Source: https://njinsuranceblog.com/2015/07/
Timestamp: 2019-04-22 02:07:12+00:00

Document:
Most third-party liability insurance policies contain an intentional acts exclusion that bars coverage for claims arising out of the intentional acts of an insured. Some policies also contain “assault and battery” and/or “sexual molestation” exclusions. Such exclusions have been upheld on the basis that it is against public policy for an insurer to indemnify an insured for the civil consequences of the insured’s intentional or criminal wrongdoing. Thus, an insurer typically has no duty to defend or indemnify its insured if the insured wrongfully and intentionally caused injury to a third party.
In order to get around application of intentional acts exclusions, an injured party typically will allege, in the alternative, that the insured acted negligently. In addition, the injured party may seek recovery from someone other than the insured, claiming that the third party negligently hired, retained, trained, or supervised the insured. Such “negligence” claims generally will not fall within an intentional acts exclusion unless the exclusion expressly so provides.
In P.D. v. Germantown Insurance Company, 2014 WL 10102329 (N.J. App. Div. July 20, 2015) the New Jersey Appellate Division had occasion to consider application of a sexual molestation exclusion in a homeowner’s insurance policy. There, it was alleged that “Matthew,” a high school student, sexually assaulted “Ann,” a classmate of his, on two occasions. The first incident took place on school property and the second incident took place at Matthew’s home. Ann later commenced an action against Matthew, asserting claims based on negligent and intentional sexual assault. Ann also sued Matthew’s parents, asserting a negligent supervision claim.
Id. The insurance company denied coverage based on those two exclusions. The insureds then commenced a declaratory judgment action against the insurer, seeking coverage under their policy.
The insureds moved for summary judgment seeking a determination that the insurer was obligated to pay Matthew’s attorney’s fees. While the motion was pending, the insureds settled with Ann and assigned their right to proceed against their insurance company to her. The insurer then cross-moved for summary judgment seeking dismissal of the complaint in its entirety. Ann then moved for summary judgment seeking complete indemnification.
The trial court granted summary judgment in favor of the insurer in connection with the claims asserted by Matthew, finding that coverage was barred based on the sexual molestation exclusion. With respect to the claim against the parents, the court likewise held that the insurer had no duty to indemnify the parents because “[t]he negligent supervision claim only rises in the context of the . . . sexual molestation claim [and] therefore there can be no coverage . . . .” Id. at *6.
Despite finding that coverage did not exist, the court nonetheless held that the insurer owed a duty to defend the parents against Ann’s claims. The court’s ruling was based on its conclusion that the insurer “was ‘quick on the draw’ to deny coverage and should have conducted some investigation before they came to the conclusion that the sexual molestation and the negligent supervision are in essence one claim.” Id. In other words, even though it found that there clearly was no coverage for the claims under the policy, the court imposed a duty to defend on the insurer because it was not happy with the insurer’s handling of the claim.
Both parties appealed the trial judge’s decision.
Regardless of the label a plaintiff attaches to its theory of liability, the facts relied on by Ann to support her claims against Matthew describe intentional acts constituting a sexual assault. Affixing the label of “negligence” to otherwise clear allegations of intentional conduct is nothing more than a transparent attempt to trigger coverage under plaintiffs’ homeowner’s insurance policy.
Id. at *9. Thus, the Appellate Division affirmed the trial court’s ruling with respect to Matthew.
On its face, the underlying complaint against plaintiffs alleging negligent supervision arises out of the exclusion for sexual molestation. The underlying cause of action seeks compensatory damages from plaintiffs because they negligently performed their duty as parents to supervise Matthew and prevent him from sexually molesting or assaulting Ann. This leaves no ambiguity. The negligent supervision claim arises from a clear exclusion in the policy. Defendant is not contractually obligated to defend plaintiffs in connection with this claim.
