In a landmark decision, New York State’s highest court, the Court of Appeals, recently addressed for the first time a host of issues that are familiar to insurance coverage disputes – allocation, number of occurrences/retentions, and waiver – in the context of underlying claims of sexual abuse. See Roman Catholic Diocese of Brooklyn, et al. v. National Union Fire Ins. Co. of Pittsburgh, PA, et al., 21 N.Y.3d 139, 2013 WL 1875302 (May 7, 2013). The decision will almost certainly have an impact on future disputes between policyholders and insurers arising under New York law, and may influence how courts in other jurisdictions determine these issues with regard to sexual abuse claims and other “conduct-based” claims.
The Relevant Insurance Policies
National Union Fire Insurance Company of Pittsburgh, PA, Illinois National Insurance Company and Westchester Fire Insurance Company provided primary and umbrella Commercial General Liability (“CGL”) insurance policies to the Roman Catholic Diocese of Brooklyn and certain individual insureds (collectively, the “Diocese”) from August 31, 1995 to August 31, 2002. The National Union CGL policies were effective for three annual policy periods, from August 31, 1995 to August 31, 1998. Illinois National then issued three annual consecutive CGL policies to the Diocese, effective August 31, 1998 to August 31, 2001. Each of the six CGL policies had a limit of liability of $750,000, each occurrence, in excess of a self-insured retention (“SIR”) of $250,000 per occurrence.
During the years in which the CGL policies were in effect, the Diocese also obtained annual umbrella coverage from Westchester, which provided insurance excess of the $750,000 limit afforded by those policies. The Diocese did not purchase primary insurance coverage from National Union or Illinois National for the August 31, 2001-August 31, 2002 policy period, but instead opted for a $1 million SIR, and secured umbrella coverage from Westchester above that amount.
Each of the six National Union and Illinois National CGL policies provided coverage to the Diocese for, among other things, “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’…to which this insurance applies.” Notably, the CGL policies only covered “bodily injury” that was caused by an “occurrence” and took place during a particular policy period. “Occurrence” was defined in the CGL policies as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”1
The Underlying Levi Action
In 2003, a lawsuit was brought on behalf of Alexandra Levi, then a minor, in the Supreme Court of New York, Queens County, against the Diocese and Reverend James Smith, alleging that Ms. Levi was sexually abused by Rev. Smith at different times and locations from on or about August 10, 1996 through May 2002 (the “Levi Action”). The abuse purportedly occurred at different times and at multiple locations throughout this period.
In addition to the allegations made against Rev. Smith, the following claims were asserted against the Diocese: (a) gross negligence in failing to act affirmatively to prevent, detect, report or investigate the alleged abusive actions of Rev. Smith; (b) failure to properly investigate Rev. Smith prior to hiring him; (c) negligent supervision of Rev. Smith; (d) failure to provide a safe and secure environment; (e) negligent retention of Rev. Smith; and (f) failure to properly train employees related to the prevention of sexual abuse. Ultimately, in 2008, the Diocese settled the Levi Action for $2 million and “additional consideration.”
The Diocese’s Declaratory Judgment Action and the Trial Court’s Ruling
Prior to the Diocese’s settlement, it had sought coverage for the Levi Action under each of the six CGL policies issued by National Union and Illinois National. Both insurers denied coverage based upon certain exclusions in the CGL policies, and also asserted that the $750,000 limit provided by those policies applied excess of the policies’ $250,000 SIR. They also expressly noted that the CGL policies only provided coverage for “bodily injury” that occurred during the applicable policy periods.
In 2009, after the Levi Action was settled, the Diocese brought a lawsuit in the Supreme Court of New York, Kings County, seeking a declaration that National Union and Westchester were required to indemnify the Diocese for certain defense expenses related to the Levi Action, its $2 million settlement payment and “additional consideration.” The lawsuit sought coverage under only the National Union CGL policies and Westchester umbrella policies in effect during the 1995-1996 and 1996-1997 policy periods, even though the Diocese alleged that the underlying acts of sexual abuse took place over seven different policy periods (8/31/95-8/31/02), and had initially sought coverage under each of the policies issued by National Union, Illinois National and Westchester for those seven periods. Further, the Diocese’s lawsuit sought to recover the $750,000 limit of liability afforded by both the 1995-1996 and 1996-1997 CGL policies, but asserted that it was only required to satisfy a single $250,000 SIR.
