Century Surety Company insured Pastazios Pizza, Inc. under a commercial general liability policy. Pastazios, along with its owner and manager, Ajredin Deari, was sued by eighteen year old Jane Doe in Texas state court. Doe alleged that Dearie and Pastazios plied her with alcohol despite her protests and that Deari drove her to a nearby hotel and sexually assaulted her after she had become intoxicated, infecting her with herpes in the process. Doe received a judgment of over $20 million in compensatory and punitive damages on causes of action against Pastazios for gross negligence, Dram Shop liability, and negligent false imprisonment. Pastazios and Deari were found jointly and severally liable.
Pastazios and Doe sought coverage under Century’s policy for the verdict, asserting that Century had breached its duty to defend and indemnify Pastazios in the state court action by withdrawing its defense shortly after the case was commenced and by refusing to pay the judgment. The United States District Court for the Northern District of Texas granted summary judgment in favor of Century applying the policy’s liquor liability and intentional harm exclusions. On June 25, 2018, the Fifth Circuit affirmed the grant of summary judgment in Century’s favor in a well-reasoned and thorough opinion applying the policy’s criminal acts exclusion. Century Surety Company v. Seidel, Case No. 17-10026 (5th Cir. Jun. 25, 2018).
The criminal acts exclusion excluded coverage for bodily injury “arising out of or resulting from a criminal act committed by any insured.” The Fifth Circuit noted that, under the applicable Texas law, when an exclusion includes the term “arising out of” it is to be given a broad, general and comprehensive interpretation, and a “claim need only bear an incidental relationship to the described conduct for the exclusion to apply.” Id. at 7 (internal citations omitted).
It also noted that “a misdemeanor act is a criminal act,” and under Texas law it is a misdemeanor to purchase an alcoholic beverage for or give an alcoholic beverage to a minor, or with criminal negligence make available an alcoholic beverage to a minor. Id.
The underlying complaint stated that Doe was a minor, that Pastazios provided alcoholic beverages to Doe resulting in her intoxication, and that Pastazios’ actions and Doe’s resulting intoxication was a proximate cause of all of Doe’s injuries and damages. In fact, the complaint plainly asserted that “all of [Doe’s] damages and bodily injuries arose out of the products provided and/or distributed to her by Pastazios.” Id. at 8. Likewise, the trial court determined in its findings of fact at trial that Pastazios’ provision of alcohol to Doe was both a proximate and a but-for cause of all Doe’s damages. Id. at 12.
Accordingly, the Fifth Circuit held that coverage was precluded and Century owed no duty to defend or indemnify Pastazios because all of Doe’s injuries arose out of or resulted from Pastazios’ criminal actions in giving or providing alcohol to a minor. The Court also noted that there is a trend among courts to find that such situations do not trigger coverage, because criminally providing alcohol to a minor is not an “accident” or “occurrence.”
The Fifth Circuit rejected a number of arguments from Doe and Pastazios advanced in favor of coverage.
First, the court rejected an argument that there was at least a duty to defend because Doe’s complaint did not specifically plead Pastazios’ actions were “criminal,” holding that the actions do not have to be specifically labeled criminal in order to imply a crime and trigger application of the criminal acts exclusion. Id. at 9.
Second, the court rejected an argument that a products-completed operations hazard (“PCOH”) exception to the policy’s separate liquor liability exclusion endorsement created coverage for liability arising from the provision of alcohol to minors, holding that “the language of an exclusion simply does not create coverage,” and that even if the PCOH exception could create coverage, the PCOH exception to the liquor liability exclusion had no bearing on the independent and separate criminal acts exclusion. Id. at 9-10.
Third, the court rejected the related argument that applying the criminal act exclusion would render the policy’s liquor liability endorsement meaningless, both for the reasons stated in the previous paragraph and because the liquor liability endorsement would still cover violations of statutes and ordinances that are not criminal in nature, such as Texas’ Dram Shop statute which imposes civil but not criminal liability for the serving of alcohol to an obviously intoxicated person. Id. at 10-11.
Lastly, the Fifth Circuit rejected the argument that Century had a duty to indemnify – even if it did not have a duty to defend – because the state court trial purportedly did not establish that Pastazios committed a criminal act. The court acknowledged that the duty to indemnify “is governed not by Doe’s factual allegations but by the facts established in the underlying  trial.” Id. at 12. The court had little trouble finding that the facts at trial established Pastazios committed the criminal act of purchasing alcohol for a minor, giving alcohol to a minor, or with criminal negligence making available alcohol to a minor, however. This was primarily because the state court’s imposition of punitive damages against Pastazios satisfied any applicable criminal negligence element and because Deari’s mental state was imputed to Pastazios in light of his position as manager, president, and sole owner of Pastazios. Deari knew Doe was underage when he provided her with alcohol from his own restaurant, Pastazios, and he had even stipulated in an agreement with the Texas Alcoholic Beverage Commission to the crime of serving alcohol to a minor. His criminal intent could thus be used to establish any criminal intent that may have been required of Pastazios.
This case provides a roadmap for application of criminal acts exclusions in future claims, and is particularly worth consulting when insureds or their principals are seeking coverage for allegations and damages relating to the illegal provision of alcohol to a minor, a far too common scenario.