Insurer Must Defend Allegations of Sexual Abuse

The Federal District Court, District of New Mexico, found that the insurer had a duty to defend allegations of sexual abuse lodged against the insured. Proassurance Spec. Ins. Co. v. Familyworks, Inc., 2022 U.S. Dist. LEXIS 71434 (D. N.M. April 19, 2022).

Four lawsuits relating to the sexual abuse of minor foster children were filed against Familyworks. It had a policy from ProAssurance first purchased in April 2014. Familyworks continued to purchase policies form ProAssurance each year through 2018. The policies included a Sexual Misconduct Endorsement which provided limited coverage for claims of negligence arising out of alleged sexual misconduct.

On July 2, 2018, the New Mexico Child Youth and Families Department (CYFD) wrote a letter to Familyworks titled “Imposition of Emergency Sanction.” The letter was directed at alleged abuse by one family and stated that Familyworks had been found noncompliant with various certification and licensing requirements. The letter restricted Famiyworks from accepting any new clients until the identified deficiencies were corrected. A second letter dated July 16, 2018 revoked Familywork’s treatment foster care license effective August 30, 2018. A third letter dated July 23, 2018 extended the revocation date to September 21, 2018.

Familyworks applied to renew its coverage with ProAssurance on August 16, 2018, following receipt of all three letters but before its license was actually revoked. Familyworks reported that the one family was currently under investigation and that Familyworks had revoked their foster care license. Familyworks did not disclose the impending revocation of its own license. A new policy was issued. On September 27, 2018, Familyworks informed ProAssurance that it had closed its business and asked the the policy be cancelled. Familyworks asked for a quote for tail coverage. ProAssurance issued a Reporting Endorsement covering professional liability claims reported during the extended period after cancellation of the policy which would be deemed to have been reported on the last day of the policy period.

Following the revocation of Familyworks’ license, four lawsuits were filed against Familyworks based on alleged sexual abuse of first children by Defendants Clarence and Debbie Garcia. All four suits alleged that Familyworks was negligent in retaining and supervising the Garcias and in failing to ensure the minors’ safety.

ProAssurance filed this declaratory judgment action seeking declarations that (1) no coverage existed under the Reporting Endorsement because it was void ab initio and could be rescinded, and (2) no coverage existed under the policies because the alleged sexual abuse did not constitute an “occurrence.”

The court found that the underlying complaints alleged an “occurrence.” Although the underlying plaintiffs alleged that Familyworks intentionally placed the children with the Garcias, none alleged that Familyworks intended the resulting sexual abuse. Whether Familyworks intended to place minor children with the Garcias or retain them as foster parents was immaterial to whether the alleged abuse constituted an “occurrence.” Therefore, ProAssurance had a duty to defend.

ProAssurance next argued that a policy exclusion for “liability arising out of any wilful, wanton, fraudulent, dishonest, criminal, reckless, intentionally wrongful or malicious act or omission.” Whether the exclusion barred coverage based on a third-party contractor’s criminal or intentional acts or whether it turned solely on the insured’s state of mind, was at the very least ambiguous. Therefore, the exclusion would bar coverage only if Familyworks acted with the requisite intent. Considering only the duty to defend, the underlying principal claims were for negligence and/or vicarious liability. Therefore, the allegations fell “arguably” within the scope of coverage, triggering a duty to defend.