Sharon Academy, Inc. v. Wieczorek Insurance, Inc., No. 442-7-13 Wncv (Grearson, J., February 25, 2015)

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                                                       STATE OF VERMONT

SUPERIOR COURT                                                                                         CIVIL DIVISION
Washington Unit                                                                                        Docket No. 442-7-13 Wncv

The Sharon Academy, Inc., and Curtis Koren
      Plaintiffs

           v.

Wieczorek Insurance, Inc., et al.
      Defendants

                                                       DECISION re:
                                            Cross-Motions for Summary Judgment

        This insurance dispute arose out of a tort suit filed by a former student, Simone
Labbance, against The Sharon Academy, Inc., (the School) and Ms. Curtis Koren. Labbance v.
The Sharon Academy, Inc., 86-2-13 Wncv. In the underlying tort case, Ms. Labbance alleges
that she enrolled in Vermont Intercultural Semesters, a semester abroad (India) program operated
by the School and Ms. Koren for the Spring 2011 semester. She alleges that shortly after
arriving in India she was sexually assaulted by Mr. Tashi Wangchuck (not a defendant). Mr.
Wangchuck, an Indian national, is alleged to have been employed in some capacity by or on
behalf of the School for purposes related to the program. The tort claims are characterized as
negligent hiring, negligent supervision, failure to prevent harm, failure to provide treatment to
victims, and outrageous conduct. The failure to prevent harm claim has been dismissed. The
other claims are pending.

        At some point after the School learned of the alleged assault, it began exploring insurance
coverage. Both of its primary insurers denied coverage and refused to defend.1 The School
came to conclude that it has coverage in its CGL policy with Massachusetts Bay Ins. Co. (Mass
Bay) and its Mass Bay umbrella policy, or it was left with a gap in coverage by the insurance
broker that procured all of its insurance, Wieczorek Insurance, Inc. It then filed this declaratory
action seeking to establish defense and indemnity duties against Mass Bay and bad faith or, in
the alternative, liability against Wieczorek for saddling it with a coverage gap.

         Plaintiffs and Mass Bay have filed cross-motions for summary judgment. The principal
dispute is whether coverage is available under the Mass Bay primary CGL policy and the Mass
Bay commercial umbrella policy. Mass Bay argues that no coverage is available, and even if it
is, it does not benefit Ms. Koren as she is not an insured. Plaintiffs argue that if Mass Bay is
found to have breached its duty to defend, then it is liable for Plaintiffs’ fees and costs expended
on their defense up to this point, and should be permitted to keep their current defense counsel at
Mass Bay’s expense for the balance of the tort suit. Mass Bay argues that if it is liable to provide

1
 The summary judgment record includes numerous allegations, many disputed, about representations about
coverage attributed to agents of the School, Wieczorek, and Mass Bay. The court has disregarded all such
allegations as immaterial to this decision.
a defense, it is entitled to select defense counsel.

         Defense and indemnity under the primary CGL policy

         The dispute related to the primary CGL policy is limited to little-litigated policy language
in a coverage territory provision.2 Plaintiffs suggest that a plain reading supports coverage and
that, in the event of ambiguity, the ambiguity should be construed in favor of coverage. Mass
Bay advocates an interpretation of the disputed language that obviates coverage.

        “We interpret insurance policies much like other contracts, striving to give effect to the
intent of the parties as expressed by the plain language of the instrument.” DeBartolo v.
Underwriters at Lloyd’s of London, 2007 VT 31, ¶ 9, 181 Vt. 609. “It is the policy of this Court
to favor complete coverage when interpreting insurance contracts. We interpret ambiguities in
favor of the insured.” Northern Security Ins. Co. v. Rossitto, 171 Vt. 580, 582 (2000) (citation
omitted). “‘Equivocation and uncertainty, whether in the significance of the terms used or in the
form and construction of sentences,’ constitute ambiguity.” Northern Security Ins. Co., Inc. v.
Doherty, 2009 VT 27, ¶ 9, 186 Vt. 598 (quoting Northern Security Ins. Co. v. Hatch, 165 Vt.
383, 386 (1996)).

