Policyholder Perspective : Insurance Lawyer & Attorney : Reed Smith Law Firm : Policyholder Perspective Law Blog : Indemnity, Mergers & Acquisitions

Until recently, the law in New York and elsewhere appeared settled that sexual assault could never be an “accident.” The courts’ reasoning was that allegations of sexual assault involve intentional acts which cannot be deemed an “accident” for purposes of triggering occurrence-based coverage. Under this line of cases, injuries caused by an assault were not caused by a covered, triggering “occurrence.” See e.g., Green Chimneys School for Little Folk v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 244 A.D.2d 386, 664 N.Y.S.2d 320 (1^st Dep’t 1997); Public Mutual Ins. Co. v. Camp Raleigh, Inc. 233 A.D.2d 273, 650 N.Y.S.2d 136 (1^st Dept. 1996) (“the inclusion in the underlying complaint of causes of action sounding in negligent hiring and supervision does not alter the fact that “the operative acts giving rise to any recover are the intentional sexual assaults’.”); but see Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 399, 425 N.E.2d 810, 442 N.Y.S.2d 422, (N.Y., 1981) (holding that “[w]hether [coverage for underlying sexual abuse] is permissible depends upon whether the insured, in committing his criminal act, intended to cause injury”).

In recent years, however, the New York Court of Appeals has called into question the holding in those cases. See RJC Realty Holding Corp. v. Republic Franklin Ins. Co., 2 N.Y.3d 158, 777 N.Y.S.2d 4 (2004) (“RJC”). In RJC, the insurer of a health spa was denied coverage for an action in which a customer of the spa alleged a sexual assault by a masseur. The policyholder in RJC sought insurance coverage for claims by the customer against the spa including, among others, negligent hiring, supervision and retention of the masseuse.

Considering the issue of “whether a liability insurer is obligated to defend and indemnify its insured     . in an action brought against the insured based on an alleged sexual assault by the insured’s employee,” the court reversed the Second Department’s denial of coverage. The Court of Appeals reasoned that because, pursuant to its decision in Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932, 693 N.Y.S.2d 67 (1999), the masseur’s alleged intentional assault could not be attributed to the spa on the basis of respondeat superior, the assault was an “accident”

from the spa’s standpoint.

The parties here agreed that the policy would cover only an “accident” and would not apply to certain acts “expected or intended” by RJC. When they did so, they could reasonably have anticipated that the rules of respondeat superior would govern the question of when a corporate entity is deemed to expect or intend its employee’s actions. Since the masseur’s actions here were not RJC’s actions for purposes of the respondeat superior doctrine, they were “unexpected, unusual or intended” by RJC. Accordingly, they were an “accident” within the coverage of the policy, and were not excluded by the “expected or intended” clause.

RJC, 2 N.Y.3d at 164-65.

Since the Court’s ruling in RJC, a number of New York courts have adopted the Court of Appeal’s reasoning as to coverage for claims arising from underlying acts of sexual abuse. See e.g., ACE Fire Underwriter’s Ins. Co. v. Orange Ulster Bd. Of Cooperative Educational Services, 8 A.D.3d 593, 779 N.Y.S.2d 545 (2d Dept. 2004); NYAT Operating Corp. v. Gan National Ins. Co., 8 Misc.3d 975, 977-79, 900 N.Y.S.2d 272 (N.Y. Sup. Ct. 2005) (“where an employee departs from his or her duties for solely personal motives unrelated to the furtherance of the business, the doctrine of respondeat superior does not apply.”); NWL Holdings, Inc. v. Discover Property & Cas. Ins. Co., 480 F.Supp.2d 655 (E.D.N.Y. March 20, 2007); see also Sweet Home Central School District v. Aetna Commercial Ins. Co., 263 A.D.2d 949, 951-52, 695 N.Y.S.2d 445 (4^th Dept. 1999) (dissent) (arguing that “where the gravaman of the complaint against Sweet Home is negligence . . . “ the “expected or intended” exclusion for bodily injury damages does not apply “[b]ecause no evidence was presented that Sweet Home expected or intended the acts upon which the underlying complaint is based [sexual abuse]”).

