Church’s Child Abuse Incident not Covered Due to Policy’s Abuse and Molestation Exclusion

In World Harvest Church v. Grange Mutual Casualty Co., 2016-Ohio-2913, 2016 Ohio LEXIS 1306 (May 12, 2016), the Ohio Supreme Court held that an abuse and molestation exclusion in a commercial liability insurance policy barred coverage for a 2006 incident where a two-and-a-half-year-old child was beaten in World Harvest Church’s (“World Harvest”) daycare center. The church had previously settled the underlying lawsuit with the child’s parents for $3.1 million and then sought reimbursement for that amount, which included attorney fees, under its commercial liability policy issued by Grange.

In the underlying matter, Michael and Lacey Faieta filed a lawsuit against World Harvest, its school and an employee named Richard Vaughan. The lawsuit alleged that the Faietas had dropped their son off for daycare one morning and when Mr. Faieta picked up him up that evening, the boy had bright red marks and abrasions on his rear end, back and upper thighs. When asked about the injuries, the boy stated that Vaughan, who had apparently taken over the classroom at some point during the day when the regular teacher left, had beaten him with a “knife,” which was later determined to be a ruler. His parents took him to a local hospital for treatment and then contacted World Harvest to report the injuries and seek action against Vaughan. Instead of investigating their claims however, World Harvest banned them from the school and church premises.

The Faieta’s complaint contained allegations against Vaughan for assault and battery and against Vaughan and World Harvest for negligence and intentional infliction of emotional distress. They also accused World Harvest of negligent hiring and supervision and additionally sought damages against World Harvest for Vaughan’s actions based on the doctrine of respondeat superior. World Harvest tendered the claim to Grange seeking a defense and indemnification and Grange agreed to defend under a reservation of rights and retained a law firm to do so.

A jury eventually awarded the Faietas $764,235 in compensatory damages and $5 million in punitive damages plus attorney fees from World Harvest and also awarded them $134,865 in compensatory damages against Vaughan and $100,000 in punitive damages. After reductions based on Ohio’s tort reform statute, the final judgment held World Harvest solely liable for $2.79 million, and Vaughan primarily liable for $82,365 for intentional infliction of emotional distress, with World Harvest being held secondarily liable for that part of the judgment. Prior to appeal, World Harvest settled the case with the Faietas for about $3.1 million.

Based on its reservation of rights, Grange denied claim after the verdict and in 2009, World Harvest sued Grange seeking reimbursement of the bulk of the $3.1 million it paid to settle the case. Grange argued that it was only obligated to provide coverage for “bodily injury” damages caused by an “occurrence,” defined in the policy as an “accident,” because it claimed that the policy excluded bodily injury that was “expected or intended from the standpoint of the insured.” It should be noted that while the policy contained a corporal punishment endorsement that provided coverage for injuries resulting from corporal punishment administered to a student by or at the direction of the insured, the policy also included an “Abuse and Molestation Exclusion” that denied coverage for bodily injury arising from “the actual or threatened abuse by anyone of any person while in the care, custody or control of the insured.”

The trial court granted summary judgment in World Harvest’s favor, holding that Grange was obligated to indemnify the church for $1.47 million in compensatory damages, attorney fees and postjudgment interest, but not the punitive damages. Both parties appealed that decision to the Tenth District Court of Appeals, which affirmed the trial court’s decision finding that Grange was obligated to reimburse World Harvest for the $82,365 in compensatory damages against Vaughan for which it was held secondarily liable, $693,861 in attorney fees, and $229,716 in postjudgment interest. However, it reversed that portion of the order directing Grange to reimburse the remainder of the damages award.

While both sides sought review from the Ohio Supreme Court, it granted review only to Grange, which contended that the abuse exclusion barred coverage for damages caused by Vaughan’s physical abuse of the child regardless of whether the damage award was based on World Harvest’s direct or vicarious liability. World Harvest claimed that the policy exclusion only applied if it was directly liable for the damages. It also claimed that Vaughan’s actions simply constituted “excessive corporal punishment,” actions it claimed were covered under the policy, and furthermore, that the abuse exclusion only excluded coverage for sexual, not physical abuse.

The supreme court noted that an insurance policy exclusion “will be interpreted as applying only to that which is clearly intended to be excluded” and held that the language of the abuse and molestation exclusion in the Grange policy was broad and excluded both actual or threatened abuse or molestation by anyone, just as long as the victim was in the care, custody or control of World Harvest at the time. As such, the court determined that the exclusion’s broad language did not limit the exclusion’s application only to damages awarded as a result of World Harvest’s direct liability, notwithstanding its contention to the contrary. In fact, the court stated that to provide coverage, it would have to add language to the policy, something it refused to do. As such, the supreme court reversed the appeals court’s determination that Grange was obligated under the policy to reimburse World Harvest for damages awarded to the Faietas. The court further held that because it had determined Grange was not responsible to cover the damages, the company was also not obligated under the policy to pay the award of attorney fees or postjudgment interest.

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