Sexual Misconduct Exclusion Bars E&O Coverage for Title IX Claim

The United States Court of Appeals for the Seventh Circuit has held that a sexual misconduct exclusion unambiguously barred errors and omissions coverage for a Title IX claim as a matter of Illinois law. Netherlands Ins. Co. v. Macomb Cmty. Unit Sch. Dist. No. 185, 2021 WL 3464356 (7th Cir. Aug. 6, 2021). 

Two female students brought claims against a school district under Illinois law and Title IX for allegedly failing to prevent and appropriately respond to sexual misconduct by a male student. The school district reported the claim under a policy affording occurrence-based coverage for sexual misconduct and molestation and claims-made coverage for school leaders’ errors and omissions. The school district also reported the claim under its umbrella policy. After the school district settled the students’ suit for $1.5 million, the two insurers filed suit.

In ensuing coverage litigation, the school district conceded that its occurrence-based coverage for sexual misconduct did not apply because the student misconduct and the school district’s response occurred outside of the policy period. The school district instead argued that its claims-made E&O coverage applied. The insurers disagreed, arguing that errors and omissions coverage was barred by a sexual misconduct exclusion for “[a]ny actual or alleged sexual misconduct or sexual molestation of any person; and any allegations relating thereto that an insured negligently employed, investigated, supervised or retained a person, or based on an alleged practice, custom or policy, including but not limited to any allegation that a person’s civil rights have been violated.” The district court held that the sexual misconduct exclusion was ambiguous because (1) it could be read to exclude only sexual misconduct by a school employee; and (2) it might not bar coverage for “reactions to” a student’s sexual misconduct. 

On appeal, the Seventh Circuit reversed, holding that the sexual misconduct exclusion was not ambiguous because (1) it precluded coverage for “[a]ny” sexual misconduct or molestation of “any person” and related allegations; and (2) the exclusion necessarily barred coverage for “reactions to” sexual misconduct by excluding coverage for “allegations relating” to sexual misconduct. The court reasoned that, even if the exclusion was limited to employees’ acts or omissions, the sexual misconduct exclusion would still apply because only employee acts could make the school district liable under Title IX. The court further reasoned that if the exclusion did not apply to “reactions to” sexual misconduct, a school district's failure to pay damages for a student’s sexual misconduct would concern its “reactions to” that misconduct—rather than the misconduct itself—and fall outside of the exclusion, which would leave the exclusion with no effect at all.  

Lastly, the court determined that the sexual misconduct exclusion was designed to ensure that the policy as a whole covered claims related to sexual misconduct only under the occurrence-based sexual misconduct coverage. The court refused to read the exclusion to turn the sexual misconduct coverage from occurrence to claims-made coverage. The court therefore reversed the district court’s decision and held that the sexual misconduct exclusion barred coverage as a matter of law.  

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