Negligence Versus Intention

While the Courts have held that liability coverage may be available to an institution that fails to supervise or screen an employee charged with intentional wrongdoing, such as sexual abuse, they have avoided extending a defense to the offender on the basis of both public policy and the intentional acts exclusion. The latest stage in the evolution of this area of law is the landmark decision of the Ontario Court of Appeal in McKenna v. Reed & The Roman Catholic Episcopal Corp. for the Diocese of Sault Ste. Marie in Canada, which was released on May 13, 2003

The plaintiff Elizabeth McKenna brought an action against Father Francis Reed and the Diocese of Sault St. Marie for negligence, assault, battery, breach of fiduciary duty and vicarious liability. Father Reed was the plaintiff’s parish priest in the mid-1960s when she was still in her teens. At the request of her family, Father Reed took on the responsibilities of providing personal guidance and counseling to the troubled teenager. Justice John Wilkins, of the Superior Court of Justice found that the relationship between Father Reed and McKenna evolved “beyond the normal and accepted interactions between priests and parishioners”.

The court found that the relationship was “clearly one of a fiduciary nature” because the priest was placed in a position of significant authority. In law, a fiduciary relationship is said to exist where someone is in a position of trust in relationship to another and is accordingly under an obligation to act for that person’s benefit. In this instance, the basis of the trust was the religious beliefs of both the plaintiff and her parents.

Over the years, the relationship between McKenna and Father Reed ultimately led from friendship to physical contact. Prior to the fall of 1966, there had been some physical contact of a generally paternal nature – hugging for “comfort and reassurance” following counseling and advisory sessions. McKenna gave evidence that, in the summer of 1967, she was sexually abused by Father Reed when she went to him for counseling after having been molested by another priest. In the course of this session, Father Reed allegedly fondled her without her consent. The defendant denied that this incident ever took place.

Whatever the cause, the plaintiff began a descent into serious mental illness the following year. She was admitted on numerous occasions to psychiatric institutions. Even though McKenna was receiving serious psychiatric care, including “electroconvulsive therapy”, Father Reed continued to meet with her and engage in inexcusable sexual activities. The action against Father Reed, the Diocese and a treating psychiatrist proceeded for six weeks at trial and then settled.

Reconstructing coverage

During the time frame of the alleged abuse, the Diocese had liability policies issued by three difference insurance companies. Two of the three insurers (Lombard and Ecclesiastical) reached an agreement and settled with the insureds. The third insurer (The Chateau, as successor to Great American) would not contribute to either the settlement or the defense costs.

Great American insured the Diocese between 1963 and the beginning of 1971 under a manuscript policy. Counsel for The Chateau took the position that the policy did not contain a duty to defend clause that could be considered to be binding upon the insurer. Counsel also took the position that the Great American policy did not cover claims for sexual battery and that there was no indemnity under the policy for either the Diocese or Father Reed. They argued that to provide indemnity for Father Reed’s actions would constitute insuring illegal acts and it would be contrary to public policy.

As with many cases where coverage under an older form of policy is at issue, the court and the insured looked to the broker for assistance. Art Despard gave evidence to the industry practices in the 1960s when the policies were formed. He noted that in 1963, manuscript policies were customarily issued with a folder generically known as a “jacket”, which would form part of each policy of insurance issued. Customarily, the jacket contained standard form clauses, terms and conditions applicable to the policy of insurance and would form part of the policy.

Given this evidence as to the custom of the insurance industry at the time, Justice Wilkins was satisfied “on the balance of probabilities” that there would “likely” have been a jacket attached to the Great American policy and that this had been lost. Justice Wilkins went further in his reasons, however, and found that this “jacket” would have contained the missing parts of the insuring agreement that contained the duty to defend.

While this finding seems farfetched in the absence of direct evidence from either the insured or the insurer, Justice Wilkins noted that the Great American had defended other claims that had been made under the policy. He stressed that in making these interpretive rulings, he was not “rectifying” the terms of the policy.

Intentional meaning

It is suggested that because the intentions of the parties at the time of the creation of the policy would undoubtedly have been to include a clause with respect to the duty to defend, the court should rectify the insurance contract by adding such a clause. “I do not think this rectification is necessary because I am satisfied on the evidence tendered before me that pages of the policy were missing and that the jacket which had disappeared would have contained standard form clauses such as a duty to defend provision,” Justice Wilkins noted.

