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Insurer Not Required to Defend Insured Against Allegations of Direct and Vicarious Liability Arising from Alleged Kidnapping Scheme by Insured and its Agents
Liberty University, Inc. v. Citizens Insurance Company of America, et al.
In Liberty University, Inc. v. Citizens Insurance Company of America, et al., No. 14-2254, (U.S. Court of Appeals for the Fourth Circuit, July 10, 2015), the U.S. Court of Appeals for the Fourth Circuit considered whether the U.S. District Court for the Western District of Virginia erred in ruling that Citizens Insurance Company of America (Citizens) had a duty to defend its insured, Liberty University, Inc., (Liberty) against a civil lawsuit alleging various intentional torts. The Fourth Circuit held that Citizens had no duty to defend and reversed the district court’s grant of summary judgment for Liberty.
In November 2012, Janet Jenkins sued Liberty, alleging that the school participated, both directly and vicariously, in a scheme to kidnap her daughter so as to interfere with court visitation orders. Specifically, the Jenkins Complaint alleged that Liberty was liable for conspiring to commit the intentional tort of kidnapping, which is also chargeable as a criminal offense, and for conspiring through a pattern of racketeering to kidnap and take the child to Nicaragua in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(d). The Jenkins Complaint also alleged that Liberty was vicariously liable for the role one of its employees played in the kidnapping.
The insurance policy at issue contained two (2) coverage forms: (1) Commercial General Liability (“CGL”) and (2) School and Educators Legal Liability (“SELL”). The CGL coverage provided two subsidiary coverage forms. Coverage A required Citizens to defend suits seeking damages arising from “bodily injury” and “property damage” arising from an “occurrence,” which the policy defined as “an incident that was unexpected from the viewpoint of the insured.” Coverage B required Citizens to defend suits alleging “personal and advertising injury,” but it included a “Criminal Acts Exclusion,” which excluded any injury arising out of a criminal act committed by the insured. The SELL coverage required Citizens to defend against any claim alleging injury arising out of a wrongful act, but it also contained a “Criminal Acts Exclusion.” The insurance policy also contained a Separation of Insureds clause, requiring the insurer to evaluate the claims against each named insured individually.
When Citizens refused to defend Liberty against the Jenkins lawsuit, Liberty filed a declaratory judgment complaint, in district court. Citizens and Liberty cross-filed motions for summary judgment, and the district court ruled in favor of Liberty, holding that Citizens had a duty to defend because the Jenkins Complaint alleged an “occurrence.” The district court based its ruling on the policy’s Separation of Insureds clause, concluding that the intent of Liberty’s agents could not be imputed to Liberty. In the alternative, the district court concluded that Liberty could not be liable for damages arising from the “occurrence” because the Jenkins Complaint did not sufficiently allege Liberty’s vicarious liability. The district court also concluded that none of the coverage exclusions in either the CGL or SELL policies applied.
The Fourth Circuit applied Virginia’s “Eight Corners Rule,” under which it compared the “four corners” of the underlying complaint with the “four corners” of the insurance policy, to determine whether Citizens had a duty to defend the lawsuit against Liberty. In doing so, the Fourth Circuit determined that the district court erroneously interpreted the Jenkins Complaint and the Separation of Insureds clause.
First, the Fourth Circuit held that the Jenkins Complaint, which only alleged Liberty’s liability for intentional conduct, did not plead an “occurrence,” the Separation of Insureds clause notwithstanding. The pivotal issue for the Court to decide was whether the Separation of Insureds clause altered Virginia’s rule that the expectations and bad intentions of agents are imputed to the principal. The Fourth Circuit determined that the Virginia rule remained unchanged, because an agent’s intentionally tortious act can never be “unexpected” by a principal who is vicariously liable for the act. The Jenkins Complaint framed Liberty’s liability in terms of respondeat superior, which the Court was careful to note was distinct from an allegation of negligent hiring or supervision. Because a negligent hiring or supervision action is not particularly concerned with the agent’s intent but instead alleges the principal’s direct negligence, a Separation of Insureds provision may require the court to analyze whether the harm was foreseeable solely from the principal’s perspective. Critically, unlike an allegation of negligent hiring or supervision, the Jenkins Complaint did not allege that Liberty was responsible for its agents’ intentional acts. The Separation of Insureds clause does not displace the ordinary rule in Virginia that a complaint alleging a principal’s liability based solely in respondeat superior does not state an “occurrence.”
The Fourth Circuit also rejected the district court’s alternative basis for holding – that the Jenkins Complaint did not sufficiently allege Liberty’s vicarious liability – stating that a claim’s probability of success (i.e., whether it “sufficiently” states a claim) is inconsequential for determining whether insurance coverage exists. Therefore, the Fourth Circuit held that Citizens had no duty to defend Liberty pursuant to CGL Coverage A.
The Fourth Circuit held that the Criminal Acts Exclusion in Coverage B applied. First, the Jenkins Complaint clearly and unambiguously alleged that Liberty and its agents committed criminal acts. Second, the Jenkins Complaint unambiguously claimed that Liberty was liable for injuries arising from those criminal acts. Therefore, the Fourth Circuit held that Citizens had no duty to defend Liberty pursuant to CGL Coverage B.
Finally, the Fourth Circuit held that the Intentional and Criminal Acts Exclusion (“the Exclusion”) in the SELL Coverage applied. Because the Jenkins Complaint alleged Liberty’s liability for injuries arising from its direct involvement in conspiracies to commit kidnapping and racketeering, these claims clearly and unambiguously triggered the Exclusion, leaving Citizens with no duty to defend Liberty pursuant to the SELL Coverage.
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