Sexual Misconduct Exclusion Eliminates Duty to Defend Civil Lawsuit

The United States District Court for the Central District of California, applying federal and California law, has held that there is no coverage for a civil judgment against an employee of an insured because the employee’s prior criminal guilty plea satisfied the “final adjudication” requirement under the policy’s sexual misconduct exclusion, which eliminated the insurers’ duty to defend the employee. Samantha B. v. Am. Int’l Grp., Inc., 2022 WL 343050 (C.D. Cal. Jan. 19, 2022).

Two insurers issued primary and excess policies that provided general liability and professional liability coverage to a hospital and its parent corporation. The insurance policies contained an exclusion for “any medical incident, claim or suit arising out of” sexual misconduct. An employee of the insured hospital pled guilty to criminal sexual misconduct violations against three patients. The patients filed civil lawsuits against the employee, the hospital, and its parent corporation. After a jury trial, the employee was found liable for the tort of sexual battery and a judgment was entered against the employee, the hospital, and the parent corporation. The patients obtained a written assignment of the employee’s rights against the insurers and sued the insurers, alleging causes of action for bad faith and breach of contract for failure to defend the employee in the civil suit. The insurers filed a motion for summary judgment.

The court granted the motion and dismissed the lawsuit against the insurers. The applicable exclusion provided that it did not apply to insured persons “unless it is judicially determined that the Specific Individual Insured committed the sexual misconduct” and provided for a defense “until final adjudication.” Although the underlying civil complaint contained allegations that the employee “pled guilty to those sexual misconduct violations,” the patients pointed to a policy provision stating that the insurers “will defend civil claims alleging such [criminal] acts . . . until final adjudication.” The court ruled that the policy provision did not apply because the quoted language “is from a separate Dishonesty Exclusion in the policy rather than the Sexual Misconduct Exclusions at issue[.]”

The court further held that, even though a jury was “tasked with answering the question on sexual battery” during the underlying civil trial, the “final adjudication” language contained in the relevant exclusion will “equally apply to criminal matters.” Accordingly, the employee’s prior criminal pleas satisfied the “final adjudication” requirement and negated any defense obligation. In reaching this determination, the court cited “to persuasive authority that adopts a more common-sense approach” and stated that where the “contractual language is clear and explicit, it governs.”

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