Connecticut Court Holds Sexual Molestation Limitation Applicable

In its recent decision in Metropolitan Prop. & Cas. Ins. Co. v. Briggs, 2013 U.S. Dist. LEXIS 74885 (D. Conn. May 29, 2013), the United States District Court for the District of Connecticut had occasion to consider a homeowner’s insurer had a duty to defend its insured in connection with an underlying suit alleging sexual molestation.

The insured was alleged to have sexually assaulted a minor, while in the insured’s home, on repeated occasions during a two-year period.  The lawsuit alleged numerous physical and emotional injuries resulting from these incidents.  The insured sought a defense in connection with the suit from his homeowner’s insurer, Metropolitan Property & Casualty.  The Metropolitan policy provided coverage for bodily injury resulting from an occurrence.  The policy’s definition of bodily injury, however, expressly carved-out the following categories of harm:

a.   any of the following which are transmitted by you to any other person: disease, bacteria, parasite, virus or other organism; or

b.   the exposure to any such disease, bacteria, parasite, virus or other organism by you to any other person; or

c.   the actual, alleged or threatened sexual molestation of a person.

Metropolitan denied coverage to its insured on the basis that sexual molestation was an excluded category of bodily harm.  The insured, on the other hand, argued that the definition of bodily injury only excluded coverage for the “act” of sexual molestation, but did not exclude coverage for the harm resulting from molestation.   Specifically, the insured argued that “bodily injuries sustained as a result of sexual molestation should be covered by the policy,” at least for duty to defend purposes.

The court found the insured’s reading of the policy unreasonable, concluding that the insured’s strained interpretation of the policy definition of bodily injury would render moot all of the carved-out categories of harms.  As the court explained:

In addition to sexual molestation, the exclusionary provision excludes from the definition of bodily injury: disease, bacteria, parasite, virus or other organism. If we extend defendant's reasoning to these other excluded categories, insureds would be covered for bodily injury as a result of disease, bacteria, parasite, virus or other organism, despite that disease, bacteria, parasite, virus or other organism themselves, like sexual molestation, are clearly and explicitly excluded from coverage. This would render the exclusionary provision virtually meaningless.

Thus, finding that the only reasonable interpretation of the policy is that bodily injury resulting from sexual molestation is not an insured category of loss, the court granted summary judgment in favor of Metropolitan.

Alabama Supreme Court Addresses Coverage for Faulty Workmanship Claim

In its recent decision in Shane Traylor Cabinetmaker, L.L.C. v. American Resources Ins. Co., Inc., 2013 Ala. LEXIS 42 (Ala. May 3, 2013), the Supreme Court of Alabama had occasion to consider whether a general liability policy was triggered by an underlying claim arising out of alleged faulty workmanship.

The insured, Shane Traylor Cabinetmaker, L.L.C. (“STC”) was hired to perform cabinetry and woodworking on several homes.  STC later sued the developer/owner of the homes for amounts due under the contract and the suit included a claim for foreclosure on a lien.  The lawsuit also involved issues of whether the developer was a partner in STC.  The developed counterclaimed on several theories, including breach of contract, slander of title, and mental-anguish arising out of the slander of title.  Among other things, the counterclaim alleged that STC’s work was defective and had to be repaired or replaced.  The counterclaim, however, contained no allegation of specific damage resulting from the defective work.  STC’s general liability insurer, American Resources, denied coverage for the counterclaim on several grounds, including lack of bodily injury or property damage resulting from an occurrence.

Looking to its prior decisions concerning insurance coverage for faulty workmanship, in particular its decisions in Town & Country Property, LLC v. Amerisure Insurance Co., 2011 Ala. LEXIS 183, (Ala. 2011), United States Fidelity & Guarantee Co. v. Warwick Development Co., 446 So. 2d 1021 (Ala. 1984), and Moss v. Champion Insurance Co., 442 So. 2d 26 (Ala. 1983), the Alabama Supreme Court observed the general rule that faulty workmanship, in and of itself, is not an occurrence as that term is defined by a standard general liability policy.  The court observed that faulty workmanship can lead to an occurrence if it “subjects personal property or other parts of the structure” to some form of damage.  Applying this standard to the underlying counterclaim, the court agreed that there was no occurrence, because the counterclaimant alleged only defective work, but no physical damage or loss of use of property resulting from the defective work. 

