Definition of Third-Party Wrongful Act and Sexual Misconduct Exclusion Bar EPL Coverage for Claim Alleging Negligent Supervision

The New York Appellate Division has held that a lawsuit against a children’s non-profit organization alleging negligent supervision of staff accused of sexually molesting children in the organization’s care was excluded from coverage under the policy’s employment practices liability coverage part based on the policy’s definition of a third-party wrongful act. Madison Square Boys & Girls Club, Inc. v. Atlantic Specialty Ins., 2022 WL 1177466 (N.Y. App. Div. Apr. 21, 2022). The court also determined that the EPL coverage part’s sexual misconduct exclusion barred coverage.

The insured non-profit entity had a claims-made policy that covered “Loss from any Third Party Claim” made during the policy period “for a Third Party Wrongful Act.” The policy’s EPL coverage part defined “Third Party Wrongful Act” to include “non-intentional or negligent sexual harassment or sexual harassment imputed through the doctrine of vicarious liability,” but excepted “any form of intentional sexual harassment.”  The EPL coverage part also contained a sexual misconduct and child abuse exclusion precluding coverage for any claim “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged Sexual Misconduct…or child abuse or neglect.” 

The insured was sued for alleged sexual abuse of former child patrons by asserted staff members. The underlying complaint alleged that the organization failed to adequately supervise staff members who sexually abused the former child patrons. The insurer denied coverage on the basis that the allegations did not constitute a “Third Party Wrongful Act” and the claim was barred by the sexual misconduct and child abuse exclusion. The insureds sued. The trial court granted the primary and excess insurers’ respective motions for summary judgment, and the insured appealed.

On appeal, the appellate court first rejected the non-profit’s argument that the sexual abuse was unintentional, and therefore fell within the ambit of covered Third Party Wrongful Acts, because sexual abuse is inherently intentional. The non-profit argued that the claim still met the definition of a “Third Party Wrongful Act” because the non-profit was vicariously liable for the sexual harassment. However, the complaint only alleged direct liability – negligent supervision and emotional distress. Nowhere in the complaint was it alleged that the non-profit condoned the sexual abuse or that the abuse was in furtherance of the non-profit’s business. The allegations therefore did not meet the definition of “Third Party Wrongful Act” because they involved intentional rather than unintentional sexual harassment and not sexual harassment imputed through vicarious liability.

As for the sexual abuse exclusion, the appellate court held that because the negligent supervision and emotional distress claims necessarily arose out of the sexual misconduct, the exclusion applied. 

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