Insurers are increasingly being called upon to defend and indemnify their insureds for actions arising out of assaults, sexual abuse, harassment, and the like. When these allegations are asserted solely against the insured's employees and no conduct (intentional or negligent) is asserted against the insured employer, the question arises as to whether the intentional acts exclusion can be invoked to disclaim coverage to the insured. In such cases, the insured employer's liability is sought to be imposed on a vicarious liability respondeat superior basis.
Given the breadth of the duty to defend, the insured — often joined by plaintiff's counsel seeking a "deep pocket" — will usually concede that the employee, the active wrong-doer, may not be entitled to coverage. Instead, the insured will argue that it is entitled to a defense and indemnification because the assault was not intended from its standpoint. These insureds also argue that allegations of vicarious liability are not grounded in intentional conduct, and therefore the exclusion should not be applicable. Insurers, at least those in New York, should resist the temptation to "compromise" and provide a defense subject to a reservation of rights. Such a "compromise" requires the insurer to inform the insured of its right to select its own (potentially high-priced) counsel, or risk a finding of "bad faith" according to at least one New York Appellate Division decision about which we have previously written. More importantly, insurers that decline to provide a defense when the only allegation in the complaint alleges intentional conduct by the insured's employees may be on solid ground, depending on the specific allegations.
In RJC Realty Holding Corp. v. Republic Franklin Insurance Company, 2 N.Y.3d 158 (2004), the New York Court of Appeals considered if an insurer was obligated to defend its insured, a beauty salon in an action against the salon based on an alleged sexual assault by its employee. Reversing the Appellate Division, the Court of Appeals essentially answered that it depends on whether the actions of the employee could be imputed to the employer. Invoking the traditional rules applicable to determining whether an employee's actions could be imputed to the employer under the doctrine of respondeat superior, the Court held that if the action of the employee could not be imputed to the employer, then the intentional element of the cause of action also could not be imputed to the employer for coverage purposes.
However, as in the case relied upon to support that holding, in such a scenario the employer could not be liable and was entitled to summary judgment. Refer to Judith M. v. Sister of Charity Hospital, 93 N.Y.2d 932 (1999) ("Assuming plaintiff's allegation of sexual abuse are true, it is clear that the employee here departed from his duties…[and] the courts below properly dismissed plaintiff's respondeat superior cause of action"). In such cases, insurers must ensue that defense counsel vigorously acts to have such claims dismissed.
In the alternative scenario, where the insured employee's conduct is imputed to the employer — for example, for conduct reasonably expected by the insured — according to the reasoning of RJC Realty, the intentional element of the conduct should also be imputed to the employer rendering an intentional acts exclusion applicable. No cases have however expressly so held.
Both of these scenarios must be distinguished from claims alleging direct claims against the employer, such as those for negligent supervision, negligent hiring, negligent retention, or other negligent conduct by the employer. In such cases, neither the intentional acts exclusion nor the definition of an "occurrence" as an accident will provide any comfort to the insurer. In these scenarios, only an assault and battery exclusion will provide an insurer with a rock-solid basis to avoid coverage.
The moral of the story here is that an intentional acts exclusion will not always provide an insurer with the coverage protection it desires. In situations where the only claim against the insured employer is vicarious liability based on an employees intentional (often egregious) conduct, the insurer seeking to rely on an intentional acts exclusion will be placed in the uncomfortable position of arguing that the employee's conduct must be imputed to the insured employer. Not only is this contrary to its insured's interest, but should the argument not prevail the insurer has potentially provided plaintiff with evidence or arguments that buttress its claim against the employer. An insurer seeking to avoid this awkward scenario and thus avoid potential defense and indemnity obligations for the intentional acts of an insured's employee should give serious consideration to including an assault and battery exclusion in its policy in addition to — and not in place of — the intentional acts exclusion.
Abbie Havkins is a partner at Havkins, Rosenfeld, Ritzert and Varriale, where he advises insurance companies, claims administrators, and brokers on issues involving excess insurance, extra-contractual liability, policy language, conflict of laws, notice requirements, co-insurance, rescission, misrepresentation and the interplay of other insurance clauses. He may be reached at (646) 747-5100 or abbie.havkins@hrrvlaw.com.
Matthew Kraus is an associate at Havkins, Rosenfeld, Ritzert and Varriale, where he focuses his practice on insurance coverage analysis and litigation, appellate work, and commercial litigation. He may be reached at (646) 747-5127 or matthew.kraus@hrrvlaw.com.
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