Errors-and-omissions Sexual Misconduct Exclusion Applied In Case Against School

By Don R. Sampen, published, Chicago Daily Law Bulletin, December 7, 2021

The 7th U.S. Circuit Court of Appeals, reversing the district court, recently upheld the application of a sexual misconduct exclusion in a school district’s claims-made errors and omission policy.

The case is Netherlands Insurance Co. v. Macomb Community Unit School District No. 185, 8 F.4th 505 (Aug. 6). The insurer, Netherlands, was represented by Best, Vanderlaan & Harrington of Chicago, among other firms. The school district was represented by Franczek Radelet P.C. of Chicago.

Students from the school district brought suit in February 2018 alleging the district had failed to prevent and inappropriately responded to sexual misconduct by a male student. The misconduct allegedly took place in spring 2014 and fall 2016.

The school district notified its insurer, Netherlands, a few days after suit was filed.

The district’s policy contained occurrence-based general liability coverage and claims-made errors and omissions coverage. The coverage for sexual misconduct was occurrence-based and applied to misconduct that occurred between December 2017 and December 2018.

The alleged misconduct and failures to respond here occurred before December 2017 and thus fell outside of the sexual-misconduct occurrence coverage. The parties thus agreed that the occurrence coverage did not apply.

The claims-made errors and omissions coverage applied to claims made from December 2017 through December 2018, and thus was in effect when suit was filed in February 2018. That coverage, however, contained a sexual misconduct exclusion.

The exclusion applied to sexual misconduct “of any person,” including related allegations that an insured negligently employed, supervised, etc., the person, and allegations that someone’s civil rights had been violated.

Following settlement of the underlying lawsuit, Netherlands brought this suit seeking a declarations of rights and obligations. Upon the School District motion for judgment on the pleadings, the district court held that the exclusion was ambiguous and the errors and omissions coverage therefore applied.

Specifically, the district court found that the exclusion could be read to apply only to a school employee, and, apparently, not to conduct by a student. In addition, the court said the exclusion might not bar “reactions to” a student’s misconduct. The court therefore granted the school district’s motion in favor of coverage, and Netherlands appealed.

Analysis

In an opinion by Judge Frank H. Easterbrook, the 7th Circuit reversed. He attacked both aspects of the district court’s reasoning.

Initially he pointed out that the exclusion’s application to sexual misconduct “of any person” was broad enough to cover such misconduct by a school employee or student. More important, though, was the fact that, even if the exclusion applied only to an employee’s actions, it still applied.

The exclusion still applied because the school district could only be liable for the conduct of its employees. And, in fact, no one argued that it could incur direct liability for actions of students.

Thus, wrote Easterbrook, the exclusion reflected, and applied to, the school district’s liability under Title IX of the Civil Rights Act of 1964, for discrimination of which the district had notice and was deliberately indifferent.

By the same reasoning, the school district’s “reactions to” a student’s misconduct — the second ground for the district court’s ruling — would, once again, be the very acts that could establish liability for violations of Title IX. By excluding coverage for “allegations relating” to sexual misconduct, Easterbrook said, the exclusion necessarily barred coverage for such “reactions.”

In short, Easterbrook found that, by the errors and omissions exclusion, Netherlands intended to confine sexual misconduct coverage to that set forth in the sexual misconduct occurrence provision. Since that provision did not apply, the policy extended no coverage to the school district for the sexual misconduct allegations at issue.

The court therefore reversed in favor of Netherlands.

Key Point

An exclusion applicable to the sexual misconduct “of any person,” and related allegations that the insured negligently employed or supervised such person, applies to actions and reactions by the employees of the insured for the misconduct of such other person.