It is the axiomatic formula for determining if a claim is covered: is the policy’s insuring agreement satisfied? If so, do any exclusions apply? If yes, do any exceptions to the exclusions apply?
However, these steps are sometimes overlooked. It generally happens when it is believed that coverage will rise or fall based on the applicability of an exclusion. With the exclusion being the key issue, the analysis initially starts there -- with no consideration given to whether the insuring agreement has been satisfied in the first instance.
On one hand, perhaps I’m being too pedantic. It may be so obvious that the insuring agreement applies – say, that “bodily injury” was caused by an “occurrence” -- that it’s not even worth the trouble to address this mere formality. Also, if the exclusion applies, what difference does it make if the insuring agreement were first satisfied. Of course, if an exclusion does not apply, the impact of that would not be felt if the insuring agreement is not satisfied.
The Kentucky Supreme Court’s decision in Robinson v. Thomas is the only one that I have seen where lower courts’ failure to follow these steps led to their reversal. The courts skipped over the applicability of the insuring agreement, instead, jumping right to an exclusion, and this led to their undoing. Perhaps there are other cases like this, but certainly not many, and especially from a state high court. Robinson was chosen for selection here not because of the specific coverage issue, but, rather, because of its uniqueness and this fundamental coverage issue applies to all liability policies.
My take-away of the high court’s decision -- If the insuring agreement had been analyzed before a “violation of any statute” exclusion, the exclusion would have been analyzed within the context of the insuring agreement. In such case, it may not have been interpreted in a manner that so easily led the lower courts to conclude that it was applicable.
Over two decades ago, two-year old Brianna was enrolled at Room to Grow pre-school and evidence of sexual abuse was discovered. Following an investigation, it was determined that the abuse did not occur at the pre-school. Ultimately, Brianna’s father, Dr. Thomas Robinson, was indicted for sexual abuse and acquitted by a jury.
Many years later, Brianna’s mother, Lisa Robinson, sued Room to Grow and its owner, John Thomas, alleging various acts of negligence related to its failure to prevent the assault by a pre-school employee. Room to Grow was dismissed.
At issue before the Kentucky Supreme Court was the availability of coverage for Thomas, under a commercial general liability policy issued by Monroe Guaranty Insurance Company. The standard terms of the CGL policy were unremarkable. However, the policy also contained a “Home Child Day Care/Day Care Professional Liability” endorsement that provided coverage specific to the operation of a preschool. The endorsement amended the definition of “occurrence” to include “any act or omission arising out of the rendering of or failure to render professional service as a day care.” The endorsement excluded coverage for any “bodily injury” arising out of “violation of any statute, or government rule or regulation.”
The trial court and appeals court both concluded that no coverage was owed based on the applicability of the “violation of any statute” exclusion. However, in reaching their decisions, the Supreme Court noted that neither lower court first addressed whether the claimed injuries resulted from an “occurrence.”
“CGL coverage analysis,” the supreme court explained “is a three-step process: (1) was the event covered under the policy as an ‘occurrence?’ If so, (2) are there any explicit policy exclusions for the damage that occurred? If not, (3) are there any exclusions to those policy exclusions, such as PCOH coverage?”
By going straight to the “violation of any statute” exclusion, the supreme court stated that the trial court “put the proverbial cart before the horse by determining Brianna’s claims are subject to the particular exclusionary language of the endorsement without ever discerning whether coverage should exist in the first instance. ‘[E]xclusion clauses do not grant coverage; rather, they subtract from it.’” For this reason, the supreme court reversed and remanded.
What’s really going on here? After all, the appeals court had no trouble concluding that the “violation of any statute” exclusion applied, stating “It is unthinkable penetration of the vagina of a two-year-old child, resulting in four lacerations, is not violative of our statutes, regardless of the identity of the perpetrator and regardless whether a conviction could be obtained. The language of the exclusion does not specify that the statutory violation must result in a conviction.”
So, if the “violation of any statute” exclusion applies, what difference does it make if the insuring agreement is or is not satisfied? While the opinion does not address this issue specifically, the dissenting opinion from the court of appeals, which is discussed by the supreme court, provides an explanation.
In dissenting from the court of appeals decision, Judge Acree stated that the “violation of any statute” exclusion only applied to the Endorsement, which provided coverage for claims “arising out of the rendering of or failure to render professional services in connection with the operation of the Insured’s business as a day care.” The judge stated that “[t]o give meaning to the restriction of this exclusion to this coverage, the contract must be interpreted as referencing the violation of laws regulating Mr. Thomas’s ‘business as a day care.’” Therefore, according to the judge, this “limits the applicable violable laws to those regulating day care businesses.” (emphasis in original).
The supreme court picked up on this:
“[W]e believe it is important to briefly address certain matters which are likely to reoccur on remand. We are troubled by the expansive reading embraced by the trial court of the “violation of any statute” exclusion and the apparent broadening of that interpretation by the Court of Appeals to include the violation by any person—not limited to the insured’s or their employees—of any of the Commonwealth’s thousands of statutes—regardless of the subject matter covered thereby. As noted by Judge Acree in his dissent, the exclusions in the endorsement would appear to apply only to the expanded coverage for damages ‘arising out of the rendering or failure to render professional services in connection with the operation of the Insured’s business as a daycare.’ Neither court below adequately analyzed or explained why the statutory violation exclusion should be read to cover anyone other than the insured or apply to statutes outside the realm of operating a daycare. On remand, should the trial court determine there was an ‘occurrence’ triggering coverage and again be tasked with interpreting the exclusionary provisions of the base policy and the endorsement, it must rely solely on facts which are in evidence and draw all reasonable inferences in favor of the party opposing any summary judgment motion.”
