By David A. O’Neill

A recent decision by the Indiana Court of Appeals may have a profound effect on the ability of schools, churches and general contractors to rely on general liability insurance policies insuring them and their employees against sexual abuse or battery claims.

While insuring agreements in general liability insurance policies exclude coverage where the insured’s actions leading to bodily injury or property damage are “expected or intended by the insured,” the Separation of Insureds provision in these policies can allow for coverage for one of the insureds even where the other insured’s acts may not be covered.  The Indiana Court of Appeal issued its opinion in Holiday Hospitality Franchising, Inc. v. Amco Insurance Company on October 13, 20011, finding that Holiday Hospitality’s hiring or supervision of an employee who molested a business invitee constituted an occurrence under its general liability insurance policy even where the employee’s action was intentional.

When a fifteen-year-old hotel guest was molested by a hotel employee and the guest filed suit, the hotel defended against its insurer’s declarative judgment action, seeking a finding of coverage under its comprehensive general liability insurance policy.  The insurer filed a motion for summary judgment.  
The trial court granted the insurers motion and Holiday Hospitality appealed this judgment.

Holiday Hospitality raised two issues for the Court of Appeals to decide: (1) whether an “occurrence” took place for the purposes of the insured’s insurance policy, and (2) whether a hotel guest is in the “care, custody and control” of the hotel.

The Amco policy included an Insuring Agreement that stated in part:

            b. This insurance applies to “bodily injury” and “property damage” only if:

1)     The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the coverage territory.

The Amco policy also included an exclusion for abuse and molestation which read as follows:

      Exclusions

            f. Abuse or Molestation

            “Bodily injury” or “property damage” arising out of:

(1)  The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or
(2)   The negligent:
         (a)  Employment;
         (b) Investigation;
         (c)  Supervision;
         (d) Reporting to the proper authorities, or failure
                to so report; or
         (e)  Retention;
                of a person for whom any insured is or ever was legally responsible 
                and whose conduct would be excluded by Paragraph (1) above.”

Further, the policy had the following Separation of Insureds language:

            IV.   Liability Conditions
                    The following conditions apply in addition to the COMMON POLICY
                    CONDITIONS:
                    *********   

5.  Separation of Insureds

                            Except with respect to the Limits of Insurance, and any rights or
                            Duties specifically assigned in this policy to the first Named  
                            Insured, this insurance applies:
                            a. As if each Named Insured were the only Named Insured;
                            and
                            b. Separately to each insured against whom claim is made or “suit” is brought.

The Court of Appeals determined that the policy’s Separation of Insureds provision allows for a finding of an “occurrence” even where the action of one of the insureds under the policy is not accidental. The Court relied on its 1995 decision in Wayne Twp. Bd. Of Sch. Commr’s v. Indiana Ins. Co., 650 NE 2d 1205, 1209 (Ind. Ct. App., 1995).  In Wayne Township, an elementary school principal sexually molested a minor in his office.  The minor brought suit against both the principal and the Commissioners, alleging negligence. The court concluded that due to the Separation of Insureds provision in the insurance policy, the actions of the Commissioners may have been accidental even if the principal’s actions were intentional, thereby leaving the Commissioners’ insurance coverage potentially applicable. 

In the Holiday case as in the Wayne Twp case, the insurer presented no evidence other than the intentional nature of the molester’s actions to refute the argument that an occurrence had given rise to the minor’s injuries. 

The Court of Appeal was further informed by the Northern District of Indiana’s 2010 ruling in American Family Mutual Ins. Co. v. Bower, 752 F. Supp. 2d 957 (N.D. Ind. 2010).  In Bower, the claims included that of negligent supervision against parents whose son was accused of molesting a minor.  The Bowers’ home owner’s insurance policy covered damages for any claim arising out of an “occurrence.” The term “occurrence” was defined in the policy as an “accident.”  Whereas the insurer argued that no occurrence had taken place because the sexual molestation had not been accidental, the Bower court ruled that because the term “accident” was not further defined in the policy, ambiguity existed concerning the meaning of the term “accident.” Resolving ambiguity against the insurer, as Indiana law requires, the Bower court concluded that the term “accident” in the policy was susceptible to differing reasonable interpretations, one of which was that the alleged negligent supervision by the Bowers constituted an “occurrence” for purposes of the insurance policy.

As in Bower, the court ruled that Holiday Hospitality’s role in the instant case had constituted an occurrence.  However, for coverage to apply, the Court of Appeal still had to deal with the issue of whether or not the “Abuse or Molestation” exclusion barred coverage. The court determined that being a business invitee at the hotel was arguably not the same thing as being in “the care, custody or control” of the hotel, since the hotel employees did not supervise its guests, only housed them.

The Court remanded the case to the trial court with the finding that there had been an occurrence under the insurance policy and with the question of whether the molested minor had been in the “care, custody or control” of the hotel.  Resolution of that issue will determine whether the Abuse or Molestation exclusion applies to bar coverage or whether coverage applies to defend and indemnify the hospital against the molestation claims of the minor.