determined that the complaint “clearly” demonstrated the university’s respondeat superior liability beyond “conclusory allegations,” since it alleged facts and circumstances demonstrating the law school employee’s role in kidnapping and racketeering. Id. at 27.

Liberty prompts us to scrutinize separation of insureds clauses, both in drafting and litigation. Drafters must think ahead to how policyholders may try to appropriate these provisions to establish or extend coverage in the absence of valid claims. In litigation, insurers may benefit from proactively establishing that the clause does not serve as a shield to insured principals.