Policyholder Pulse
The U.S. Court of Appeals for the Tenth Circuit’s just-issued decision Church of Jesus Christ of Latter-Day Saints v. National Union Fire Insurance Company of Pittsburgh, PA, et al., has established an important new tool for general liability insurance policyholders facing vexing problems involving liability for patterns of multiple harm arising from the same general circumstances or conditions, like sex abuse cases. The court determined that the standard CGL “occurrence” definition is ambiguous and must therefore be interpreted in whichever manner maximizes coverage for the policyholder.
By way of background, from 2007 to 2011, the son of prominent members of the Church of Jesus Christ of Latter-Day Saints allegedly sexually abused several children in his care while babysitting. Some of the victims sued the Church for failing to take precautions that might have prevented the abuse. The Church settled with the minor plaintiffs and their families and then turned to two of its insurers—National Union and ACE—to pay its defense and settlement costs. Both refused on the ground that the alleged abuse—which involved different children, different locations, and different time periods—constituted multiple occurrences, no single one of which exceeded the applicable per-occurrence retention. By contrast, the Church argued that its alleged negligence constated a single occurrence, and that when added together, the settlements exceeded the per-occurrence retention. The Church argued that the insurers would need to cover all amounts which exceeded the retention, absent some other reason to deny coverage.
The Key Problem: When Is a Loss One Occurrence, and When Is It Multiple?
The proliferation of mass sexual abuse claims, often arising decades after the alleged conduct, has created a uniquely complex and evolving risk environment for today’s institutions. In the past, many of these claims would have been barred by statutes of limitations. But several states have recently passed laws permitting claimants to pursue otherwise time-barred sexual abuse claims for a fixed period of time—for example, California Assembly Bill 250 gives adults until December 31, 2027, to file certain civil claims that were time-barred under the statute of limitations for sexual assault. For many claimants, the target of the lawsuit is not the alleged abuser, who often has little to no assets. Instead, claimants may target deep-pocketed institutions that they allege facilitated the abuse, such as educational institutions and youth groups, religious organizations, health care systems, care and detention facilities, and entertainment companies.
Under many legacy CGL policies, liability will be covered if the injury or damage occurred during the policy period (i.e., “occurrence-based” policies, in contrast to “claims-made” policies which are triggered by a claim made during the policy period even though the injury or damage occurred beforehand). In these occurrence-based policies, “occurrence” is often defined to include “continuous or repeated exposure to the same general harmful conditions” (or similar wording).
When an occurrence-based policy is at issue, the number of occurrences will often determine the amount of coverage available, because these policies generally have per-occurrence deductibles or self-insured retentions (herein generally, “retentions”), and many have per-occurrence policy limits without an aggregate cap. Under such policies, a finding of a single occurrence means that only one per-occurrence retention applies, but it also means that only one per-occurrence policy limit is available. On the other hand, a finding of multiple occurrences means that multiple policy limits are available, but only to the extent that each occurrence exceeds the per-occurrence retention.
With a high per-occurrence retention and/or smaller claims, the policyholder will generally favor a single occurrence because the amount sought by any one claimant is unlikely to exceed the per-occurrence retention (better to add the claims together to exceed the retention and tap one policy limit than to never exceed the retention), while the insurer will generally favor multiple occurrences so that the per-occurrence retention is never exceeded. With a low per-occurrence retention and/or larger claims, the policyholder will generally favor multiple occurrences in order to tap multiple policy limits, while the insurer will generally advocate for a single occurrence so as to cap its liability to one policy limit. (An aggregate limit may change this dynamic significantly, particularly where the per-occurrence limit is the same as the aggregate limit. This article focuses on policies without an aggregate limit.)
In most cases, the preferred outcomes for the policyholder and insurer are in opposition and case-specific. Moreover, with retentions and/or claims in between the two extreme ends of the spectrum, the likely favorable outcome for the policyholder requires skill and forethought to ascertain, and in some instances the policyholder might find itself arguing for a single occurrence and multiple occurrences in the same coverage dispute (e.g., where multiple towers of coverage are involved with differing policy terms).
The Tenth Circuit’s Solution: Apply the Canon Requiring Construction in Favor of the Policyholder
In the Latter-Day Saints case, the battle lines were drawn: If the Church’s alleged negligence constituted a single occurrence, the insurers would be exposed to paying much of the Church’s defense and settlement costs; but if it constituted multiple occurrences, the insurers would be obligated to pay nothing.
It was up to the court to decide. The National Union and ACE policies both contained a commonly used definition of occurrence: “[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.” And both policies included language commonly referred to as a “deemer clause”—the National Union policy stated that “All such exposure to substantially the same general harmful conditions will be deemed to arise out of one Occurrence,” while the ACE policies stated that “All such exposure to substantially the same general harmful conditions shall be considered as arising out of the same ‘occurrence’, regardless of the frequency or repetition thereof, or the number of claimants.”
Interpreting these provisions, the district court granted summary judgment in favor of the insurers, ruling that the policies’ “occurrence” definitions unambiguously meant that “the abuse of separate victims at separate times and in separate places presumptively constitutes multiple occurrences.” The district court held that “a separate occurrence arose every time [the babysitter] abused separate children at separate times and in separate places.”
The Tenth Circuit reversed, concluding that “[t]he policies’ definitions of ‘occurrence’ are ambiguous, the Church’s reading is plausible, and Utah law requires courts to read ambiguous provisions in favor of coverage.”
The court explained that “a contractual provision is ambiguous when it is capable of more than one reasonable interpretation,” meaning that “the terms used to express the intention of the parties may be understood to have two or more plausible meanings.” The court conceded that the insurers’ “interpretation of the policies—that a separate occurrence arose every time [the babysitter] abused separate children at separate times and in separate places—is plausible.” But the court also found that the Church “plausibly reads ‘general harmful conditions’ to include the dangerous environment allegedly created by failing to take precautions against” sexual abuse, and that the deemer clause could mean that “[a]ll such exposure . . . will be deemed to arise out of one Occurrence.” The court concluded that “even though the victims were separate children abused at separate times in separate places, the church plausibly reads the policy to count those ‘repeated exposure[s]’ as one Occurrence.”
The court held that it was unnecessary for the Church’s interpretation to be “the most reasonable or most plausible interpretation.” The mere fact that the policyholder’s interpretation was plausible meant the provision is ambiguous, and thus the court must adopt the interpretation that favors coverage.
Critically, the Court acknowledged but was untroubled by the insurers’ argument that the ambiguity could enable the same policyholder to argue both positions—one occurrence or multiple occurrences—depending on which argument increased coverage:
[T]he district court worried that on Monday, an insured could argue that an insurance policy counts discrete accidents as one “occurrence.” And on Tuesday, because of different settlement amounts in a different case, the same insured could argue that the same policy counts discrete accidents as separate “occurrences.”
This could happen. So what? Under Utah law, the court’s job is to ask whether the insurer wrote a policy that can reasonably be interpreted in two ways. If so, then the insurer has invited insureds to play “heads I win tails you lose” with that ambiguous provision. Ambiguous provisions thus carry a high price. To avoid that high price, insurance-policy drafters can clarify those provisions—to the benefit of the insurer, the insured, and the courts.
The LDS decision provides policyholders with a tremendous tool to maximize coverage for sexual abuse claims (or any other set of claims where the number of occurrences is consequential). Indeed, in theory the decision permits a policyholder facing mass sex abuse litigation to treat settlements of smaller claims as a single occurrence, so as to exceed the policy’s deductible or self-insured retention, while treating settlements of larger claims as multiple occurrences, to trigger multiple per-occurrence policy limits.