        “A claim against the insured triggers the insurer’s duty to defend whenever it appears that
the policy might cover that type of claim.” Hardwick Recycling & Salvage, Inc. v. Acadia Ins.
Co., 2004 VT 124, ¶ 15, 177 Vt. 421. “In determining whether there is a duty to defend, we
compare the language of the policy to the language of the complaint.” Co-operative Ins. Cos. v.
Woodward, 2012 VT 22, ¶ 10, 191 Vt. 348.

        There is no dispute that the CGL policy (No. ZDV 8823860 00) includes sexual
misconduct coverage, that the alleged aggressor, Mr. Wangchuck, is an Indian national who
worked for the School at the time of the incident, and that the alleged incident occurred in India
in the course of Ms. Labbance’s semester abroad.

        The occurrence-based CGL policy is modified by an ISO “sexual misconduct or sexual
molestation liability” endorsement identified as 421-0334 09 08 (the Endorsement) for which the
School paid additional premium. The insuring agreement in the Endorsement expands the
meaning of “bodily injury” to include a “‘sexual misconduct or sexual molestation incident’ that
takes place in the ‘coverage territory.’” Endorsement § A(1)(b)(1). There is no dispute that the
alleged sexual assault describes bodily injury within the meaning of the Endorsement. The sole
issue is whether the alleged assault occurred within the coverage territory.

        “Coverage territory” is not defined in the Endorsement. It is defined in the definitional
section of the general coverage form, identified as CG 00 01 12 07 (the CGL Policy). There is
no dispute that this is the operative definition:

         “Coverage territory” means:

2
 Of the dozen or so reported cases that quote the language disputed in this case, only one, a trial court level decision
cited by both parties, comes close to interpreting it. Though the parties examine it closely, the court does not find it
particularly helpful. Spears v. Nationwide Mut. Ins. Co., 254 F.Supp.2d 144 (D.D.C. 2003).

                                                           2
       a. The United States of America (including its territories and possessions,
          Puerto Rico and Canada; [or]

                                              .   .   .

       c. All other parts of the world if the injury or damage arises out of:

                                              .   .   .

            (2) The activities of a person whose home is in the territory
                described in Paragraph a. above, but is away for a short time on
                your business;

                                              .   .   .

       provided the insured’s responsibility to pay damages is determined in a “suit” on
       the merits, in the territory described in Paragraph a. above or in a settlement we
       agree to.

CGL Policy § V(4). The following are undisputed: India is a part of the world other than the
U.S., Canada, and Puerto Rico; Ms. Labbance’s “home” is in the U.S.; Mr. Wangchuck’s home
is not in the U.S., Canada, or Puerto Rico; and the suit on the merits is underway in the U.S.
Mass Bay has not contested the temporal (“short time”) limitation on the person’s activities in
India.

        The point of contention thus boils down to whether the alleged sexual assault arose out of
the activities of a person whose home is in the U.S. but who was in India on the School’s
business. The most reasonable reading of this language favors coverage. Ms. Labbance is a
person whose home is in the U.S. but who was in India on the School’s business. The Policy
does not limit the meaning of “business.” As a general matter, the business of the School is the
education of its students. There is no suggestion that Ms. Labbance was in India for any reason
other than to participate in the School’s semester abroad program. She thus was there while on
the School’s business.

        The alleged sexual assault arose out of Ms. Labbance’s activities. To arise out of means
to flow from, result from, or originate out of; it requires some connection but does not connote
traditional legal causation and thus cannot require fault. See 7 Steven Plitt, et al., Couch on Ins.
§ 101:52 (3d ed.) (WL updated Nov. 2014); 3 Allan D. Windt, Insurance Claims and Disputes §
11:22A (6th ed.) (WL updated Mar. 2014); Black’s Law Dictionary 102 (7th ed. 1999). Ms.
Labbance’s “activity”—her participation in the semester abroad program—was the only reason
she was in India and exposed to the alleged aggressor. The alleged assault is not disconnected in
some meaningful way from that activity such that there is no coverage. A reasonable insured
confronted with these circumstances and this policy language would expect coverage.

