On May 7, 2013, a divided panel of the NY Court of Appeals issued an important opinion, in Roman Catholic Diocese of Brooklyn v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2013 N.Y. Slip. Op. 03264 (May 7, 2013). The court affirmed, by a plurality, the Appellate Division’s ruling that at least one occurrence per year of abuse transpired under the policy wording at issue. Secondly, the court held, by a majority, that pro rata allocation applies to a sexual abuse claim that triggers policies issued in multiple years during which abuse occurred. In addition, the court held that New York Insurance Law § 3420(d) does not impose a waiver with regard to an insurer’s right to invoke self-insured retentions and policy limits, even if those provisions were not raised when the insurer first reserved rights.
Sexual abuse was repeated over a six-year period
Alexandra Levi was the daughter of an employee of the Roman Catholic Diocese of Brooklyn (the diocese). Ms. Levi alleged she was abused over a six-year period by a priest employed by the diocese. She alleged that the abuse occurred at the church rectory, at a beach house owned by the diocese, and other locations. She alleged hundreds of incidents of abuse, with multiple incidents in each of the six years. After taking discovery, the diocese settled the Levi action for $2,000,000.
Policies were issued excess of a $250,000 “Per-‘Occurrence’” self-insured retention
National Union had issued a series of three consecutive annual policies to the diocese. Each policy was subject to a self-insured retention (SIR) of $250,000. National Union contended that the diocese must exhaust an SIR for each policy period during which abuse had occurred. The diocese contended that the abuse constituted a single occurrence, and that the diocese was entitled to recover the entire amount of the settlement under a single policy year, and thus need pay only a single SIR.
New York Insurance Law § 3420(d) does not impose a waiver of an insurer’s right to invoke self-insured retentions and policy limits
The court first addressed the trial court’s conclusion that National Union had waived its right to rely on the SIRs as a basis to deny or limit coverage. National Union, when initially reserving rights, had not expressly asserted that the SIRs barred coverage.The diocese contended this alleged omission precluded National Union from invoking the SIRs, because of the strictures of New York Insurance Law Section § 3420. Insurance Law § 3420(d) provides that under liability policies, if the insurer disclaims liability or denies coverage for bodily injury occurring in New York, “it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”
The Court of Appeals held that Insurance Law 3420(d) does not impose waiver as a penalty for an insurer’s failure to disclaim with regard to self-insured retentions. An insurer, the court explained, is under no statutory duty to disclose “a liability limitation” or a theory of allocation. Insurance Law 3420(d) applies only to provisions that bar coverage or exclude it. It does not apply to other limitations on coverage, such as deductibles, SIRs or policy limits.
By a plurality, the court concluded that there was at least one “occurrence” per policy period
The plurality concluded that “the Diocese must exhaust the SIR for each occurrence that transpires within an implicated policy from which it seeks coverage.” The plurality reasoned that “where, as here, each incident involved a distinct act of sexual abuse perpetrated in unique locations and interspersed over an extended period of time, it cannot be said ... that these incidents were precipitated by a single causal continuum and should be grouped into one occurrence.” The plurality observed that, absent policy language indicating an intent to aggregate separate incidents into a single occurrence, New York’s “unfortunate event” test should be applied to determine how occurrences are categorized for insurance coverage purposes.
The “unfortunate event” test generally looks to the spatial and temporal proximity of any series of events to determine whether they constitute a single occurrence. Here, the plurality held that: “Incidents of sexual abuse that spanned a six-year period and transpired in multiple locations lack the requisite temporal and spatial closeness to join the incidents.” Moreover, the incidents did not share the same causal continuum: “Where, as here, each incident involved a distinct act of sexual abuse perpetrated in unique locations and interspersed over an extended period of time, it cannot be said … that these incidents were precipitated by a single causal continuum and should be grouped into once occurrence.”
The diocese had contended that a “single occurrence” result was dictated by the policies’ occurrence wording, which provided that an occurrence included any “continuous or repeated exposure to conditions.” The plurality disagreed. It explained that the wording of the “continuous or repeated exposure to conditions” clause does not neatly capture “sexual abuse.” “A priest is not a ‘condition’’ but a sentient being.” The court cited a 2nd Circuit decision that observed that “‘exposure to conditions’ involves physical exposure to phenomena such as heat, moisture, or radiation.” Because the “exposure to conditions” clause did not apply to instances of sexual abuse, it could not operate to preclude a finding that at least one separate occurrence” arose within each policy period.
The court’s “multiple occurrence” conclusion was supported by three of the seven judges of the Court of Appeals. This was sufficient to affirm the Appellate Division’s ruling in favor of National Union, because one justice abstained, and the others joined the court’s allocation decision, which by itself was dispositive in favor of National Union.
Majority rejects “joint and several” liability and hold that sexual molestation claims must be allocated pro rata
A majority of the court concluded that, separate and apart from the question of the number of occurrences, the liability of the diocese must be apportioned “pro rata” across all the years of abuse. This means that the amount of the settlement is divided by the number of years of abuse, and thus only the proportionate fraction of the total liability can be recovered in any one year.
The majority held that pro rata allocation applies whenever the policy provides that coverage exists “only if the bodily injury occurs during the policy period and is caused by an occurrence.” In such instance: “Plainly, the policy’s coverage is limited only to injury that occurs within the finite one-year coverage period of the policy.” Consequently, “a joint and several allocation is not applicable in this case as the diocese cannot precisely identify the sexual abuse incidents to particular policy periods.” “Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.”
The court held that any potential liability should be apportioned among consecutive insurance policies pro rata, including during years when exclusions barred coverage. The court observed that allocation is a “distinct” issue from the occurrence issue. “Resolution of the occurrence issue,” the court explained, “involves a different question: how many self-insured retentions will the Diocese have to pay to gain access to the pro rata coverage allegedly available under the policies” that provide coverage?
Significance of decision
Pro rata allocation in sexual molestation cases will favor insurers in most cases. The court stated that the liability must be allocated across all years in which abuse occurred, including years in which policies may have contained sexual molestation exclusions. Accordingly, the decision creates potentially uninsured exposure for policyholders that does not exist under “joint and several” regimes, which permit policyholders to claim the entire liability under a single policy year. In addition, deductibles and SIRs will have a proportionately greater impact, as they apply fully in each year to the reduced amount of liability allocable to individual policy periods.
The Multiple Occurrence conclusion, insofar as applicable in future cases, may be deemed to require exhaustion of a separate SIR or deductible, at least for each policy. The plurality opinion spoke in terms of occurrences within a single policy period, though it did not expressly find multiple occurrences within any policy period as this was unnecessary to resolving the dispute adversely to the diocese. Insurers that are excess of primary policies on a per-occurrence basis may be relieved of liability in most cases involving repeated molestation or abuse.
Application of New York Insurance Law § 3420(d) has been restored to its historically narrow scope. A number of federal district court decisions, as well as the trial court’s decision in Roman Catholic Diocese, had expanded Section 3420 to go beyond a waiver of exclusions or other strict limitations on coverage. The Roman Catholic Diocese decision is a welcome return to the principle that “waiver” cannot give rise to coverage where it otherwise would not exist.