Legal Updates for Coverage and Bad Faith - Special Alert

Edited by Allison Krupp, Esquire

Ohio Supreme Court Paves Way for Broad Application of Abuse or Molestation Exclusion in Ohio

By  David J. Oberly, Esq., Cincinnati, OH

In World Harvest Church v. Grange Mutual Casualty Company, 2016 Ohio 2913, the Ohio Supreme Court was afforded its first opportunity to interpret the standardized abuse or molestation exclusion commonly seen in commercial insurance contracts today. In that case, the court found that World Harvest Church was not entitled to insurance coverage for a 2006 incident involving the beating of a small child while at the church's daycare center. The decision is a noteworthy one, especially for insurers, as the court unanimously determined that an abuse or molestation exclusion contained in a commercial insurance policy is not limited to excluding claims only for bodily injury arising from direct liability, but also excludes claims for bodily injury arising from secondary—or vicarious—liability for the same conduct. 

In May 2006, Michael and Lacey Faieta instituted a civil action against World Harvest Church and Harvest Preparatory School and its employee, Richard Vaughn, for claims stemming from an incident involving the Faietas' son, who attended WHC's daycare service. That case was settled by WHC for $3.1 million, at which time WHC turned to its commercial insurance carrier, Grange, to reimburse the church for a portion of the settlement amount. After Grange denied the church's claim, WHC filed suit against Grange pertaining to a dispute over coverage under the church's commercial policies.

WHC prevailed in its coverage action at the trial court level, where the Franklin County Court of Common Pleas found that the insurance carrier was obligated to indemnify WHC in the amount of $1.4 million plus interest, representing the compensatory damages, attorney fees and post-judgment interest awarded to the Faietas. On appeal, the Tenth Appellate District affirmed the decision of the trial court requiring Grange to indemnify WHC in the amount for which WHC was found to be secondarily liable under a theory of vicarious liability. 

The Ohio Supreme Court reversed the decision of the appellate court, finding that the plain and unambiguous language of the policy's abuse or molestation exclusion excluded coverage for damages stemming from the insured's vicarious liability for a claim arising from its employee's physical abuse of a child. The abuse or molestation exclusion at issue provided that coverage was excluded for bodily injury stemming from "[t]he actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured" or the negligent employment, investigation or supervision of any person for whom any insured was legally responsible. The court highlighted the fact that the exclusion covered abuse or molestation by anyone and that the exclusion also eliminated coverage for damages awarded for claims of bodily injury arising from the insured's negligence in employing, investigating, supervising or retaining the bad actor. The court further found that the exclusion was devoid of any language that would limit its application to damages awarded for an insured's direct liability. As such, under the abuse or molestation exclusion, there was no coverage as long as the claim was for bodily injury that arose out of the abuse by anyone of any person while in the care, custody or control of the insured. Importantly, the court held that the abuse exclusion precluded coverage for both claims arising from direct liability, as well as claims arising from secondary, or vicarious, liability for the same conduct. Therefore, the court concluded that "the language in the exclusion is simple and unambiguous: there is no coverage for any injury arising from abuse or molestation." 

Turning to the incident involving the Faietas' son, the court noted that WHC's vicarious liability arose from its admission that its employee acted within the scope of his employment when he committed the abusive acts while the minor was in WHC's care, custody and control. Because those acts gave rise to the damages awarded in favor of the Faietas, the language of the exclusion encompassed WHC's vicarious liability for its employee's intentional infliction of distress arising from the abuse. As such, Grange was not obligated to indemnify WHC for any damages awarded based on vicarious liability for Vaughn's intentional infliction of emotional distress. 

The court's decision that a commercial liability insurance policy excludes coverage for an award of damages based on the insured's vicarious liability for a claim arising from its employee's physical abuse of a child in the insured's care and custody is a big win for insurers.  Significantly, the court concluded that the exclusion is clear and unambiguous in that it excludes all claims for bodily injury arising from vicarious liability in an identical manner to the exclusion's bar on direct liability claims stemming from abuse. In addition, the decision also provides that an abuse or molestation exclusion also applies with equal force to physical abuse as it does to sexual abuse. Accordingly, insurers are well advised to take note of the strength of this exclusion and its broad applicability in Ohio in connection with a variety of scenarios involving physical or sexual abuse or other misconduct, as clear authority now exists to support application of the exclusion regardless of who the abuser is and regardless of the legal theory (direct or vicarious) pursued.

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