These decisions are consistent with decisions by New York courts which have found the term “accident” in liability policies to be ambiguous. Citing multiple New York cases, the First Department in Tortoso v. MetLife Auto & Home Ins. Co., 21 A.D.3d 276, 799 N.Y.S.2d 506, (1^st Dept. 2005) explained that when analyzing coverage for “accidents,” a greater degree of importance must be placed upon the expected or intended nature of the offense as opposed to blanket offense-specific exclusions.

The policy requires that Metropolitan provide a defense where there has been an occurrence, i.e., an accident that results in bodily injury. Exactly what constitutes an accident is not defined in the policy. However, an accident may be considered “an event which is unanticipated and the product of thoughtlessness rather than willfulness.” McGroarty v. Great Am. Ins. Co., 36 N.Y.2d 358, 363, 368 N.Y.S.2d 485, 329 N.E.2d 172 (N.Y. 1975). Indeed, “No all-inclusive definition of ‘accident’ is possible, nor any formulation of a test applicable in every case, for the word has been employed in a number of senses and given varying meanings depending upon the relevant context.” Matter of Croshier v. Levitt, 5 N.Y.2d 259, 262, 184 N.Y.S.2d 321, 157 N.E.2d 486 (N.Y. 1959).

An intentional act may, but need not necessarily, result in intended consequences. “Clearly more than a casual connection between the intentional act and the resultant harm is required to prove that the harm was intended.” Allstate Ins. Co. v. Mugavero, 79 N.Y.2d 153, 160, 581 N.Y.S.2d 142, 589 N.E.2d 365 (N.Y. 1992).

Tortoso, 21 A.D.3d at 278-279, 799 N.Y.S.2d at 509 (1^st Dept. 2005).

Thus, it is possible that coverage may exist for sexual abuse and other intentional torts even when a policy’s definition of “occurrence” requires an “accident.” Don’t take no for an answer, push back.

… But wait: Didn't he know that when he took the job? We'd assumed he was like the David Blaine of CEOs; you know, that he liked putting himself into impossible situations and getting out against all odds, but apparently, Benmosche was on a media blackout for 2008-2009 and had no idea what he was getting into. What did the board tell him, we wonder? That he was being hired to run an insurance company? 

 

Clusterstock goes with outrage:

Robert Benmosche should not be given the opportunity to step down as the chief executive of AIG. He should be fired immediately.

The scope and scale of the arrogance of Benmosche is almost stunning. Except that we've become so accustomed to financial big shots acting like they were divinely anointed that we hardly notice.

If this kind of PR ploy actually works with Ken Feinberg, well …; more likely, it will just continue to backfire. In any event, the parlor game of predicting Benmosche’s successor has begun.

Feinberg’s letter to AIG can be found HERE.

UPDATE: In response to the uproar (e.g. "AIG's Benmosche is a drama queen") created by the WSJ story, Benmosche has sent a letter to AIG employess saying he's "totally committed" to the job.

had engaged in securities fraud in connection with SFC’s securitization of student loans. The firm terminated its representation of SFC one month later and in June SFC was forced into involuntary bankruptcy. Pepper Hamilton’s professional liability (or E&O) insurance came up for renewal the following October. In connection with its renewal process, the firm’s general counsel asked all its attorneys whether any were aware of any fact or circumstance, act, error, omission or personal injury that might be expected to be the basis for a professional liability claim. In early August, the partner who was aware of the SFC fraud advised the firm accordingly, but the application submitted by the firm in September did not disclose any information concerning SFC. In April 2004, a new bankruptcy trustee proposed that Pepper Hamilton enter into a tolling agreement with respect to potential claims against the firm by the estate and its creditors. At that point, the firm gave notice to its insurance companies. Lawsuits were filed against the firm in early 2005 and the firm’s primary insurer, Westport, defended the claims.