       Mass Bay argues instead that the “person” on whom the analysis must exclusively turn is

                                                  3
Mr. Wangchuck, the alleged aggressor. If so, there could be no coverage: Mr. Wangchuck is an
Indian national and his home is in India. Mass Bay arrives at this result largely by importing
concepts related to causation, bodily injury, and sexual assault into the terms of the coverage
territory provision. The Policy and Endorsement, however, plainly are intended to insure against
bodily injury caused by a sexual assault so long as the assault occurred and the suit is brought in
specific geographic locations. See Waters v. Concord Ins. Cos., 169 Vt. 534, 536 (1999)
(“Proper insurance contract interpretation requires that the policy provisions be read together and
viewed as an integrated whole.”). The coverage territory provision includes location limitations.
It is not intended to limit coverage for any particular type of injury and does not focus on
causation beyond its “arises out of” language. Mass Bay’s focus on bodily injury and causation
fit poorly with this policy language.

         Mass Bay claims to find support for its interpretation in the concurrent causation doctrine
and a trial court decision, Co-operative Ins. Cos. v. Woodward, No. 168-8-10 Oecv (Vt. Super.
Ct. Apr. 2011) (Eaton, J.), available at 2011 WL 8472970. The concurrent causation doctrine
provides that “if an occurrence is caused by a risk included within the policy, coverage may not
be denied merely because a separate excluded risk was an additional cause of the accident.”
State Farm Mut. Ins. Co. v. Roberts, 166 Vt. 452, 457 (1997). The doctrine focuses attention on
the separateness of the hazards and actual causal chains and away from liability theories. See
generally Mailhiot v. Nationwide Mut. Ins. Co., 169 Vt. 498 (1999) (discussing how the doctrine
operates in the context of a covered negligent supervision claim and excluded but related
underlying tort); Woodward, 2011 WL 8472970 (distinguishing excluded injury from theories of
liability). In short, the concurrent causation doctrine and Woodward address problems not
presented by this case. Here, there is no need to segregate an excluded claim from a covered one
or an injury from a theory of liability. Bodily injuries arising out of sexual assaults are intended
to be covered by the policy in this case. The liability theories forming the claims in the
underlying complaint also are covered. These matters do not control the coverage territory
provision.

       Accordingly, the CGL policy provides coverage for the claims, as alleged, in the
underlying complaint and Mass Bay is in breach for refusing to defend. Plaintiffs suggest that
the same outcome would be reached if the “person” out of whose activities the bodily injury
arose were considered to be Plaintiffs rather than Ms. Labbance. Because coverage exists in
reference to Ms. Labbance, the court does not need to reach that issue.

       The umbrella policy

        The availability of coverage in the primary CGL policy limits the dispute in the umbrella
policy to which of two competing endorsements is effective. The umbrella policy has two
endorsements that, in identical or nearly identical language, exclude coverage for incidents of
abuse or molestation and related negligent employment, investigation, supervision, etc. One
such endorsement, 473-0060 12/05, contains an exception that reads:

       This exclusion does not apply if valid “underlying insurance” for the exclusion
       described above exists or would have existed but for the exhaustion of the
       underlying limits of such “underlying insurance.” Coverage provided will follow

                                                 4
       the provisions, exclusions, conditions and limitations of the “underlying
       insurance.”

The other endorsement, 473-0105 (01/07), omits the exception. The exception to the exclusion
makes umbrella coverage available. Umbrella coverage is not available in the endorsement
without the exception.

        Mass Bay argues that the 473-0105 (01/07) endorsement (no coverage) supersedes the
473-0060 12/05 endorsement (coverage available) because the former came later in time. The
theory is that a later-in-time endorsement prevails over an earlier-in-time endorsement with
which it conflicts. Mass Bay cites some out-of-state authority in support of that general
principle. It presumably relies on the “(01/07)” and “12/05” expressions in the endorsement
identification numbers to indicate the relevant dates.

       Plaintiffs argue that the 473-0060 12/05 endorsement should prevail because it appears
deeper into the pile of papers that is the policy as a whole. It also suggests that a reasonable
insured seeing both endorsements in a policy would think that sexual assault coverage is
preserved or, if the conflicting provisions create an ambiguity in that regard, then the ambiguity
should be construed in Plaintiffs’ favor.