In reaching its holding, the court considered STC’s argument that loss of use could be reasonably inferred from the counterclaim.  Specifically, STC argued that since the kitchen cabinets it installed had to be repaired, this aspect of the kitchens were rendered unusable to the claimant while the remedial work was underway.  The court rejected this argument, explaining:

Barbee's counterclaim alleged that STC and Traylor's defective work "requir[ed] Robert L. Barbee to repair and/or replace the work performed by Traylor and STC." It did not allege damage to other property resulting from that work. …  we decline to infer loss of use or other injuries based on speculation as to damage that was not alleged in the counterclaim or the amended counterclaim.

The court also considered STC’s argument that the counterclaim for mental anguish arising out of slander of title constituted a claim for bodily injury.  Without ruling on whether a mental anguish claim constitutes bodily injury in the first instance, the court concluded that the claim for mental anguish did not arise out of an occurrence because the mental anguish did not arise out of the alleged faulty workmanship.  Rather, the alleged anguish arose out of the business dispute between STC and the counterclaimant, and the intentional placement of a lien on the property which gave rise to the alleged slander of title.  Such acts, concluded the court, did not qualify as an occurrence.

Eleventh Circuit Holds Mental Anguish Claim Not Bodily Injury

In its recent decision in N.H. Ins. Co. v. Hill, 2013 U.S. App. LEXIS 7204 (11^th Cir. Apr. 10, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider whether an emotional distress claim arising out of an alleged breach of contract qualified as a claim for bodily injury.

New Hampshire insured Leisure Tyme, a seller of RVs, under a garage operations liability policy.  Leisure Tyme entered into a series of deals with customers whereby the customers traded in their used RVs toward the purchase price of new RVs.  Leisure Tyme agreed to pay the customers’ loan balances on the traded in RVs as part of this promotion.  Leisure Tyme, however, filed for bankruptcy before these loans could be fully paid.  The bankruptcy court lifted the bankruptcy stay to allow the customers to sue Leisure Tyme to the extent of available proceeds.  New Hampshire provided Leisure Tyme with a defense, but brought a declaratory judgment action regarding its coverage obligations.

The New Hampshire policy insured Leisure Tyme for bodily injury or property damage caused by an accident and resulting from garage operations.  New Hampshire argued that plaintiffs’ claims for financial harm occasioned by Leisure Tyme’s failure to honor its loan repayment commitments did not qualify as bodily injury, notwithstanding any financial harm or emotional distress claimed by the plaintiffs.  The court agreed, finding that under Florida law, plaintiffs’ “complained of injuries, pecuniary loss and damage to credit worthiness do not constitute physical injuries to their persons.”  The court further stated that under Florida law, the “impact rule” precluded coverage “for mental anguish-and any physical manifestations of mental anguish” that were caused by Leisure Tyme’s breach of contract.

In addition to its holding with respect to the absence of bodily injury, the court agreed that plaintiffs’ claims did not come within the policy’s coverage for property damage; specifically as loss of use of property.  The court concluded that even if plaintiffs lost use of their traded-in RVs, those RVs were nevertheless in the care, custody or control of Leisure Tyme, and thus excluded under the policy’s coverage.  The policy also contained a breach of contract exclusion that the court held applicable to any property damage claim.

Ninth Circuit Holds No Duty to Defend Anxiety Claim

In its recent decision in Conley v. First Nat'l Ins. Co. of America, 2012 U.S. App. LEXIS 20281 (9^th Cir. Sept. 27, 2012), the United States Court of Appeals for the Ninth Circuit had occasion to consider whether under Montana law, a lawsuit alleging “anxiety” qualified as “bodily injury” for the purpose of triggering a duty to defend under a general liability policy.

