The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings. Following its passage, the State of Ohio passed a law specifically to prevent its adoption, providing that the RLLI “does not constitute the public policy of Ohio.” Ohio Revised Code of Insurance, Title XXXIX, Chapter 3901.82.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our first post considers RLLI’s suggestions on the interpretation of policy language, and specifically exclusions:

§ 32 Exclusions

(1) An “exclusion” is a term in an insurance policy that identifies a category of claims that are not covered by the policy.

(2) Whether a term in an insurance policy is an exclusion does not depend on where the term is in the policy or the label associated with the term in the policy.

(3) Exclusions are interpreted narrowly.

(4) Unless otherwise stated in the insurance policy, words in an exclusion regarding the expectation or intent of the insured refer to the subjective state of mind of the insured.

(5) An exception to an exclusion narrows the application of the exclusion; the exception does not grant coverage beyond that provided in the insuring clauses.

WHY IT IS PROBLEMATIC

The RLLI proposes that any exclusion related to the expectation or intent of the insured should be determined by the subjective state of mind of the insured. RLLI proposes that even the insured’s statement of his/her state of mind can be disregarded – “even an insured’s admission of intent to harm is subject to cross-examination and the jury’s assessment of credibility.” Comment d.

Furthermore, RLLI suggests that as to exclusions such as sexual abuse, physical and mental abuse, etc., “The default rule is that such exclusions are severable, meaning that they apply only to insureds whose conduct meets the requirements of the exclusion.” Comment c. That is not an accurate statement of the law, which depends upon the precise language of the exclusion, including whether the exclusion applies to “the insured” or to “any insured.” In policies with severability or “separation of insureds” language, claims against each insured are evaluated separately for coverage, but there is considerable case law distinguishing between “the insured” and “any insured” language, where “any insured” language will exclude coverage for all insureds if any of them has engaged in the excludable conduct. See, e.g., Am. Family Mut. Ins. Co. v. Copeland-Williams, 941 S.W.2d 625, 629-30 (Mo. App. E.D. 1997) (“The use of the phrase ‘any insured’ makes the exclusionary clause unambiguous even in light of the severability clause. . . . [it] unambiguously precludes coverage to all persons covered by the policy if any one of them engages in excludable conduct.”).

Moreover, many modern exclusions are written to exclude coverage for particular claims and losses, without regard to the insured’s intent, including the sexual, physical, and mental abuse exclusions. Courts interpreting this kind of policy language have found that it “serves to exclude an entire category of injury based on the cause, not just the person who committed the harmful act.” Safeco Ins. Co. v. Thomas, No. 13-CV-0170-AJB (MDD), 2013 WL 12123852, at *5 (S.D. Cal. Nov. 26, 2013) (emphasis added); see also, accord, Universal N. Am. Ins. Co. v. Colosi, No. 217CV00113JADGWF, 2018 WL 3520118, at *4 (D. Nev. July 20, 2018); Liberty Mut. Fire Ins. Co. v. Shaibaz S., 2017 WL 2118312 (N.D. Cal. May 16, 2017); Travelers Indem. Co. of Am. v. Isom, 2014 WL 1092542 (D. Ariz. Mar. 20, 2014). RLLI does not address the modern language of sex abuse exclusions in suggesting that there is a “default” rule that applies the exclusion only to the abuser.

RLLI mentions, in passing, that some states have adopted an inferred-intent approach to the insured’s subjective intent with sexual molestation claims, but otherwise takes no position that intent may (and should) be inferred or determined on an objective basis in many circumstances. Not only does this raise significant questions of how the insurer could prove the insured’s subjective state of mind, it is inconsistent with well-established law in all jurisdictions that will infer intent as to certain conduct as a matter of public policy, including sex abuse and other criminal conduct.

As discussed below, it is clearly distasteful and inappropriate to allow insureds who have engaged in certain conduct to advance an argument regarding whether they subjectively believed that their victims would welcome, rather than be harmed by, offensive behavior. Moreover, the principle that the insured is deemed to intend the reasonable and probable consequences of his/her voluntary acts, an objective standard for intent, is a widely-accepted standard that serves public policy and preserves the resources of the courts and parties.

Sexual abuse and expected/intended exclusions

Many modern policies will have a specific sexual abuse/molestation exclusion. However, practitioners can face a lack of case law interpreting their specific exclusion(s) or a policy that lacks a sex abuse-specific exclusion, including in older policies. Historically, sex abuse has been addressed, in whole or in part, through expected/intended exclusions.

A person who sexually molests a minor is deemed as a matter of law to have expected and intended to cause harm or injury. See, e.g., B.B. v. Cont’l Ins. Co., 8 F.3d 1288, 1296 (8th Cir. 1993) (applying Missouri law).