The Pepper Hamilton ruling on rescission is instructive. CNA had submitted an affidavit from its underwriter stating that he would have treated the application differently had the information been disclosed. The court concluded that CNA failed as a matter of law to meet its high burden, which requires proof by “clear and convincing evidence,” for rescission:

[E]ven if the law firm defendants' omission of the SFC incident is a known false statement, [CNA] failed to establish as a matter of law that the false statement was material to the reinsurance [sic] determination and that the false statement was made in bad faith. Here, the self-serving affidavit of [CNA's] underwriter -- that Pepper Hamilton's renewal application would have been treated differently had it disclosed the underlying circumstances which led to the denial of coverage -- is insufficient to meet the insurer's heightened burden of proof.

On the “prior knowledge” exclusions, the court reversed the pro-policyholder ruling of the intermediate appellate court. Rather than the First Department’s requirement that the insurer had to prove knowledge of "wrongful conduct on the part of the insured" (Executive Risk Indem. Inc. v Pepper Hamilton LLP, 56 AD3d 196, 204 [1st Dept]), the New York high court held that the prior knowledge exclusion

excludes coverage of "any act, error, omission, circumstance ... occurring prior to the effective date of the [policy] if any [insured] at the effective date knew or could have reasonably foreseen that such act, error, omission, circumstance … might be the basis of a [claim]."

On the basis of this stricter standard, the court granted summary judgment to the two excess insurance companies with policies containing this exclusion.

Under UK law, an insurance company can wind up its operations under either an Insolvent Scheme of Arrangement or a Solvent Scheme of Arrangement. An Insolvent Scheme has US equivalents in our state-run insurance liquidation processes. However, Solvent Schemes are unique to the UK. They allow an otherwise solvent insurance company, including companies that sold occurrence policies for which the company has largely unquantifiable continuing obligations to its policyholders, to wind up operations by forcing policyholders to accept policy commutations. 

Solvent Schemes are governed by Section 899 of the Companies Act 2006 (although they have been around longer). The act requires 75% of the value of each class of creditors to approve the Scheme. The attacks on the British Aviation Insurance Scheme led to the current requirement that creditors with IBNR (Incurred But Not Reported) claims be treated separately from those with existing claims, with separate meetings and votes. 

The valuation of IBNR claims by Scheme administrators have led to numerous attacks. Those valuations are critical to the voting, since they determine the weight of each creditor’s vote. Objectors usually are US policyholders with IBNR long-tail claims under occurrence policies, usually environmental, product liability and toxic tort claims. That was the case in Scottish Lion as well. Whatever the merits of “actuarial science” in the context of liability coverage may be, it is certain that the projected value of the IBNR claims will be wrong, whether too high or too low. These valuations also determine the amount paid in the eventual commutation, once the Scheme is sanctioned.

The objections to Solvent Schemes can be summarized as follows:

• Policyholders paid substantial premiums for occurrence-trigger policies, which are valuable and now irreplaceable assets
• No amount of money paid in commutation will allow a policyholder to replace this coverage.
• Unless the policyholder is in need of short-term cash, there is no benefit to these commutations for policyholders; all of the benefit goes to the insurance company and its owners and managers.
• Nothing prevents a policyholder which wants a commutation from seeking one; there is no reason to force unwilling policyholders to do so. 

In the end, the court agreed, following the reasoning of the court which refused to approve the British Aviation scheme in 2006:

"If individual policyholders wish to compound the company's contingent liabilities to them, and to accept payment in full of an estimate of their claims, there is nothing to stop them doing so. But to compel dissentients to do so would ... require them to do that which it is unreasonable to require them to do."

That unreasonableness seems to me to stem from the fact that where the company is solvent it is unnecessary for the body of creditors or class of creditors to as a whole that there should be any scheme, still less a scheme forced upon unwilling participants. I respectfully agree with that reasoning.

The Court of Session is Scotland’s supreme civil court. The case may eventually end up before the new Supreme Court of the United Kingdom which opened on October first. 

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UPDATE [November 3, 2009]: PricewaterhouseCoopers, Scheme Advisors to Scottish Lion and many other effective and proposed solvent schemes has announced their intent to appeal Lord Glennie's decision.