Expected or Intended Injury Exclusion and Multiple Insureds

This matter came before the United States District Court in Illinois on a motion for summary judgment by the insurer. The dispute involved the duty to defend and alleged intentional conduct on the part of one of the insureds. This case is State Auto Property and Casualty Insurance Company v. Kincaid, 2011 WL 344086 (C.D.Ill.).

 

Kincaid was charged and convicted of sexual abuse of a minor. Kincaid was a business partner with Collins in a hair salon. The business was insured by State Auto with the named insured as “Steve Collins and Paul Kincaid dba The Hair Clinic”. The victim of the abuse sued Kincaid, Collins, and the Hair Clinic. The allegations against Collins was that he was negligent because he failed to protect the victim from Kincaid and the allegations against The Hair Clinic was that it was liable for negligently hiring, retaining, and supervising Kincaid. The lawsuit was turned over to the insurer and coverage was denied.

 

The insurer denied coverage based on the expected or intended injury exclusion in the public liability policy. Kincaid, as the abuser, was not entitled to coverage due to his intentional conduct. Collins and The Hair Clinic were not entitled to coverage because Collins allegedly knew of Kincaid's pederastic behavior and thus expected Kincaid's actions, and The Hair Clinic was not a distinct entity from Collins. Moreover, the insurer contended that since the policy did not contemplate that sexual abuse would occur on the business premises, it had no duty to defend the clinic. The insurer also argued that if it succeeds in proving it had no duty to defend all of the claims against Collins, it was entitled to reimbursement of all the costs expended litigating the duty to defend the issue of coverage.

 

The U.S. District Court, employing Illinois law, said that it must look to the allegations against the insureds to determine whether the insurer owed a duty to defend in this instance. Illinois law clearly asserted that if one or more causes of action alleged against the insured are potentially within the policy's coverage, then the insurer must honor its duty to defend. With reference to Kincaid, the court said that as a general rule, insurers have no duty to defend insureds who sexually abuse minors because the resulting harm is expected and therefore not accidental, not an occurrence. As for Collins, the court stated that, while one insured's intent cannot be imputed to another insured for the purpose of assessing an insurer's coverage duties, a policy's express language coupled with a complaint's explicit allegations have been used to show that a non-abuser insured can be denied coverage when a victim's claims demonstrated that the non-abuser insured expected or intended harm. However, the claims against Collins did not accuse him of actively encouraging or facilitating Kincaid's physical conduct with the minor. Moreover, the insurer could not show that Collins expected or intended the minor's injuries. Therefore, the insurer did owe Collins a duty to defend under the terms of the liability policy.

 

The court then addressed the duty to defend The Hair Clinic. The insurer contended that an insurer had no duty to defend a business in a civil action when liability arises from criminal acts perpetrated by one of the partners on the business premises; the court noted that State Auto failed to cite any authority to support its argument. Additionally, the court said that the insurer's contention about the insureds is at odds with the policy. The policy provided coverage for “Steve Collins and Paul Kincaid dba The Hair Clinic”. While State Auto says Collins and The Hair Clinic are one and the same, the insurer failed to appreciate the effect of that oneness. Since The Hair Clinic and Collins are one, a lawsuit against The Hair Clinic is a lawsuit against Collins; coverage is therefore required for both entities under the policy since Collins is entitled to coverage.

 

The court ruled that State Auto had a duty to defend Collins and The Hair Clinic. And, because the insurer owed a duty to defend, it was not entitled to seek reimbursement from Collins or The Hair Clinic for any defense costs. The motion for summary judgment by the insurer was denied.

 

Editor's Note: The duty of the insurer to defend the insured can be a contentious issue, especially when, as in this case, there are multiple named insureds and one of the named insureds most certainly caused intentional injury. The U.S. District Court correctly found that each named insured has to be treated as separate insureds, and that, at least under the terms of the general liability policy, the expected or intended injury exclusion is to be applied only to “the” insured that expects or intends the injury.