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Liability Coverage For Innocent Co-Insureds Under Intentional Acts Exclusionary Provisions Continues To Be Litigated - Insurance Coverage

Insurance Coverage

Posted on: Feb 26, 2020

By Gregory M. Gotwald, Plews Shadley Racher & Braun LLP

Back in May of 2019, the IndyBar Insurance Coverage Section teamed up with the Appellate Practice Section to provide a CLE titled, “Coverage for Innocent Co-Insureds? You Be the Judge.” This CLE addressed the use of “any insured” language in insurance policies’ intentional acts exclusionary language. Specifically, it covered arguments whether such language (e.g., there is no coverage for the intentional acts of any insured) precludes coverage for an innocent co-insured that did not commit the intentional act(s). 

In 2018, the Indiana Supreme accepted a certified question from the Northern District of Indiana on this issue. In making the request to the Indiana Supreme Court, the District Court noted a potential conflict between the Indiana Supreme Court’s holdings in  Holiday Hospitality Franchising, Inc. v. AMCO Insurance Co., 983 N.E.2d 574 (Ind. 2013) and Frankenmuth Mut. Ins. Co. v. Williams, 690 N.E.2d 675 (Ind. 1995) on this issue.  However, the case settled before the Indiana Supreme Court issued a decision.

This question continues to be a “hot” issue. Recently, the issue arose in the USA Gymnastics (USAG) bankruptcy. In re USA Gymnastics, No. 18-9108-RLM-11, Adv. Pr. No 19-50012. There, one of USAG’s insurers argued that the intentional acts of Larry Nassar (a potential insured under the policy) precluded coverage for USAG (which had not acted intentionally). USA Gymnastics v. Ace Am. Ins. Co. (In re USA Gymnastics), Nos. 18-9108-RLM-11, 19-50012, 2019 Bankr. LEXIS 3972 at *23¬¬–27 (Bankr. S.D. Ind. Oct. 24, 2019). 

USAG’s  policy language stated: 

This Policy does not apply to any Claim made against any Insured: based upon, arising from, or in any way related to: (a) any Insureds gaining in fact any personal profit, remuneration or advantage to which they were not legally entitled; or (b) any deliberately dishonest, malicious or fraudulent act or omission or any willful violation of law by any Insured; provided, however, this exclusion shall only apply if it is finally adjudicated that such conduct in fact occurred. *11 (emphasis in original).

The Bankruptcy Court analyzed this language, comparing and contrasting it to the language in Frankenmuth and Holiday Hospitality. Id. at *23–27. The Bankruptcy Court found no “conflict” between the Indiana Supreme Court’s two holdings. Instead, it noted that the Indiana Supreme Court does not implicitly overrule cases and found key differences between the language used in each case. Id. at *25–26. In Frankenmuth, “[t]he policy excluded coverage for injuries ‘caused intentionally by or at the direction of any insured.’” Id. at *23. Holiday Hospitality’s exclusionary language, however, was much more explicit: 

The policy explicitly excluded coverage for “the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured,” for the negligent hiring or retention “of a person for whom any insured is or ever was legally responsible” and who commits the abuse. 

Id. at *24–25 (emphasis in original).

The Bankruptcy Court found the language in USAG’s policy more like the language in Frankenmuth than in Holiday Hospitality. “The Holiday Hospitality exclusion puts the purchaser of the policy on notice that there was no coverage for negligence for any insured related to abuse by anyone.” Id. at *25. Like the Frankenmuth policies, USAG’s policy was not so clear. The Bankruptcy Court, therefore, construed the language against the insurer. Id. at *25–27.

The insurer objected to the Bankruptcy Court’s order. However, Judge Young, accepted the Bankruptcy Court’s order in full. USA Gymnastics v. Ace Am. Ins. Co. (In re USA Gymnastics), No. 18-09108-RLM-11, 2020 U.S. Dist. LEXIS 5660 (S.D. Ind. Jan. 13, 2020). 

The insurer is now seeking to further appeal this decision to the Seventh Circuit Court of Appeals. Regardless of the ultimate result of this case, there is little doubt this issue will continue to be litigated. 

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