Despite this, The Chateau had a very strong public policy argument that there could not to be coverage for Father Reed based on his deliberate acts. It relied on the landmark decisions of the Supreme Court of Canada in Scalera v. Oppenheim, Attorney in Canada for Marine Underwriters, Lloyds of London (2000), 185 D.L.R. (4th) (S.C.C.) and Sansalone v. The Wawanesa Mutual Insurance Co. (2000), 195 D.L.R. (4th) 57 (S.C.C.). In both of these decisions, the Supreme Court ruled that liability policies did not afford coverage for sexual battery because this act invariably constituted an “intentional act” within the meaning of the policy exclusion.

The Supreme Court ruled that the exclusion clause in the policy must be interpreted as requiring an intent to injure. Where there is an allegation of sexual battery, courts will conclude as a matter of legal inference that the defendant intended harm for the purpose of construing exemptions of insurance coverage for intentional injury. Justice Wilkins observed, however, that the insuring agreement in the Great American policy “contractually identified losses arising from intentional acts and provided indemnity for them”. Section 1 of the policy stated that the insurer agreed: “To pay on behalf of the insured, all sums which the insured shall become obligated to pay by reason of any liability imposed by law upon the insured for damages, including damages for care and loss of services because of bodily injury, sickness, disease, mental anguish and/or mental suffering, including death at any time resulting there from, sustained by any person or persons, and occurring during the policy period, caused by an occurrence including assault and battery by a person, arising out of or in the course of his duties as an employee of the insured, unless committed by or at the direction of the insured.”

Reasonable expectation

On the facts of the case, the judge found that Father Reed committed a “battery of a sexual nature in the course of performing the general scope of his duties as a priest, and that the battery was not committed by or at the direction of the [Diocese]”. Accordingly, he ruled that there was coverage for both the Diocese and Father Reed under the Great American policy.

There is one critical problem with this argument. In addition to the intentional act exclusion, the Supreme Court of Canada in Scalera rejected the duty to defend or indemnify in sexual misconduct cases, on the basis of the “doctrine of reasonable expectations”. Th
e court noted that a policyholder could not reasonably expect the insurer to defend an action or indemnify them for damages alleged to have been caused by the sexual misconduct. Paragraph 135 of Scalera states: “This conclusion is also consistent with basic insurance theory. Insurance is meant to cover risk of loss…Where the loss is caused intentionally, it is hardly the result of a risk. Regardless of whether an insurance company could find a way profitably to insure someone against intentionally caused injuries, the respondent clearly did not believe it was doing so when it wrote the policy at issue in this appeal. Sexually assaulting someone is not like getting in a car accident, or having someone injure themselves by slipping on an unshoveled sidewalk…Absent express language to the contrary, I am unable to conclude that the parties to this insurance contract agreed to cover such a claim.”

Appeal decision

On appeal, the Ontario Court of Appeal agreed with the reasoning of the trial judge on this issue and his conclusion that “the policy as written provides coverage for the very circumstances of the case at bar”. The Court of Appeal also rejected the argument that Father Reed was not an employee of the Diocese and that coverage was limited to assaults and battery by a person arising out of “his duties as an employee of the insured”.

The court dismissed the argument that the risk of assault or battery by a priest was neither contemplated nor reasonably anticipated at the time that the insurance policy was issued. It noted that the point of an insurance policy was to transfer the risk of future events, foreseen and unforeseen. The Diocese cross-appealed the fact that Justice Wilkins did not order Great American to pay Father Reed and the Diocese their costs of the third-party proceedings on a solicitor-and-client basis.

The Court of Appeal agreed that the Diocese was entitled to a defense by their insurer “without expense to them”. Since that issue had been determined in their favor, the court ruled that they were entitled to their costs on a solicitor-and-his-own-client scale for the defense of the main action and cross-claims. These costs were held to include the conduct of the third-party proceedings, subsequent motions and the appeal.

Conclusion

The public policy issue raised by the Ontario Court of Appeal in extending defense costs for the sexual misconduct of Father Reed will be the subject of a further appeal to the Supreme Court of Canada. Paying either the defense or indemnity costs for the intentional or criminal acts of an insured negates the purposes of an insurance contract and turns the policy into a license to do harm without fear of civil retribution. This argument has been persuasive in courts throughout North America.

It is difficult to believe that either the Diocese of Sault St. Marie or Great American intended that the liability policy secured in the early 1960s would someday be interpreted in a way to provide insurance coverage for an individual accused of sexual abusing a minor. It is to be hoped that the Supreme Court of Canada will follow the rationale in the Sansalone and Scalera decisions and apply the “reasonable expectations” test in a way that avoids this mischievous result.