        The court is not persuaded that the principle on which Mass Bay relies is sufficient to
decide the matter in the circumstances of this case. Here, there is one policy with two directly
conflicting exclusions, one clearly excluding coverage, the other clearly providing coverage. All
else being equal, two irreconcilably conflicting provisions is an ambiguity per se that must be
interpreted in the insured’s favor. Mass Bay’s interpretation depends on the fact that the 01/07
endorsement was incorporated into the policy after the 12/05 endorsement and that this occurred
in some manner that makes it fair to attribute knowledge of that chronology and its significance
to the insured.

        The record simply does not support Mass Bay’s argument. The 01/07 and 12/05 dates,
presuming they are dates at all, both long precede the coverage period. They could refer to
incorporation into the policy. They also could refer to ISO’s copyright. They could refer to the
latter without necessarily reflecting on the former. Each form contains an ISO copyright
statement next to the numerals. There is no course of conduct between the insurer and the
insured that would have indicated to the insured which of these endorsements was intended to
supersede the other. A reasonable insured who merely had the policy as a pile of papers would
have no reasonable basis to believe what Mass Bay insists—that the policy contained the 12/05
exclusion until it was replaced by the 01/07 exclusion—that coverage was included until it was
excluded.

        In this case, the conflicting endorsements present an ambiguity, which the court interprets
in favor of the coverage. The 12/05 endorsement prevails. Accordingly, Mass Bay was and is
required to provide a defense for the School in the underlying tort litigation.




                                                 5
       Whether Ms. Koren is an employee

        The same ruling applies to Ms. Koren if she is an insured. The parties agree that she is
insured only if she was, at the relevant time, the School’s “employee.” Plaintiffs argue that, for
purposes of the duty to defend, Ms. Koren must be treated as an employee because she is alleged
to be the School’s employee in the tort complaint. They also argue that the court can decide on
summary judgment that, as a matter of law, she actually was its employee. Mass Bay argues that
the court is not limited to the four corners of the tort complaint on this issue and Ms. Koren’s
status as an employee is genuinely disputed.

         The court concludes that, in considering whether Ms. Koren is an insured, it is
appropriate to pierce the allegations of the underlying complaint and evaluate extrinsic evidence.
There are exceptions to the rule that the duty to defend must be triggered by the underlying
allegations. One is as follows: “an insurer should not have a duty to defend an insured when the
facts alleged in the complaint ostensibly bring the case within the policy’s coverage, but other
facts that are not reflected in the complaint and are unrelated to the merits of the plaintiff’s action
plainly take the case outside the policy coverage.” 1 Allan D. Windt, Insurance Claims and
Disputes § 4:4 (6th ed.) (WL updated Mar. 2014). Windt cites Blake v. Nationwide Ins. Co., 180
Vt. 14 (2006) in support. A related exception applies “when the company determines that, even
assuming that the insured is liable based on the allegations in the complaint, there can, in fact, be
no coverage because of the falsity of some extraneous fact alleged in the complaint.” Insurance
Claims and Disputes § 4:4.

       The exception applies with even more vigor when the question is whether the tort
defendant is an insured at all.

                Before the general principle regarding the duty to defend applies, it must
       be shown that the person claiming coverage is, in fact, an insured. The insurer
       has imposed on itself a contractual duty to defend its insured against suits alleging
       facts that, if proved, would constitute a risk insured against under the provisions
       of the policy. It has not imposed on itself a duty to defend a complete stranger to
       the contract. Several courts, therefore, have held that the insurer is not obligated
       to provide a defense for a stranger merely because the plaintiff alleges facts that,
       if true, would make the stranger an additional insured as defined in the policy.
       They have, instead, allowed the insurer to avoid providing a defense if extrinsic
       evidence demonstrates that the plaintiff’s allegations are untrue, and that the
       defendant is not an insured.

