Does crime pay? Insurance for criminal acts.

• Author: Aylward, Michael F.
• Position: Insurance coverage

Sometimes yes, if you have insurance, and sometimes no. But the battle between policyholders and insurers continues

ONE might fairly wonder why there ever should be a question of insurance coverage for criminal acts. After all, the purpose of insurance is to guard against unforeseen events, not to insure conduct that is so heinous that society has imposed special penalties to discourage it. But, as claims professionals can attest, claims for criminal acts are being presented, and in many cases, courts are finding coverage.

This article considers three areas--first, the traditional bases on which courts have refused to permit coverage for criminal acts; second, the evolving theories on which some jurisdictions now permit coverage for certain types of conduct and claims; and third, the new exclusions and arguments that insurers have developed to counter or limit their exposure for such claims.

CONTRACTUAL LIMITATIONS TO COVERAGE

Courts traditionally have refused to permit coverage for criminal conduct because to do so is antithetical to the entire concept of insurance, whether based on express policy provisions or implied concepts of fortuity and risk transfer. Alternatively, courts have concluded that it would be against public policy to indemnify criminals against the consequences of their intentional acts. Such concerns sometimes merge, as in cases in which courts have looked to public policy concerns to enunciate standards for interpreting insurance contracts.

1. Contractual Considerations

   The principal focus of these coverage disputes has been on policy wordings that purport to limit coverage for various types of intentional acts.(1) In general, the disputes concern (1) "occurrence"-based general liability insurance for "bodily injury"; (2) "personal injury" coverage that may be added to general liability (GL) policies by broad form endorsements or, more recently, as a standard part of GL policies; and (3) "claims made" errors and omissions policies.

   1. Accidents and Occurrences

      Since 1965, most GL policies have been written on m "occurrence" basis, which typically is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

      1. "Accident"

         An "accident" is something that "arises from extrinsic causes," "occurs unexpectedly or by chance" or "happens without intent or through carelessness."(2)

      2. "Expected or Intended"

         The resulting injuries also must not have been "expected or intended." In recent years, this requirement has been extracted from the definition of "occurrence" and set out as a separate policy exclusion.

         States differ as to whether an objective or subjective standard should be applied to determine intent. An objective standard asks whether a reasonable person, standing in the shoes of the insured, would have expected or intended the injuries to occur. By contrast, a subjective standard requires proof that this specific insured concededly meant to cause harm.

         In recent years, a slight majority of jurisdictions have adopted a "subjective" approach, including Alabama, Arizona, California, Delaware, Idaho, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New Jersey, New York, Ohio, Virginia, Washington and West Virginia.

         States that still follow an "objective" approach include Arkansas, Hawaii, Iowa, Minnesota, Mississippi, Montana, Nebraska, North Dakota, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Vermont, Wisconsin and Wyoming.

         Finally, states such as Illinois and Indiana have adopted a compromise position under which "expected" takes on an objective connotation, but "intended" implies a subjective viewpoint.

         Whether courts use a subjective or objective test, an intent to injure generally is inferred as a matter of law if the insured's conduct is inherently harmful. Nearly every U.S. jurisdiction has concluded that intent should be inferred in cases of rape, sexual molestation or sexual assault, especially when the victim is a minor.

         These holdings are based on the unconsented to and violent nature of the insured's conduct.(3) Conversely, intent will not be inferred as a matter of law in cases if the sex is consensual or, as is often the case, where the issue of consent itself is disputed.(4) On the other hand, an insured cannot compel coverage just by arguing that the victim of his assault secretly desired to have sex or that he had a subjective belief that he would give pleasure to his victim.(5)

         This analysis has been extended to other cases involving violent criminal conduct. Thus, courts have generally refused to require coverage for armed robbery cases.(6) But this has not been true of all crimes involving forcible conduct. Claims for kidnapping or false imprisonment have been held outside the scope of coverage.(7) On the other hand, in a case where the plaintiff separately claimed that the insured had kidnapped her after raping her in her hotel room, the Louisiana Supreme Court ruled that the kidnapping claims were outside the scope of an "assault and battery" exclusion.(8) Although the rape allegations necessarily involved an assault and battery, the court declared that the claims of kidnapping might not involve force and thus should not be excluded from coverage.

