HNRK Coverage Corner

On April 22, 2022, the New York Appellate Division, First Department issued a decision in Madison Square Boys & Girls Club, Inc. v. Atlantic Specialty Ins. Co., 2022 NY Slip Op 02625, holding that a sexual abuse exclusion applied to claims for negligent supervision.

This coverage action arose out of a lawsuit by former members of the Madison Square Boys and Girls Club, who alleged that they were sexually abused as children by a former volunteer and former coach for the organization.  Madison Square sought coverage under a claims-made liability policy for the lawsuit, which asserted claims for negligent supervision.  The insurer denied the claim based on a sexual misconduct and child abuse exclusion, which barred coverage for any claim “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged Sexual Misconduct . . . or child abuse or neglect.”

The First Department affirmed the trial court’s dismissal of the insured’s coverage action based, inter alia, on this exclusion.  Although Madison Square was not sued for sexual misconduct but for the negligent supervision of its staff, the Court explained:

The exclusion at issue bars coverage for loss from any claim arising out of, or in any way involving sexual misconduct and child abuse.  The underlying complaint’s negligent supervision claim necessarily arises out of sexual misconduct as it is based on the allegations that the failure to supervise led to the sexual abuse of MSBGC’s members when they were children. . . .  The underlying complaint’s emotional distress claim is also premised on MSBGC’s failure to supervise and arises out of sexual misconduct.

(Citation omitted).

The First Department’s ruling in this case relies on precedent establishing a broad definition of the phrase “arising out of” to require only “some causal relationship” between the loss and the excluded conduct.  Country-Wide Ins. Co. v. Excelsior Ins. Co., 147 A.D.3d 407, 409 (1st Dep’t 2017) (citing Mount Vernon Fire Ins. Co. v. Creative Hous., 88 N.Y.2d 347, 350 (1996)) (emphasis added).  This broad reading—rather than a more narrow one focusing on proximate as opposed to “but-for” causation—would appear to run counter to the general maxim that exclusionary clauses are to be read narrowly in favor of coverage.  Indeed, an insurer could easily write an express exclusion for negligent supervision claims involving sexual misconduct.  Having not done so, why should it be entitled to accomplish the same end through a broad reading of an less precisely-worded exclusion?