With the rise of abuse lawsuits in the past decade or so, and various insurers including additional language in liability policies to limit, or outright exclude coverage for such claims, Washington Courts have been faced with an increasing number of coverage lawsuits for abuse claims.
One of the most recent decisions on this issue is Knaack, et al v. Allied World Spec. Ins. Co., 2024 WL 5247136 (W.D. Wash., Dec. 20, 2024), in which the Court found that the insurer owed no duty to provide defense or indemnity coverage to a substance abuse treatment facility that was sued in August 2020 for alleged abuse and harassment of patients by one of its employees. After the lawsuit was filed, the insurer denied defense and indemnity coverage to the facility under a policy that was in effect from October 2019-October 2020. After the denial of coverage, the plaintiffs and facility entered into a covenant judgment for $2.4 million dollars that was later approved as reasonable by the underlying trial court. The plaintiff, as assignee of the facility’s coverage and extra-contractual claims against the insurer, brought the present lawsuit.
The parties filed cross-motions for summary judgment on coverage, as well as other claims. The first coverage issue was whether there was a claim first made during the policy period in the EPL coverage section. The Court noted that a complaint had been submitted to the facility by an “unknown” patient in October 2018 reporting “an issue” with the employee at issue, but an internal investigation did not substantiate the allegations.” The Court found this was insufficient to constitute a “claim” as this term was defined in the EPL coverage section.
However, the Court found that exclusion K to the EPL coverage section applied as it excluded coverage for “loss in connection with any Claim…alleging, arising out of, based upon, attributable to or in any way relating to any actual or alleged sexual molestation or sexual abuse, including any mental anguish or emotional distress resulting therefrom.” The Court applied a “straightforward application” of exclusion K to find that the allegations in the complaint, which used the phrase “sexual abuse” numerous times, were not covered under the EPL coverage. Interestingly, and somewhat creatively, the plaintiffs asked the Court to disaggregate various allegations to separate certain actions that fall within exclusion K from those that may not, such as occasional hugs. The Court refused to do so by finding that “claim” includes the entire underlying lawsuit, and also found that the different allegations were “relating” to the excluded activities listed in exclusion K.
Another interesting argument raised by the plaintiffs in this case is that the insurer owed a duty to defend even if it owed no duty to indemnify. While some states have allowed such a conclusion, Washington has not. The Court referred to this argument as seeking a “strained and convoluted” reading of an endorsement that provided defense coverage if the Claim is covered in whole or in part. The Court also noted that such a conclusion would be contrary to Washington law.
Lastly, the Court found that the D&O coverage part did not apply because it contained an identical exclusion K. But the interesting argument was made by Plaintiffs by arguing that the insurer did not provide a full explanation of the reasons for the denial of coverage under the D&O coverage
Part at the time of the denial of coverage, and as such, the insurer should be estopped from asserting the applicable exclusions, including exclusion K, in the present lawsuit. The Court rejected this argument and found that “[p]laintiffs fail to cite any authority for their position that an insurer is obligated to provide a thorough explanation for coverage denial under every coverage provision in the policy an insured holds…”
This case not only affirms the enforceability of certain abuse exclusions in liability claims, but also provides sound guidance on how a straightforward application of clear policy language leads to the intended result in these circumstances instead of a tortured and convoluted conclusion.
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