Abuse Exclusion – Not A Straight Road To Denial of Coverage

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The recent decision from Ontario in the case, Southside Muay Thai Academy Corporation v. Aviva Insurance Company of Canada, 2019 ONSC 6086, affirms that an “abuse exclusion” clause will not automatically remove an insurer’s duty to defend an organization in respect of alleged abuse by one of its employees in the course of their employment.

A martial arts club and their employee were sued by a student of the club for alleged sexual abuse by the employee. The Ontario Superior Court’s decision turned on the broad pleadings against the club, which met the low threshold to trigger a duty to defend.

More particular to abuse cases against organizations, the Court also considered an insurer’s duty to each individual insured – and the need to assess coverage for each insured separately in relation to the policy wording and pleaded allegations. This case serves as a reminder for insurers seeking to rely on exclusion clauses, that determining coverage for one insured will not be determinative of coverage for another. This will ring especially true in abuse cases against insured organizations, in which the scope and nature of allegations will vary from one insured to another.

Background

Mr. Fontalvo was an employee of the Southside Muay Thai Academy (the “Academy”), a kickboxing academy in Ontario. During a flight returning from a training trip in Thailand, P.F., a student of the Academy, alleged that Mr. Fontalvo touched her in a sexual manner without her consent.

P.F. sued Mr. Fontalvo and the Academy. The statement of claim alleged damages for assault against Mr. Fontalvo, and also alleged against the Academy for, among other things:

  • failing to supervise and protect P.F. generally and during the flight with Mr. Fontalvo;
  • failing to supervise Mr. Fontalvo, intervene and prevent inappropriate behaviour from recurring and worsening;
  • failing to ensure their employees were suitable for employment around children.

The Academy held a commercial general liability policy with Aviva Insurance Company of Canada (the “Insurer”). The Insurer denied coverage for both defence and indemnification, to Mr. Fontalvo and the Academy pursuant to an “Abuse” exclusion clause under the policy. The Insurer held that the allegations were not covered as they arose from the alleged acts of abuse by Mr. Fontalvo. The Academy disputed the Insurer’s decision and applied for coverage. The Academy took the position that the broad allegations of wrongdoing against it in the statement of claim give rise to the duty to defend notwithstanding the language in the Abuse exclusion because of another provision in the policy which separates the liability of Southside and Fontalvo.

Exclusion and Separation Clauses

One issue for the Court was determining how the Abuse exclusion clause interacted with a Separation clause under the policy.

The Abuse exclusion clause under the policy excluded claims or actions:

  • arising directly or indirectly from “abuse” committed or alleged to have been committed by an insured;
  • based on practices of employee hiring, acceptance of volunteer workers or supervision or retention of any person alleged to have committed abuse; or
  • alleging knowledge of an insured of or failure to report, the alleged abuse to the appropriate authorities.

However, a cross-liability or otherwise Separation clause, provided coverage:

  •  as if each named insured were the only named insured; and
  • separately to each insured against whom claim is made or action is brought.

The other issue for the Court was determining whether the allegations as pleaded in the statement of claim fell within coverage provided under the policy.

The Court’s Decision – Coverage Is Determined For Each Insured Severally

The Court ruled against the Insurer and found that a duty to defend was triggered in favour of the Academy.

The Court considered the case law concerning separation clauses in the context of claims for intentional acts. In such cases, separation clauses such as the one contained in the applicable policy, distinguished claims of negligence and vicarious liability against certain insureds, from claims of intentional acts against other insureds. For instance, in cases where parents were sued for negligent supervision in respect of their children’s acts of assault, such claims of negligence were not derivative of the intentional torts of assault – the negligence claims only concerned the intentional acts to the extent the intentional acts were the consequence of the negligence.¹

In particular, the Court noted that the effect of such separation clauses, means that policy coverage must be determined individually for each insured.² So, even if coverage is clearly excluded for a certain insured, such finding is not determinative of coverage for another insured.

In application to this case, the Court agreed with the Insurer that the broad wording of the policy excluded coverage for both intentional and negligence claims. With the wording “arising from”, the policy’s Abuse exclusion clause excluded coverage for intentional or negligent acts against the Academy in relation to its employees’ acts of abuse. The Separation clause did not alter the scope of the Abuse exclusion clause.

However, that did not end the Court’s discussion. The Court went on to find that the similarly broad allegations pleaded against the Academy, created the potential for the Academy’s liability in situations that did not arise, directly or indirectly, from Mr. Fontalvo’s acts. Applying the doctrine of contra proferentem to interpret the policy against the Insurer who drafted it, and interpreting the policy coverage broadly and its exclusions narrowly, the pleadings could not be said to be completely excluded. The allegations of the Academy’s negligent supervision of P.F. that might extend beyond the flight in question with Mr. Fontalvo, would not be caught by the Abuse exclusion clause and would be covered under the policy. This satisfied the low threshold of a mere possibility of a duty to defend, and therefore the Insurer owed a defence to the Academy. The issue of indemnification was left to be determined at the conclusion of the underlying litigation in the usual course.

¹Godonoaga (Guardian of) v. Khatambakhsh, 2000 CanLII 5737 (ON CA)
Snaak v. Dominion of Canada General Insurance Co., 2002 CanLII 44897 (ON CA).

² Belair Direct v. Shoup, 2012 CanLII 98690 (ON SC).

Take Away

Southside reaffirms the guiding principles that when assessing coverage under a liability policy, all of the policy’s clauses must be read in relation to each other and in relation to the pleaded allegations for each applicable insured. Insurers should also remember that the threshold to trigger a duty to defend is relatively low compared to an insurer’s duty to indemnify.

While general liability policies generally exclude claims of intentional or criminal acts (and in this case any negligence in relation to such acts), they may also apply to more than one insured, each to whom a cross-liability clause may provide a separate duty of coverage. This is particularly relevant in claims of abuse or intentional acts. In such cases, different allegations may be directed at different insureds under a policy. Notwithstanding that such allegations may arise from the single incident of abuse or intentional conduct, some allegations against certain insured(s) may anticipate situations beyond the single incident, outside the scope of the exclusion clause for those particular insured(s). It is therefore important to remember it is not just that pleadings determine coverage, but that the pleadings against a particular insured determines coverage for that insured.

For more on defences to abuse lawsuits or insurance coverage matters, please contact a member of Clark Wilson’s Insurance Practice Group.