Sexual Misconduct Exclusion Found Ambiguous

    The court granted the insured's motion for summary judgment, finding a duty to defend was owed because the policy's Sexual Misconduct Exclusion was ambiguous. Powers v. Certain Underwriters at Lloyd's London, 2024 U.S. Dist. LEXIS 153265 (D. Nev. Aug. 26, 2024). 

    Plaintiff was sexually assaulted while walking to her apartment. She sued the apartment complex and its security company, American Protection Group, Inc. (APG) for negligence and negligent hiring, training, retention, supervision and management. APG sought defense and indemnity coverage from its insurers, Lloyd's and Hiscox, pursuant to its Hiscox Pro Liability Insurance Policy.

    The insurers declined to defend APG, asserting the policy's Sexual Misconduct Exclusion applied. The exclusion precluded claims "based upon or arising out of any actual, alleged, or threatened abuse, molestation, harassment, mistreatment, or maltreatment of a sexual nature, including the negligent employment, investigation, supervision, training, or retention of a person who commits such conduct, or the failure to report such conduct to the proper authorities." 

    At the underlying trial, APG ran out of funds to pay its counsel, so the trial court entered default judgment against it and awarded Plaintiff over $20 million in damages. The trial court assigned APG's rights to plaintiff, and she filed this suit against the insurers, claiming, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. 

    Plaintiff moved for summary judgment on the breach of contract claim. The insurers cross-moved for summary judgment on all claims. 

    Plaintiff argued the Sexual Misconduct Exclusion contained ambiguous language that should be construed in the insured's favor. The court agreed that the exclusion was ambiguous in two ways: whether sexual assault by a third party was excluded; and whether the exclusion applied to sexual assault at all. Plaintiff interpreted the "including" clause as precluding coverage for only the "rogue security officer" that sexually harasses or abuses those they are employed to protect. This was a reasonable reading of the clause. The language of the exclusion could be read to mean only claims arising out of sexual misconduct by an insured's employee were barred. 

    The insurers' interpretation that the exclusion also precludes claims arising out of third-party conduct was likewise reasonable because the Sexual Misconduct Exclusion did not expressly limit the exclusion to the insureds' misconduct, but rather included the insureds' misconduct. The exclusion was written broadly, perhaps intentionally, to leave open the possibility that a third party's sexual misconduct would be excluded. 

    Under Nevada law, the exclusion was to be read narrowly against the insurer. Therefore, even assuming the insurers' broad interpretation was reasonable, it could not prevail because the insurers did not establish that their interpretation was the only reasonable one. 

    A second ambiguity existed in the exclusion's described conduct: "abuse, molestaion, harassment, mistreatment, or maltreatment of a sexual nature . . ." The exclusion did not mention sexual assault and rape. The insured could reasonably believe that sexual assault and rape of an adult would not be covered under the exclusion, but the insurer could also reasonably argue that sexual assault and rape were included under the broadly used terms. The insurers again failed to employ clear language communicating the nature of the exclusion. In light of the exclusion's ambiguity, the court interpreted the provision to effectuate the insured's reasonable expectations: that bodily injury resulting from sexual assault was covered under the policy in the same way that bodily injury resulting from another type of battery would be.

    The court granted plaintiff's motion for summary judgment to the extent she alleged a breach of the duty to defend.