Allegations of sexual misconduct by professionals, such as teachers or priests, dominate the news once again. Seeking to expand liability into deeper pockets, as well as create coverage, claimants in most civil sexual misconduct cases typically include allegations against a perpetrator’s employer, asserting liability on theories of negligent failure to supervise, negligent failure to protect, or negligent hiring.
Such claims present significant coverage and financial implications for both insurers and insured employers and often call into question whether an employer’s general or professional liability policy responds to provide coverage for the alleged negligent hiring or supervision claim. Which policy responds to coverage is a complex question, often motivated by financial concerns but best resolved by reference to policy language and facts.
Insured Employer’s Need for Coverage
When an employer learns of a claim against it that is based upon an employee’s alleged sexual misconduct, the insured faces concern both for their own reputation and financial stability as well as for the victim(s). The insured’s business concerns are significant, including the ability to maximize the coverage available. Although general liability and professional liability policies are designed to insure different risks, it is often difficult to determine, at least initially with any definitiveness, if a negligence claim based upon the sexual misconduct of an employee triggers general liability coverage or professional liability coverage.
Claims professionals should be aware that employers have the financial incentive to attempt to categorize the claim in the manner that obtains the greatest financial benefit. Even when limits under an insured’s professional liability policy and its general liability policy are identical, one policy may provide a greater financial benefit to the insured. Under most general liability policies, defense costs are supplemental to the policy’s limits, and the insurer must keep defending until the liability limits are eroded by judgments or settlements. In contrast, professional liability policy limits are typically defense-cost erosive, depleting the limits available for indemnity.
Likewise, the two coverages may be subject to different risk retention mechanisms, with general liability coverage subject to a deductible and professional liability coverage subject to a self-insured retention. As a result, an insured is entitled to a “dollar-one” defense under the former but not the latter. Likewise, the employer may wish to obtain general liability coverage because the general liability policy may be subject to a narrower sexual molestation exclusion and, hence, serve as the only policy that offers any potential for coverage.
Triggers of Coverage
A professional insured facing a negligent-supervision claim for actions of a miscreant employee will typically tender the claim to both its professional liability insurer and its general liability insurer. Irrespective of the type of policy issued, the insurer must begin the process of determining whether the claim is covered under the respective liability coverage. Despite potential pressure from the insured to find coverage under the most financially advantageous policy, insurers are advised to adhere to the policy language and be guided by the facts to determine which policy is triggered.
The first issue that can either permit coverage or render coverage completely unavailable is the trigger. Professional liability coverage and general liability coverage are subject to different triggers. General liability policies are “occurrence” based and are triggered by an accident that results in bodily injury or property damage that occurs during the policy period.
In contrast, most professional liability policies are “claims-made” and are triggered by a claim that is first made against the insured during the policy period and reported during the policy period or the policy’s grace period. Accordingly, if an insured is sued for negligent supervision for an injury that occurred in year one and the resulting lawsuit is filed against the insured in year two, the suit would trigger the general liability policy in force in year one when the injury occurred.
By comparison, the time of the injury is not the trigger under a claims-made-and-reported policy. Under the professional liability policy, the policy in place at the time the claim is made is the initial trigger of coverage, requiring the insured to report the claim in the same policy period.
Because of this distinction, the insured’s own response to the negligent hiring claim is often the motivating factor for an insured’s request for general liability coverage. If a claimant files an action for negligent supervision against a professional employer based upon a professional or a paraprofessional employee’s alleged sexual misconduct but the employer fails to comply with reporting requirements of its claims-made coverage, the employer may then turn to its occurrence-based general liability policy for coverage.
Financial Considerations Impacting Tenders
In addition to the trigger issue, other practical, financial considerations can motivate a professional insured to choose to tender a negligent supervision claim to one insurer over another. Because professional employer general liability coverage is occurrence-based, a complaint may reference injuries occurring several years before, thereby triggering a general liability policy less recent than its professional liability policy and perhaps subject to a sexual misconduct exclusion that allows coverage for the non-perpetrator. By contrast, in light of the recent proliferation of abuse claims, the claims-made professional liability policy in effect when the claim is submitted is likely to be subject to a broad sexual molestation exclusion.
Alternatively, the damage alleged by the claimant may cause the professional insured to categorize the claim as within the professional liability coverage instead of the general liability coverage. If the claimant alleges primarily emotional harm, the employer may seek coverage under its professional liability policy to avoid a general liability policy’s requirement of physical bodily injury.
