Applying Florida law, the United States District Court for the Middle District of Florida has held that a prior knowledge exclusion does not preclude an insurer’s duty to defend a foster care licensing agency in a lawsuit alleging negligent licensing. Diamond State Ins. Co. v. Boys’ Home Ass’n, Inc., 2016 WL 1110422 (M.D. Fla. Mar. 22, 2016). However, the court ruled that it could not determine the insurer’s duty to indemnify until the underlying action concluded.
The insured was a child-placing agency that contracted with Florida to conduct studies of foster parents for minor children and to certify that foster parents met state licensing requirements. Between October 2004 and October 2006, the agency licensed a foster parent who failed to meet licensing requirements because of a criminal background of child abuse and later revoked the license as a result of verified abuse. In 2011, parents of children placed with the foster parent filed suit against the insured for negligent licensure of the foster parent, and the insured tendered the lawsuit to its E&O insurer. The insurer filed suit seeking a determination that it did not owe a duty to defend or indemnify the insured based on a prior knowledge exclusion, which barred coverage for any “claim, suit, or wrongful act that might result in a claim or suit, of which any insured had knowledge or could have reasonably foreseen at the signing date of the application for this insurance [July 20, 2010].”
The court held that the prior knowledge exclusion did not bar coverage for the lawsuit. The insurer contended that, by 2005 or 2006, the insured had actual or constructive knowledge that the foster parent had a criminal abuse history, knew the foster parent had lied about her criminal abuse history, and knew that children placed with the foster parent after 2004 were removed based on verified complaints of child abuse. Rejecting those contentions, the court held that the underlying complaint contained no allegations that, before it signed the application in 2010, the insured was aware that it breached a duty in licensing the foster parent. The insured revoked the foster parent’s license in 2006 because of verified complaints of abuse, but the court held that there was no allegation that the insured “was aware of its failure to uncover the information which should have disqualified [the foster parent] for licensure and re-licensure at the time of her application.” Although the insured knew that the foster parent abused children during the period in which she was licensed by the insured, the court held that the agency was unaware that its licensing failures had allowed the foster parent to be licensed improperly. It stated that a reasonable person may not have plausibly viewed the report of abuse in 2006 as potentially leading to a claim because the insured received hundreds of abuse reports per year but had only been sued once and made two insurance claims.
The court observed that it was appropriate for it to consider extrinsic evidence relevant to the applicability of the prior knowledge exclusion, but the court held that none of the extrinsic evidence proffered by the insurer showed that the insured had knowledge of a wrongful act that might result in a claim or suit.
Because the insurer’s duty to indemnify the insured in the lawsuit would require resolution of facts that necessarily overlapped with facts to be determined in the underlying action, the court determined that it could not adjudicate the duty to indemnify until the underlying action concluded.