Decisions Expand Scope of Business Owners’ Policy Exclusion

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In the age where cling wrap doesn’t cling and “shrinkflation” is a necessary portmanteau, it’s rare to get more.  This is especially true for insurers, whose policies are construed against them when ambiguous, and particularly when such ambiguity excludes coverage.  But in recent months, two courts have opted to give insurers more, holding that Abuse or Molestation Exclusions include not just negligent employment and supervision allegations, but also claims for negligent training.

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In Mid-Century Ins. Co. v. Mid-Am. Mental Health LLC, 2024 WL 2272744 (N.D. Ind. May 17, 2024), Mid-Century sought a declaration that it had no duty to defend or indemnify Mid-America under its business owners’ insurance policy.  The policy contained an “Abuse or Molestation Exclusion” which stated:

This insurance does not apply to “bodily injury”, “property damage”, “advertising injury”, or personal injury arising out of: 

(a) the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or 

(b) the negligent: 

            (i) Employment;

            (ii) Investigation;

            (iii) Supervision;

            (iv) Reporting to the proper authorities, or failure to so report; or

            (v) Retention; 

of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by (a) above.

After a Mid-American employee was sued for sexual assault by one of the company’s patients in state court, Mid-Century sought a declaration in federal court that it owed neither the company nor the employee a defense or indemnity. 

The federal court found for Mid-Century. First, pursuant to part (a) of the exclusion, the court held that Mid-Century did not owe the employee a defense or indemnity.

Second, the court agreed with Mid-Century that it had no duty to defend or indemnify Mid-American under part (b) of the exclusion, arguing that the exclusion barred negligent training claims.  The plaintiff in the underlying case alleged that Mid-American was negligent because it owed a duty “to properly hire, train and supervise its employees” and it “failed to properly train [the subject employee], including training on the phenomenon of transference in the context of psychotherapy and addiction treatment.”  And the plaintiff alleged that Mid-America “failed to supervise and train [the subject employee] in his position of trust and authority as a healthcare provider”

But Mid-American responded that the exclusion did not apply to exclude claims for negligent training.  The court was not persuaded.  It held that “it is neither here nor there that the words ‘negligent training’ are not specifically mentioned in the exclusion,” explaining that the Indiana Supreme Court has referred to the tort of negligent hiring, training, and supervision, as a single tort.  Thus, “exclusions for injuries that arose from an employer’s negligent ‘employment’ or ‘supervision’ of a person also encompass training.”

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Just months after Mid-Century, the California Court of Appeals for the Second District faced a similar set of facts—and its ruling was congruous.  In Gordon v. Continental Casualty Co., 107 Cal. App. 5th 89 (2d Dist. 2024), the owner and operator of a massage spa purchased a commercial insurance policy from Continental.  The policy contained an exclusion for abuse or molestation identical to that at issue in Mid-Century.  Again, the exclusion was implicated when a spa employee was accused of sexually assaulting three customers.  Relying on the exclusion, Continental declined to provide the owner and its employee with a defense.

In a lawsuit later filed directly against Continental, the insurer moved for summary judgment on the basis of parts (a) and (b) of the Abuse or Molestation Exclusion, and the trial court granted it.

On appeal, the plaintiffs contended that the trial court erred in granting summary judgment for Continental because their underlying complaint alleged the negligent training of the employee, an action not listed in part (a) or (b) of the exclusion.  Specifically, the underlying complaint alleged that the spa owner had a duty “to ensure its [agents, employees, independent contractors] were “fit to perform their jobs and that they were properly trained in the laws setting forth their ethical obligations not to sexually assault patrons.”  Continental argued that the plaintiff’s claim for “negligent hiring, training and supervision” fell within the exclusion despite its wording.

As in Mid-Century, the court agreed with the insurer.  It held that “[a]lthough negligent training is not listed in subsection (b), it is encompassed within negligent employment and supervision, which are expressly excluded.”  The court found it unreasonable that the plaintiffs would have it not apply the exclusion simply because the underlying complaint “uses a different verb to describe a type of negligent supervision, i.e., that the employer or supervisor failed to train the employee.”  Consequently, the court affirmed the trial court’s granting of summary judgment to Continental.

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So, what is the immediate implication of these rulings?  The Mid-Century and Gordon decisions are providing insurers with more when it comes to the increasingly common Abuse or Molestation Exclusion.  Insurers, insureds, and attorneys alike should be on the lookout for additional jurisdictions interpreting this issue.