Forcing the insurer to indemnify the insured “subsidizes the episodes of sexual abuse of which its victims complain, at the ultimate expense of other insureds to whom the added costs of indemnifying child molesters will be passed.” . . . “The average person purchasing homeowner’s insurance would cringe at the very suggestion that he was paying for [coverage for liability arising out of his sexual abuse of a child]. And certainly he would not want to share that type of risk with other homeowner’s policy holders.”

B.B., 8 F.3d at 1295 (citations omitted).

“The inference or inferred-intent standard in cases of sexual molestation is now the unanimous rule among jurisdictions that have considered the issue.” B.B., 8 F.3d at 1293.

The rationale behind the inferred-intent standard is based on the inherently harmful nature of child molestation. . . . Courts have stated that “‘acts of sexual molestation against a minor are so certain to result in injury to that minor that the law will infer an intent to injure on behalf of the actor without regard to his . . . claimed intent.’” . . . . “in the exceptional case of an act of child molestation, cause and effect cannot be separated; that to do the act is necessarily to do the harm which is its consequence; and that since unquestionably the act is intended, so also is the harm.” . . . “the very essence of child molestation is the gratification of sexual desire. The act is the harm. There cannot be one without the other. Thus the intent to molest is, by itself, the same thing as intent to harm.”

B.B., 8 F.3d at 1293.

When an adult subjects a minor to “unwanted and unconsented to sexual contact,” the perpetrator is deemed as a matter of law to have intended and expected the resulting physical and psychological damages, even if the perpetrator “believed in some perverse way” that his conduct would be welcomed by the minor. State Farm Fire & Cas. Co. v. Caley, 936 S.W.2d 250, 252 (Mo. App. W.D. 1997). “Missouri case law specifically holds that a person engaging in sexual misconduct against a minor intends to cause any resulting injuries.” California Cas. Gen. Ins. Co. v. Nelson, 2014 U.S. Dist. LEXIS 191438, *15-16 (W.D. Mo. Dec. 22, 2014).

With a “unanimous rule” for legally inferred intent as to acts of sexual abuse, is there a place for the RLLI’s subjective intent standard? In the modern climate of “me too” and a growing awareness and litigation of sex abuse, who has the appetite to argue for a subjective standard of intent as to such conduct? Although we might expect any jurisdictions tempted to adopt the subjective intent standard to try to carve out sex abuse against minors, for the same reasons that intent is inferred for this type of behavior, intent is properly inferred or judged on an objective basis for many types of conduct.

Criminal acts and expected/intended exclusions

Although many policies will include a criminal acts exclusion, the expected/intended exclusion is often used to address conduct that constitutes a crime, particularly under commercial policies. Many jurisdictions apply an inferred-intent standard to this exclusion as a matter of public policy.

In James v. Paul, 49 S.W.3d 678 (Mo. 2001), the Missouri Supreme Court agreed with an insurer that it was entitled to summary judgment on the question of the applicability of its intended/expected acts exclusion based upon the insured’s plea of guilty in a criminal case arising out of the same underlying conduct that gave rise to the civil case. 49 S.W.3d at 682.

If issue preclusion is not permitted, Paul will, in effect, be insulated by an insurer from the full brunt of economic responsibility resulting from his admittedly intentional criminal act. This runs contrary to the public policy of Missouri. . . . Both James and Paul stood to profit from Paul’s duplicity in admitting intentional wrongdoing in the criminal proceeding while, in effect, denying it in the present case. Applying collateral estoppel in this situation serves to prevent the potential of collusive litigation as well as promoting the other policies of finality, consistency and judicial economy discussed above.

James, 49 S.W.3d at 687-88 (citation omitted).

“[W]here the insured made a judicial admission as part of a prior judicial determination in a criminal case that the insured's conduct was intentional,” a court considering the application of an intended/expected exclusion is also required to presume that the insured’s conduct was intentional. James, 49 S.W.3d at 689. “The criminal conviction foreclosed [the insured] and any party claiming through him from asserting that his conduct was not intentional.” Id. (emphasis added).

Again, there are significant public policy considerations underlying an inferred-intent approach to the expected/intended acts exclusions commonly found in liability policies. RLLI’s suggestion that a subjective intent standard is preferred, which would place the burden on the insurer to establish the insured’s state of mind, is inconsistent with well-developed precedent in most jurisdictions.

HOW THE COURTS HAVE REACTED

To date, the only available decision to address RLLI § 32 cited it, along with preexisting case authority, for the proposition that an insurer bears the burden of proving the applicability of exclusions. Akorn, Inc. v. Fresenius Kabi AG, No. 2018-0300-JTL, 2018 Del. Ch. LEXIS 325, at *137 n.619 (Ch. Oct. 1, 2018) (citing Restatement of the Law of Liability Insurance § 32 cmt. e (Am. Law. Inst. 2018); “It is the insurer that has identified the excluded classes of claims and will benefit from being able to place a specific claim into an excluded class. Thus, assigning the insurer the burden of proving that the claim fits into the exclusion is appropriate.”)