   2. "Personal Injury"

      In addition to insuring claims for bodily injury and property damage, many general liability policies extend coverage to certain enumerated claims for "personal injury," including malicious prosecution, defamation and invasion of privacy. This coverage originally was available only through a broad form endorsement, but in recent years, it has been made part of the standard GL policy as Coverage B.

      Historically, "personal injury" coverage has not been subject to any exclusion for intentional acts, nor does the definition of "occurrence" have any application. As a result, many courts have found coverage for intentional and unlawful acts if they otherwise constitute one of the enumerated "offenses."(9)

      Even where policies contain exclusions for intentional and criminal acts applicable to bodily injury, property damage and personal injury, some courts have resisted giving effect to the exclusion in this context for fear that it would "swallow" the "personal injury" coverage. For instance, in Bailer v. Erie Insurance Exchange,(10) an au pair sued her former employers for invading her privacy by surreptitiously videotaping her in the shower. Although the policy at issue excluded intentional acts, the Maryland Court of Appeals held that the exclusion was in conflict with the grant of insurance for "personal injury," which expressly included "invasion of privacy." The court rejected the insurer's contention that the terms were not truly in conflict, since there could still be coverage for a negligent invasion of privacy.

      Likewise, courts have fought efforts by insurers to interpolate fortuity requirements into these coverages on the ground that they strike at the very heart of the coverage the insured has purchased for "offenses," which by their very nature involve intentional conduct.(11)

      While peeping toms therefore may be able to get coverage for "invasion of privacy" claims, more serious crimes would seem to be subject to the "penal ordinance" exclusion, which provides that the policy does not apply to claims for personal injury "arising out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured." A penal statute or ordinance is one that is enacted for the purpose of punishing an individual perpetrator for committing proscribed acts. By contrast, if a statute is enacted for the broader purpose of protecting the public by regulating the activity in question, the statute will be deemed to be remedial in character, not penal.(12)

      In Lutheran Benevolent Insurance Co. v. National Catholic Risk Retention Group,(13) a federal district court refused to give effect to the "penal ordinance" exclusion in a sexual molestation case, holding that its scope was limited to claims for "personal injury," whereas the plaintiff had alleged bodily injury.

   3. Professional Liability Policies

      Professional liability and other "claims made" policies typically lack exclusions for "expected or intended" conduct or other "occurrence"-based language. The issue in these cases is whether the insured's criminal conduct involved the rendering of or failure to render "professional services."

      With the exception of "transference phenomenon" claims involving psychiatrists, most courts have refused to find that sexual contact claims involve the rendition of or failure to render "professional services."(14) However, if the claim specifically relates to some form of therapy and is not clearly undertaken for the insured's own illicit pleasure, courts are more likely to find coverage.(15)

      Responding to these claims, professional liability insurers have added exclusions for criminal acts and sexual misconduct or, in more recent forms, have quarantined coverage for such claims by making them subject to small sub-limits, as explained later in this article.

2. Extracontractual Considerations and Public Policy

   Just as courts sometimes use reasons of public policy to find coverage, public policy has been invoked to bar coverage in circumstances in which third-party indemnification arguably would undermine the deterrent affect of the scheme of strictures and penalties that society has erected to deter and punish crime. In Western States Insurance Co. v. J.R.,(16) the Appellate Court of Illinois ruled that public policy did not require insurers to provide coverage for child molestation claims. While expressing sympathy for the victims of crime, the court concluded that "economic liability should be placed with the same precision as moral liability is placed--squarely on the shoulders of...