National Union answered the Diocese’s Complaint and asserted certain affirmative defenses, including that the Diocese was required to exhaust a separate per occurrence SIR for each policy from which coverage was sought (the Fourth Affirmative Defense), and that National Union’s indemnity obligations were limited by the availability of other insurance for which the Diocese might be entitled to coverage (the Sixth Affirmative Defense).
Before any discovery was exchanged, National Union moved for partial summary judgment. Specifically, National Union sought an order declaring that the sexual abuse alleged by the Levi plaintiff constituted a separate occurrence in each of the seven policy periods that the Diocese contended had been triggered (i.e., multiple occurrences), and that the Diocese must satisfy a $250,000 SIR under each policy from which it sought coverage before National Union had any duty to indemnify for that policy. National Union also sought a ruling that required the Diocese to allocate its $2 million settlement payment in the Levi Action (and any “additional consideration”) on a pro rata basis across each of the seven allegedly triggered policy periods.2
The Diocese opposed National Union’s motion for partial summary judgment, arguing that the acts of sexual abuse at issue in the Levi Action constituted a single occurrence under the CGL policies, thus allowing the Diocese to exhaust only one $250,000 SIR but recover the two $750,000 policy limits sought by its lawsuit. The Diocese further argued that it could allocate the entire $2 million settlement amount (and any “additional consideration”) over just two policy periods (1995-1996 and 1996-1997), even though it had alleged in the Complaint that seven different policy periods were triggered by the “bodily injury” sustained by Ms. Levi (and had initially sought coverage under each). Last, the Diocese cross-moved for partial summary judgment seeking a ruling that National Union had waived its Fourth and Sixth Affirmative Defenses under New York Insurance Law § 3420(d) (discussed in detail below). National Union opposed the Diocese’s cross-motion on the grounds that no waiver had occurred or could occur under New York law.
The trial court agreed with National Union that the underlying acts of sexual abuse constituted a separate occurrence in each of the triggered policy periods. The court also agreed that the Diocese was required to exhaust a $250,000 SIR for each triggered policy from which it had sought coverage, to the extent coverage was ultimately found to exist for the Levi Action. However, the court granted the Diocese’s cross-motion, finding that under Insurance Law § 3420(d), National Union had waived its rights to assert that the Diocese was required to exhaust more than one $250,000 SIR, and to assert a defense based upon the policies’ “Other Insurance” clause. Further, the trial court ruled that the Diocese was permitted to allocate its entire $2 million settlement payment (and any “additional consideration”) into only the two policy periods for which the Diocese’s Complaint sought coverage (1995-1996 and 1996-1997), even though the Diocese had alleged that seven policy periods were triggered by the Levi Action and initially sought coverage under the polices in effect during each period.
The Appellate Division’s Reversal
National Union appealed certain portions of the trial court’s decision to the New York Appellate Division, Second Department. Although the Diocese did not directly appeal the multiple occurrences/SIRs ruling, it sought reversal of that ruling as an additional basis on which to affirm the court’s decision. In a Decision and Order dated September 20, 2011, the Appellate Division found unanimously in National Union’s favor on all of the issues before it, reversing the trial court’s order insofar as it was appealed from.
First, the Second Department held that employing the pro rata allocation methodology previously adopted by the New York Court of Appeals in Consolidated Edison Co. of New York, Inc. v. Allstate Insurance Co., 774 N.E.2d 687 (2002) (“Con Ed”) was consistent with the allegations of “bodily injury” made in the Levi Action, as well as with the clear and unambiguous language of the CGL policies. Moreover, the Second Department noted that the allocation method advocated by the Diocese – the so-called “joint and several” method – conflicted with both New York law and the CGL policies’ requirement that any “bodily injury” take place during the applicable policy period in order to be covered (but not before or after that period)3. Thus, because Ms. Levi allegedly sustained “bodily injury” in seven different policy periods (effective from 1995-2002), the Second Department held that the Diocese’s settlement payment and any “additional consideration” must be allocated pro rata across all of those periods.
