In Roman Catholic Diocese of Brooklyn v. National Union Fire Insurance Company of Pittsburgh, Pa., 2013 NY Slip Op 03264 (May 7, 2013), the New York Court of Appeals, New York’s highest court, held that a priest’s multiple incidents of sexual abuse against one victim over a span of six years constituted multiple occurrences.  The Court of Appeals also held that the underlying settlement amount should be allocated on a pro rata basis over the seven policy periods, requiring satisfaction of the SIR attendant to each implicated policy.

The coverage dispute arose from a settlement between the Roman Catholic Diocese of Brooklyn (“Diocese”) and a minor plaintiff in an underlying civil action charging sexual molestation by a priest. The complaint alleged that the priest sexually abused the minor on several occasions spanning six years, and that the molestation took place in several locations. The Diocese settled the action for $2 million and then demanded reimbursement from National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), which had issued three consecutive one-year commercial general liability policies to the Diocese. Non-party Illinois National Insurance Company provided primary coverage for the next three years, and Westchester Fire Insurance Company, which settled with the Diocese, provided excess umbrella coverage for all seven years.

National Union disclaimed coverage for the underlying lawsuit based on two sexual abuse exclusionary provisions; the merit of National Union’s coverage defenses is still being litigated in Supreme Court and was irrelevant to the instant appeal. The Diocese subsequently instituted a declaratory judgment action against National Union, seeking a declaration that National Union was required to indemnify the Diocese for the $2 million settlement. National Union moved for partial summary judgment, seeking an order that the incidents of sexual abuse in the underlying action constituted a separate occurrence in each of the seven implicated policy periods, and required the exhaustion of a separate $250,000 SIR for each occurrence covered under a policy from which the Diocese sought coverage. National Union also sought a ruling requiring that the $2 million settlement be paid on a pro rata basis across each of the seven policies. The Diocese cross-moved for partial summary judgment, seeking a declaration that National Union waived its two affirmative defenses regarding the number of SIRs and allocation of the settlement by failing to address those issues in its disclaimer letter.

The Supreme Court denied National Union’s motion for partial summary judgment and granted the cross-motion of the Diocese. The Appellate Division reversed the order of the Supreme Court, declaring that the alleged acts of sexual abused constituted multiple occurrences, and that the settlement amount should be allocated on a pro rata basis of the seven policy periods, requiring the concomitant satisfaction of the SIR attendant to each implicated policy. The Court of Appeals affirmed the Appellate Division’s order.

As an initial matter, the Court of Appeals held that National Union did not waive its affirmative defenses by failing to include them in its coverage disclaimer. Citing to Zappone v. Home Ins. Co. (55 NY2d 131 [1982]), the Court stated that the notice requirements of Insurance Law § 3420 (d) only apply to situations in which coverage is denied “because of an exclusion in the policy.” (emphasis in the original). Because the SIR and the appropriate methodology for allocating liability “do not provide an exclusionary basis to evade coverage,” the Court held section 3420(d) did not apply to preclude National Union’s arguments.

With respect to determining the number of occurrences, the Court of Appeals applied the “unfortunate event” test, which is applied in the absence of an occurrence aggregation clause. Under this test, the Court concluded that the incidents of sexual abuse constituted multiple occurrences, stating “[c]learly, incidents of sexual abuse that spanned a six-year period and transpired in multiple locations lack the requisite temporal and spatial closeness to join the incidents.” The plurality rejected the Diocese’s and dissent’s view that negligent supervision was the sole causal factor, stating the “unfortunate event test requires us to focus on ‘the nature of the incidents giving rise to damages.’”

The Court of Appeals also rejected the Diocese’s argument that the multiple incidents of abuse constituted “continuous or repeated exposure to substantially the same harmful conditions.” The Court stated such language was more relevant to environmental exposures, and did not fit within the context of sexual abuse since a perpetrator is “not a ‘condition’ but a sentient being.” The Court of Appeals therefore found each incident of abuse was a separate occurrence and that the Diocese must exhaust the SIR for each occurrence that transpired within an implicated policy from which it seeks coverage.

Finally, the Court of Appeals found that pro rata allocation (as opposed to joint and several liability) was consistent with the policy language and appropriate under the circumstances. The Court stated there was no indication that the parties intended that the Diocese’s total liability for injuries sustained over seven years would be assumed by a single insurer. Accordingly, the Court affirmed the Appellate Division’s order holding that the settlement amount should be allocated on a pro rata basis across the seven policy periods.