DELIBERATE ACTS: THE END OF AN ARGUMENT

Insurance coverage for intentional acts — specifically sexual abuse allegations — has been one of the most contentious areas of insurance law over the past five years. The controversy has pitted some of Canada’s oldest and most respected religious and charitable institutions against the insurance industry, as churches and not-for-profit organizations seek insurance coverage for the unexpected acts of employees and volunteers.

The courts across Canada have reacted with understandable skepticism towards defendants who admit to sexual misconduct but plead that they acted under the mistaken or reckless belief that no harm would arise from the sexual act, or that the plaintiff consented.

In addition, there is a public policy argument that a defendant guilty of sexual abuse should not be able to pass his obligation off onto an insurer, especially since the contract clearly never anticipated such an eventuality. The applicable exclusion clause in most insurance policies applies to bodily injury or personal damages “caused intentionally by or at the direction of an insured”. Claims alleging assault or battery are troublesome, as they share many aspects of negligent acts which may be covered under a policy, and deliberate acts which would ordinarily be excluded.

The “other” public policy concern is that by restricting insurance coverage in cases that fall into the gray area of consent, the plaintiff in most instances will be left with a paper judgment that will effectively result in no source of compensation whatsoever.

Setting expectations

The leading authority on deliberate acts has always been the decision of the Supreme Court of Canada in Sirois v. Saindon et al. [1975] I.L.R. 1-669. A dispute between two neighbors escalated to the point that the defendant attacked the plaintiff with a running lawnmower. The plaintiff reacted by raising his hands to protect his face, with the result that the fingers on his left hand were severed and his right wrist was injured.

By a majority of 8:1, the Supreme Court of Canada held that the injuries to the plaintiff were caused intentionally within the meaning of the exclusion clause in the insurance policy. Accordingly, no defense was owed by the insurer.

However, the decision was not unanimous — Chief Justice Laskin dissented as follows: “The point at issue here is narrow but nonetheless significant. In my opinion, it is simply whether the word intentionally in the exclusionary clause covers both intentional and reckless acts. The resolution of this issue must be made with appreciation of the fact that we are concerned with an exempting provision of an insurance policy, and hence one to be construed strictly against the insurer.”

Sansalone & Scalera

decisions

Many of the issues in the Saindon case resurfaced in Sansalone v. Wawanesa Mutual Insurance Company [1996] B.C.J. No. 38, [1998] B.C.J. No. 834. Following the 1996 trial decision, it appeared that in B.C. at least, there might be a duty to defend (although not necessarily to indemnify) in some sexual abuse cases. Coverage might be found if it could be proven that the insured did not intend bodily harm, or acted negligently rather than deliberately. In this particular instance, some bus drivers employed by B.C. Transit were sued by a young woman who claimed that they had engaged in various sexual acts with her between the ages of 15 and 18 while she was employed in her father’s convenience store.

The B.C. Court of Appeal rejected the conclusion that there was a possible cause of action in negligence because Sansalone might have acted with the negligently held belief that the plaintiff consented. It held that it was enough that the harm alleged from the acts asserted was a natural and probable result of those acts and the risk of injury was inherent in the act of the insured.

Appeals of Sansalone and its companion action Scalera were heard by the Supreme Court of Canada on October 14, 1999. Mr. Justice Iacobucci, writing for the majority of the Court on the insurance issues, held that the plaintiff’s statement of claim made no allegation that could potentially give rise to indemnity under the insurance contracts.

An insurer only has a duty to defend when a lawsuit against the insured raises a claim that could potentially fall within coverage. Since the insurer’s duty to defend is related to its duty to indemnify, if an insurance policy excludes liability arising from intentionally caused injuries, there will be no duty to defend actions that are based on such injuries.

It was unanimous that non-consensual sexual activity is inherently harmful, and that any resulting injuries would always be intentionally caused within the meaning of the exclusion. The question left unanswered by the Court was whether an employer or supervisor who might be held to be vicariously liable would also have their insurance coverage voided by the deliberate acts exclusion.

The argument raised was that if the allegations against the employers arose from the same incident and the harm alleged was identical, arguably the exclusion would apply to the employer’s acts as well.

Ontario direction

The Ontario Court of Appeal has attempted to clarify this issue in their recent decisions in Godonoaga (Litigation guardian of) v. Khatambakhsh (2000) 49 O.R. (3d) 22 (Ont. C.A.) and Buchanan v. Gan Canada Insurance Co. (2000) 50 O.R. (3d) 89 (Ont. C.A.) Both of these cases involved serious injuries arising from schoolyard fights.

In the Khatambakhsh case, an adolescent was beaten up after school by a group of students. The defendant’s mother witnessed her son involved in the fight with the plaintiff and sent her other son to join in the melee. The plaintiff was seriously injured. The children were sued for assault and battery and the parents for failure to supervise. The defendants sought indemnity under their homeowners policy. The Court of Appeal found that the fact that the deliberate acts exclusion might apply to one or more of the group did not necessarily mean that the entire family should be denied coverage. The Court determined that a proper interpretation of the policy was that the parents and the two children were each separately insured to the face value of the policy.

The insurer did not have to respond to the claims against the two sons because of the exclusion against deliberate acts. The Court found, however, that the parents were in a different position under their “separate policies”. They were sued in negligence, which was not an excluded claim, and the fact that the pleadings alleged intentional assaults by their sons did not disentitle them to coverage. Finlayson, J.A. writing for the majority, commented on Scalera at paragraph 32 of his judgment: “I do not read Scalera as stating that different tort actions cannot arise out of the same occurrence. Rather, I read it to mean only that a given plaintiff cannot convert an assault and battery into an action in negligence solely to ensure that the defendant’s insurer will provide the necessary ‘deep pocket’ to make a judgment recoverable. The Court of Appeal subsequently came to a similar conclusion in the Buchanan case. In this decision, the Court ruled that the fact that the plaintiff suffered more serious injuries than the insured had anticipated was immaterial: the Insurer was entitled to rely on the exclusion clause.”

Sexual abuse exposure

These decisions of the Court of Appeal will have wide-reaching implications for the insurance industry in institutional sexual abuse cases. If the Court is correct in its reading of Scalera, full insurance coverage may be available to employers facing lawsuits alleging vicarious liability for the sexual improprieties of their workers or volunteers. (Assuming of course, that the employer was not a party to the deliberate acts.) These decisions will undoubtedly be a boon to churches and not-for-profit organizations that have been defending claims out of their own pockets where their insurers have taken an “off coverage” position. From the perspective of the insurance industry, it may be time to reassess whether passi
vity in catastrophic sexual abuse cases is an appropriate response, given the eventual possibility of having to reimburse the insured for badly managed settlements.

Insurers will also need to consider the benefits of controlling complex litigation and retaining experienced defense counsel against the unlikely possibility that the Supreme Court of Canada will someday expand its decision in Scalera to include employers. The recent decisions of the Ontario Court of Appeal may well spell the end of an argument with regard to the intentional acts exclusion in vicarious liability claims.