Next, the Second Department found that the acts of sexual abuse alleged in the Levi Action constituted multiple occurrences under New York’s “unfortunate event” test, because the abuse took place over many years, at different times and at various locations. Accordingly, the court found that the Diocese was required to exhaust a separate $250,000 SIR for each CGL policy implicated by the Levi Action. The Second Department also rejected the Diocese’s argument that the policies’ definition of “occurrence” should be construed as permitting the Diocese to aggregate the multiple acts of sexual abuse as a single occurrence.
Last, with respect to the Diocese’s waiver argument, the Second Department ruled that the timeliness requirement for disclaiming coverage under New York Insurance Law § 3420(d) did not apply to National Union’s SIR-based defense, relying upon both the plain language of that statute and two decisions from the Appellate Division, First Department that addressed this issue. The court further found that National Union did not waive its right to assert an affirmative defense related to the CGL policies’ “Other Insurance” clause, or its argument that the Diocese’s settlement payment for the Levi Action (and any “additional consideration”) be allocated on a pro rata basis across all seven policy periods that were allegedly triggered.
The Court of Appeals’ Affirmance
In a plurality opinion, a majority of the Court of Appeals affirmed the Second Department’s ruling, with one justice concurring in the result but disagreeing with the Court’s ruling on the number of occurrences/SIRs,4 and another justice concurring with the waiver and pro rata allocation aspects of the opinion but departing from the majority and concurring opinions on the number of occurrences/SIRs.
As a threshold matter, the Court found that National Union had not waived its right under Insurance Law § 3420(d) to assert that the incidents of abuse alleged in the Levi Action constituted multiple occurrences, that the Diocese was required to exhaust a separate $250,000 SIR, per occurrence, for each CGL policy from which it sought coverage and that the Diocese’s settlement payment (and any additional consideration) be allocated across each of the seven policy periods allegedly triggered by the Levi Action. Diocese, 2013 WL 1875302, at **5-6. The Court noted that while Section 3420(d) precludes an insurer from denying coverage where the bases for its disclaimer are not timely asserted, the statute does not apply to defenses that simply limit the insurer’s ultimate liability. Id. Because National Union’s multiple occurrences/SIRs and pro rata allocation arguments did not operate to bar coverage under the CGL policies, the Court held that those defenses did not invoke the timeliness requirement of Section 3420(d), and thus were not waived.
Next, the Court held that the acts of abuse alleged in the Levi Action constituted multiple occurrences under the CGL policies. Id. at **6-9. The Court rejected the Diocese’s argument that the language of the CGL policies permitted the Diocese to aggregate the various incidents of sexual abuse as a single occurrence. Id. Although an “occurrence” under the policies was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” the Court found that this provision did not apply to conduct-based offenses, such as repeated acts of sexual abuse. Id. at **8-9 (“The Diocese’s argument that the parties intended to treat numerous, discrete sexual assaults as an accident constituting a single occurrence involving ‘conditions’ is simply untenable.”).
Having found that the CGL policies did not contain an aggregation provision that applied to the acts of sexual abuse alleged in the Levi Action, the Court determined the number of occurrences under the “unfortunate event” test, which requires that courts consider whether “there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.” Id. at **7-8. The Court held that the incidents of sexual abuse alleged in the Levi Action lacked the requisite temporal and spatial nexus to constitute a single occurrence. Moreover, as “each incident involved a distinct act of sexual abuse perpetrated over an extended period of time,” the Court found that such acts were not part of the same uninterrupted causal continuum. Id. Thus, the Court ruled that the alleged acts of sexual abuse constituted multiple occurrences under the CGL policies.