The underlying matter giving rise to plaintiffs’ claim involved accounting and tax services provided by Silvertip Accounting, which was insured under a primary general liability policy issued by First National Insurance Company of America.  Plaintiffs, Dale and Karen Conley, alleged that as a result of bad advice from Silvertip, they suffered severe tax penalties and disruption of their gifting and estate plan.  The Conleys filed suit against Silvertip in Montana state court, alleging breach of fiduciary duty, fraud, negligence, false advertising and deceptive trade practices. First National denied coverage to Silvertip on the grounds that the Conleys’ lawsuit did not allege an “occurrence” or “bodily injury.” The Conleys subsequently entered into a consent judgment with Silvertip in the amount of $3.6 million as well as an assignment of rights under the First National policy.  The Conleys later filed a declaratory judgment against First National in Montana federal court.

In a June 2011 decision, the United States District Court for the District of Montana, on competing motions for summary judgment, held that the underlying suit did, in fact, allege an “occurrence.”  It further held, however, that the complaint filed by the Conleys in their state court action against Silvertip did not allege any specific physical injuries qualifying as “bodily injury,” but instead merely alleged anxiety resulting from their financial loss.  The Conleys nevertheless relied to a letter their attorney had written to First National immediately after First National denied coverage to Silvertip, which stated that the Conleys’ financial loss had “taken a serious toll on their health” and that their financial loss also had an “emotional cost.”   The lower court acknowledged that under Montana law, facts extrinsic to a complaint can give rise to a coverage obligation.   Notwithstanding, the court concluded that the Conleys’ letter failed to “make even a generalized reference to physical injury” that could be considered “bodily injury.”  Further, the court concluded that:

An injury to a person’s “health” can take many forms, and will not necessarily include physical harm.  It is not the Defendants’ responsibility to affirmatively disprove a bodily injury where none has been alleged.  An insurer is not required to seek out information that could give rise to a duty to defend.

On appeal, the Ninth Circuit began its decision by observing that in Allstate Ins. Co. v. Wagner-Ellsworth, 188 P.3d 1042 (Mont. 2008), Montana’s Supreme Court articulated the rule that for the purpose of a general liability policy, “bodily injury” includes “mental or psychological injury that is accompanied by physical manifestations.”  This necessarily includes “conditions that are susceptible to medical diagnosis and treatment in a manner which distinguishes them from mental injuries.”  In other words, under Montana law, mental injuries unaccompanied by a physical manifestation do not constitute “bodily injury.”

The Conleys argued that for the purpose of a duty to defend, anxiety, unlike a claim of emotional distress or mental anguish, is typically understood to include physical manifestations.  The Conleys further argued that their letter to the insurers explicitly stated that their “dread of tax liability” had taken a serious toll on their health.  Notwithstanding, the Ninth Circuit held that this allegation, in and of itself, did not trigger a defense obligation:

Even if anxiety "typically includes such things as headaches, sleeplessness, muscle tension, [and] nausea," an insurer need not assume physical manifestations rising to the level of "bodily injury" whenever "anxiety" is alleged.

Rather, continued the court, there must be an actual allegation of a physical manifestation supported by “sufficient documented evidence” for coverage to be triggered.  In this regard, the Ninth Circuit agreed with the lower court that the Conleys’ letter to First National failed to make even a generalized reference to physical injury that could constitute “bodily injury.”

The Ninth Circuit also rejected the Conleys’ argument that their pre-suit letter at the very least triggered a duty for First National to investigate whether the Conleys had actually suffered “bodily injury.”  In addition to agreeing with the lower courts statement of Montana law that insurers do not have an affirmative obligation to disprove bodily injury where none has been alleged, the court concluded that First National did, in fact, sufficiently investigate by reviewing the complaint and accompanying materials and by requesting additional information pertinent to its investigation.