Basic and commonly accepted insurance principles should be the guideposts for insurers facing tenders motivated by timing or financial considerations. Under the professional liability coverage, the inquiry should focus on whether the claimant’s allegations implicate the insured’s use of his or her professional training and skill. Under this standard, a tender of a negligent-supervision claim under a general liability policy, even one subject to a narrow molestation exclusion, can fall outside of general liability coverage due to a professional services exclusion.
Injury Resulting from Professional Services
In the event that a professional insured tenders a claim to its professional and general liability insurers and the claim falls within the timing parameters of the professional liability coverage, the critical issue becomes whether the conduct alleged on the part of the insured constitutes a “professional service.” While most courts find that claims for negligent hiring and negligent supervision of a sexual predator do not qualify as professional services, certain facts may support a contrary conclusion.
Professional liability policies provide coverage for claims for injuries arising out of the rendering of or failure to render professional services. Courts agree that the test for whether the injury-causing conduct constitutes a professional service depends upon the nature of the conduct itself and not upon the title of the actor. Conduct constitutes a professional service if it requires specialized and/or intellectual knowledge, skill, or training. If the conduct requires specialized knowledge, even specialized knowledge to supervise another professional, the claim would fall within a professional liability policy’s professional services definition and is subject to a general liability policy’s professional services exclusion.
A claim for negligently supervising a medical professional illustrates this reasoning. In Duncanville Diagnostic Center v. Atlantic Lloyd’s Insurance Company, parents of a clinic patient sued the clinic for negligently failing to adequately hire, train, and supervise its employees after their daughter received a fatal dose of chloral hydrate. The clinic’s general liability policy was subject to a professional services exclusion. The court concluded that administering drugs and providing medical advice or diagnoses requires the application of specialized education and knowledge, subjecting the negligent supervision claim to the exclusion.
When evaluating what constitutes a professional service in the context of negligent-hiring claims rooted in allegations of an employee’s sexual misconduct, courts similarly focus on whether the employee’s conduct requires specialized knowledge. Schuler v. Michigan Physicians Mutual Liability Company presented the issue of whether sexual conduct allegations against a professional were subject to a general liability policy’s professional services exclusion. In that case, patients of a gynecologist alleged that the gynecologist committed sexual misconduct during pelvic examinations. The general liability carrier argued that the negligent hiring and supervision claims against the gynecologist’s employer implicated professional services because the misconduct occurred in the course of pelvic exams, triggering the professional services exclusion. The court agreed, finding that the negligent-hiring and supervision claims were subject to the professional services exclusion. It noted that properly supervising employees to prevent harm to patients is part of providing health services, which was the nature of the insured’s business.
However, the court in Mork Clinic v. Fireman’s Fund reached a contrary result. In that case, an allergist employed by the insured clinic sexually assaulted patients during exams. The general liability carrier denied coverage for the negligent-supervision claims, relying upon the professional services exclusion. The court rejected the general liability insurer’s position, first explaining that the sexual misconduct committed by the allergist was not a professional service. It then turned to the negligent-supervision claims against the clinic, concluding that the negligent supervision was administrative in nature, as it did not directly affect the physician’s work. Accordingly, the professional services exclusion did not bar general liability coverage. Other cases have reached similar results. For example, American Family Mutual Insurance Company v. Enright held that an insured providing ultrasound procedures at hospitals was negligent in hiring a medical technician who then committed a sexual assault, which fell within the insured’s general liability coverage, and was not subject to the professional services exclusion.
Although courts employ the same test for professional services in the context of both general and professional liability policies, where the issue is close, rules of interpretation may explain the tendency toward the willingness to allow coverage under a general liability policy subject to a professional services exclusion. Because exclusions are construed narrowly, courts may interpret the term “professional services” narrowly in the context of a professional services exclusion to a general liability policy.
Practical Considerations
Claims against an insured employer alleging the negligent hiring and supervision of a sexual predator are increasing, and these claims demand increasing attention from insurance professionals. The financial motivation of the professional insured seeking coverage under its respective policies may, if coverage is denied, cause them to allege that the insurer was motivated more by its own financial interests than by equally considering the insured’s interests.
To avoid or rebut these assertions, the coverage determination should focus on the nature of the employee’s actions. Even in the face of pressure from the insured to provide coverage under the most financially generous coverage, claims professionals must evaluate the insured’s coverage in light of the specific factual allegations in the underlying claim and the relevant policy language.
Deborah M. Minkoff is a member of the Global Insurance Group at Cozen O’Connor, a member firm of CLM. She represents and counsels clients in complex coverage litigation, with an emphasis on liability coverage issues. Kathryn M. Rutigliano is an associate lawyer at the firm.