The U.S. Court of Appeals for the Eighth Circuit recently affirmed a lower court decision that held that an insurer has no duty to indemnify its insured under a liability policy for damages arising out of an alleged sexual assault. (Click here to read the decision in Evanston Insurance Co. v. Johns, 530 F.3d 710 (8th Cir. June 24, 2008)).

The plaintiff in the underlying civil action alleged that she was sexually assaulted by the defendant-insured, a massage therapist, during a massage at a salon. The defendant was charged in Minnesota state court with criminal sexual conduct in the fifth degree but was found not guilty on the basis that he was incapable of understanding the nature of any wrongdoing associated with his actions because of his mental illness. After the criminal trial ended, the alleged victim filed a civil action against the massage therapist and the salon at which he was employed, which resulted in a settlement with $220,000 in damages being assessed against the massage therapist. In the settlement agreement, the alleged victim stated that she would only seek recovery of the damages from the defendant’s insurer and not from the defendant individually.

The insurer filed a declaratory judgment action against the massage therapist and the alleged victim so that the court would determine if the insurer was obligated to provide coverage for the settlement. The primary coverage issues involved the applicability of two policy exclusions. Under one of these exclusions, there was no coverage for claims arising out of “the actual or threatened abuse or molestation or licentious, immoral or sexual behavior whether or not intended to lead to, or culminating in any sexual act . . . .” The appellate court affirmed the lower court’s decision that this exclusion applied to bar coverage for the massage therapist’s claim. It held that the exclusion is broader than the criminal code that requires a showing of intent. Because the exclusion applies regardless of intent, the court found that the plaintiff’s claim is excluded from coverage.

The Eighth Circuit also affirmed the district court’s holding regarding the policy’s exclusion for claims arising out of “the actual or alleged physical contact . . . of a sexual nature with any person by any insured . . . .” The appellate court held that since this exclusion applies to claims arising out of physical contact of a sexual nature, the claim against the insured was excluded from coverage. Based on the applicability of these two exclusions, the Eighth Circuit affirmed the district court’s opinion that the insurer had no duty to defend or indemnify the defendant.