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The U.S. Court of Appeals for the Ninth Circuit has ruled that a woman who operated a home day care center was not entitled to coverage under her renters insurance policy for a lawsuit alleging that her negligent supervision had proximately caused the sexual assault of a child.

The Case

The mother of a child molested by Cooper Potter at the child-care facility his mother Susan Potter operated in her home in Ventura, California, where the Potters lived sued the Potters for damages. The complaint alleged only a single cause of action against Ms. Potter – that her negligent supervision of her son had proximately caused the sexual assault.

Ms. Potter tendered defense of the suit to State Farm General Insurance Company, from which she had purchased a renters policy with a child care liability endorsement covering “bodily injury, property damage, and medical expense coverages arising out of child care services” provided by an insured from Ms. Potter's home.

Ms. Potter settled with the mother, conceding liability and assigning her claims against State Farm to the mother. In exchange, the mother agreed to refrain from collecting the settlement amount from Ms. Potter.

The mother then sued State Farm.

The U.S. District Court for the Central District of California granted summary judgment to State Farm on all claims except the claim asserting breach of contract. The district court determined there was an “interpretive ambiguity” created by the California Supreme Court in Minkler v. Safeco Insurance Co. of America, 232 P.3d 612 (Cal. 2010), that prevented summary judgment for State Farm.

The dispute reached the Ninth Circuit.

The State Farm Policy

The State Farm policy provided:

Sexual Molestation Exclusion. We do not cover bodily injury, property damage, or medical expense arising out of or resulting from the actual, alleged or threatened sexual molestation of a minor by:

1. any insured; . . . .

We have no duty to defend or settle any sexual molestation claim or suit against any insured. . . .

The State Farm policy also stated that the insurance was “separately” applicable to “each insured.”

The Ninth Circuit's Decision

The circuit court reversed and remanded the case with instructions to enter judgment in favor of State Farm.

In its decision, the Ninth Circuit explained that, in Minkler, the plaintiff sued David Schwartz and his mother Betty Schwartz, alleging that Schwartz, an adult, had sexually molested the plaintiff when he was a minor. The complaint alleged, among other things, that some of the acts of molestation had occurred in Ms. Schwartz's home, and as a result of her negligent supervision.

The California Supreme Court held that Ms. Schwartz would reasonably have expected her homeowners' insurance policy “to cover her separately for her independent acts or omissions causing such injury or damage, so long as her conduct did not fall within the policies' intentional acts exclusion, even if the acts of another insured contributing to the same injury or damage were intentional.” The court observed that because her policies “did not contain a specific exclusion for claims arising from sexual molestation . . . nothing we hold in this case concerns how an exclusion framed in those terms should be construed.”

In the Potters' case, the Ninth Circuit pointed out, the Potters' insurance policy expressly excluded injury or damage “arising out of or resulting from the actual, alleged or threatened sexual molestation of a minor by [] any insured.” The Ninth Circuit concluded that applying the severability-of-interests or “separate insurance” clause in the State Farm policy to each Potter alongside the sexual molestation exclusion did “not result in any ambiguity.” State Farm, the circuit court determined, “expressly excluded coverage for this type of damage or injury, regardless of the theory for liability.”

The case is Bayes v. State Farm General Ins. Co., No. 17-56035 (9th Cir. June 10, 2019). Attorneys involved include: For HOLLY BAYES, Plaintiff – Appellee: James D. Henderson, Jr., Esquire, Attorney, Law Offices of James D. Henderson, JR., Santa Monica, CA. For STATE FARM GENERAL INSURANCE COMPANY, an Illinois Corporation, Defendant – Appellant: Sandra Stone, LHB PACIFIC LAW PARTNERS, LLP, Emeryville, CA; Jenny Jen-Yi Chu, Attorney, Clarke Benbow Holland, Attorney, Pacific Law Partners, LLP, Emeryville, CA.

Insurance Coverage Law Center Comment

A circuit judge dissented in Bayes, stating that Minkler's reasoning “foreclose[d] the [majority's] facile conclusion” and suggesting that the issue be certified to the California Supreme Court. In the dissent's view, the majority's decision could not be squared with Minkler's “basic premise” that a severability clause “requires us to apply the [p]olicy's exclusions to each insured as if she were the only insured.”

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.