Key to the court’s conclusion was the fact that sexual molestation exclusion barred coverage for claims “arising out of” sexual molestation. The phrase “arising out of” has been interpreted broadly by the New Jersey Supreme Court to bar coverage for all claims that “originate in,” “grow out of,” or have a “substantial nexus to” the excluded conduct. See Flomerfelt v. Cardiello, 202 N.J. 432, 456 (2010). Thus, although the exclusion made no reference to negligent supervision claims, the court nonetheless held that such claims were barred.
The New Jersey Insurance Fraud Prevention Act (“IFPA”) provides for the imposition of certain penalties in connection with the commission of insurance fraud by an insured and/or certain individuals acting on behalf of an insured. N.J.S.A. §17:33A-1 to -30. The purpose of the IFPA “is to confront aggressively the problem of insurance fraud in New Jersey by facilitating the detection of insurance fraud, eliminating the occurrence of such fraud through the development of fraud prevention programs, requiring the restitution of fraudulently obtained insurance benefits, and reducing the amount of premium dollars used to pay fraudulent claims.” Id. at §17:33A-2.
A claim alleging a violation of the IFPA may be brought by the Office of the Insurance Fraud Prosecutor. The IFPA sets forth certain statutory penalties for violation of the IFPA. The IFPA also provides that an insurance company may bring a private cause of action seeking compensation for damages sustained as a result of the fraud, and provides for the recovery of “reasonable investigation expenses, costs of suit and attorney’s fees.” Id. at §17:33A-7a. In addition, an insurer is entitled to recover treble damages “if the court determines that the defendant has engaged in a pattern of violating [the] act.” Id. at §17:33A-7b. A “pattern” means “five or more related violations.” Id. at §17:33A-3. Given the potential to recover treble damages and attorney’s fees, the IFPA provides insurance companies with an effective weapon for fighting insurance fraud.
In a 2013 decision, Allstate New Jersey Ins. Co. v. Lajara, 433 N.J. Super. 20, 77 A.3d 491 (App. Div. 2013), the Appellate Division held that there is no statutory or constitutional right to a jury trial under the IFPA. That decision represented a major change in the law because IFPA claims had routinely been tried before juries since at least 1994.
In 2014 the New Jersey Supreme Court granted leave to appeal the Lajara decision. On July 5, 2015, the New Jersey Supreme Court issued a decision reversing the Appellate Division’s decision. See Allstate New Jersey Ins. Co. v. Lajara, 2015 WL 4276162 (N.J. July 16, 2015).
Unlicensed defendants provided “purported healthcare services” through companies that concealed their true status. Defendants provided unnecessary care and prescribed unnecessary medical equipment, engaged in fraudulent testing of patients, misrepresented test results and patients’ symptoms, and unlawfully split fees and concealed prohibited self-referrals—all for the purpose of wrongly securing or enhancing recoveries for claimants or price gouging.
Id. Allstate further alleged that certain “defendants paid fees to individuals who staged accidents, created fraudulent medical records and bills, and recruited persons involved in accidents who suffered either minor or no injuries.” Id.
Allstate initially requested a jury trial in the complaint. It later decided, however, to withdraw that demand, a move that was opposed by a number of the defendants. The trial court held that there was no right to a jury trial under the IFPA and, therefore, granted Allstate’s request to withdraw its demand. That decision was affirmed on appeal by the Appellate Division.
In determining whether the jury-trial right applies to a statutory cause of action, we assess whether the grant of a jury trial is consistent with our common-law tradition. An IFPA claim meets that standard because compensatory and punitive damages are legal—not equitable—in nature and because the elements necessary to prove an IFPA claim are similar to common-law fraud.
Id. Consequently, the court concluded that the defendants were entitled to a jury trial.
There is a general perception that juries tend to be prejudiced against insurance companies. Thus, most insurance companies prefer bench trials, in which the claims are decided by a judge and not a jury. Insureds, on the other hand, typically favor having insurance claims resolved by juries. Thus, it is not surprising that certain defendants fought so persistently to have Allstate’s claims heard by a jury, taking the case all the way to the New Jersey Supreme Court. Ironically, had Allstate not requested a jury trial to begin with, the issue may never have arisen.

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