The Court also rejected the Diocese’s argument that it could recover the $750,000 limit afforded by each of the 1995-1996 and 1996-1997 CGL policies, but only be required to exhaust one $250,000 per occurrence SIR. Id. at **10-11. To that end, the Court noted that “for each policy from which coverage is sought, the SIR is inextricably linked to an occurrence which results in bodily injury during the policy period.” Id. at *10. Accordingly, the Court held that the Diocese must satisfy a separate $250,000 SIR for each occurrence, even if that meant that the Diocese was required to pay multiple SIRs in a given policy period. Id. at *11. (“To permit the Diocese to exhaust a single SIR and then receive coverage from up to seven different policies would conflict with the plain language of the policies, and produce an outcome not intended by the parties. We reject this attempt by this insured to escape the consequences of its bargained for insurance policy provisions.”).
Last, relying on its decision in Con Ed, the Court reiterated that a pro rata allocation method was appropriate under the language of the CGL policies and the allegations of sexual abuse at issue in the Levi Action, because the policies only provided coverage for “bodily injury” that occurred during a particular policy period, but not before or after that period. Id. at **11-12. Since the Levi plaintiff alleged that “bodily injury” occurred during each of the seven policy periods at issue, and the Diocese could not prove that such injury took place in any one particular policy period to the exclusion of others, a pro rata method of allocation was required under New York law.
The Potential Impact of the Court of Appeals Decision
The Court of Appeals decision in Diocese v. National Union could have a significant impact on future insurance coverage disputes, whether arising under New York law or that of another state.
This decision represents the first time that New York’s highest court has addressed whether an insurer can waive its right under Insurance Law § 3420 to assert an argument based upon the number of occurrences/SIRs, or that a particular allocation method should be employed. Because these issues often arise in coverage disputes involving many different lines of business, this prong of the Court’s decision has implications beyond the CGL context. Indeed, had the Court of Appeals adopted the waiver argument made by the Diocese, carriers would have faced enormous pressure to assert their positions regarding the number of occurrences/SIRs or allocation issues (or other defenses that do not operate to bar coverage under a policy) in their initial coverage positions communicated to insureds, or risk waiving such defenses. As it is often not clear at the outset of a carrier’s analysis of a claim whether these defenses are even applicable, a ruling that an insurer can waive such defenses if not asserted when initially providing its coverage position could create a windfall for insureds, which might be able to avoid the bargained-for terms, conditions, obligations and restrictions of their policies.
The Diocese decision is also the first time that the Court of Appeals has addressed the number of occurrences/SIRs and allocation issues in the context of a claim involving conduct-based offenses, such as sexual abuse. Accordingly, the Court’s holding will have significant ramifications in coverage matters arising under New York law that involve similar types of claims. Further, because the body of case law nationwide concerning these issues is far less developed than New York’s in the context of sexual abuse claims (or other conduct-based offenses), courts in other jurisdictions may look to the Diocese ruling for guidance.
Perhaps most significant for other jurisdictions is the Court of Appeals’ finding that the “continuous or repeated exposure” language in the CGL policies’ definition of “occurrence” did not provide the Diocese with the ability to aggregate multiple acts of sexual abuse as a single occurrence, but was rather intended to apply to claims arising from the exposure to asbestos fibers or lead-based paint. Id. at **8-9. Many states have case law holding (unlike New York’s) that claims involving multiple injuries or acts nonetheless constitute a single occurrence under CGL policy wording if the injuries/acts can be traced back to a single cause. In reaching that conclusion, these courts sometimes rely upon the same definition of “occurrence” contained in the CGL policies at issue in Diocese, which includes “continuous or repeated exposure to the same general harmful conditions.” Id. at *8. Thus, the Court of Appeals ruling on the number-of-occurrences issue may influence how that issue is determined in jurisdictions where the “sole cause” test is employed.
Finally, in holding that the acts of sexual abuse at issue in the Levi Action constituted multiple occurrences, the majority opinion did not specify how many occurrences there were in a given policy period, or how many $250,000 SIRs the Diocese was required to exhaust. Accordingly, in future cases involving insurance coverage for multiple injurious acts alleged to have taken place over several policy periods, courts may find, based on the Diocese decision, the existence of many occurrences in a given policy year, and require the insured to exhaust a separate retention for each occurrence.