                This is a salutary rule. It is similar to the rule, discussed in § 4:4, allowing
       the use of extrinsic evidence to justify a refusal to defend when some extraneous
       fact in the complaint, which would otherwise give rise to a duty to defend, is
       untrue. It goes farther than that rule, however, because the erroneous allegation
       that the defendant is an insured need not be immaterial to the plaintiff’s cause of
       action.

1 Allan D. Windt, Insurance Claims and Disputes § 4:5 (6th ed.) (WL updated Mar. 2014)

                                                   6
(footnotes omitted). The court has found no rule to the contrary in Vermont cases. The question,
then, is whether the summary judgment record demonstrates that Ms. Koren, at the relevant time,
was an employee of the School.

        The parties agree that, in this context, “employee” means employee versus independent
contractor. The parties also agree that the common law right-to-control test describes how this
distinction is drawn. For more on the test, see Hathaway v. Tucker, 2010 VT 114, ¶ 23, 189 Vt.
126; RLI Ins. Co. v. Agency of Transp., 171 Vt. 553, 554; Crawford v. Lumbermen’s Mut. Cas.
Co., 126 Vt. 12, 18 (1966); Kelley’s Dependents v. Hoosac Lumber Co., 95 Vt. 50, 53 (1921).

        The court is unable to resolve Ms. Koren’s employment status as a matter of law on this
record, however. Certain characteristics of Ms. Koren’s work for the School tend to support a
finding that she was an employee. Others imply that she may have been an independent
contractor. The impediment to a ruling is that the record includes little relevant evidence other
than Ms. Koren’s deposition testimony, which itself does not appear to be fully calculated to
address this issue. The full picture of the services Ms. Koren provided to the School and the
terms on which they were delivered is simply too undeveloped to support summary judgment.
For current purposes, the court considers the matter disputed.

       Bad faith

        The court declines to address Plaintiffs’ bad faith claim at this time. Plaintiffs did not
raise the issue in their own summary judgment motion. Mass Bay raised the matter in its motion,
but only to the extent of mentioning it in passing in a single footnote. Mass Bay’s Motion for
Partial Summary Judgment at 2 n.2 (filed Sept. 4, 2014). There, Mass Bay makes two
“arguments”: the bad faith claim must fail because (1) there is no duty of defense or indemnity in
either the CGL or umbrella policy as a general matter, and (2) in the event that any coverage
exists, Mass Bay’s policy interpretation to the contrary at a minimum was “fairly debatable.”
The first argument is foreclosed by the court’s analysis above. Plaintiffs request more time for
discovery before the court rules on the second argument.

        Mass Bay’s footnoted argument is not sufficiently briefed for the court to conclude that
the matter has been fairly raised at all. The question of whether the insurer, in denying coverage,
did so for “fairly debatable” reasons presents a richer, more complex inquiry than Mass Bay’s
ipse dixit argument implies. Notably, the lack of authority on the disputed coverage territory
language is not itself sufficient to render Mass Bay’s interpretation fairly debatable. Similarly,
an overly “narrow construction of an ambiguous policy provision of [the insurer’s] own drafting,
in the face of the rule that ambiguous policy provisions are construed against the insurer, may
amount to bad faith.” Stephen S. Ashley, Bad Faith Actions Liability & Damages § 5:11 (2d ed.)
(WL updated Sept. 2014). Plaintiffs are entitled to discovery.

       Defense costs to date and selection of defense counsel going forward

       Plaintiffs have argued that, if they establish Mass Bay’s breach, then they are entitled to
defense costs reasonably expended to date in consequence of the breach, and the right to keep the
defense counsel already selected by them going forward, at Mass Bay’s expense. Mass Bay

                                                7
does not dispute liability for defense costs reasonably expended by the School to date. The court
concludes that Mass Bay is so liable as a matter of law, in an amount yet to be established. The
court cannot so rule at this time with regard to Ms. Koren’s defense costs. She must establish
that she is an insured under the policy before the court can find Mass Bay in breach of its duty to
defend her.

        Mass Bay cites Judge Crawford’s decision in Northern Sec. Ins. Co. v. Pratt, No. 838-11-
10 Wncv, 2011 WL 8472930 (Vt. Super. Ct. May 19, 2011) (attached), available at
https://www.vermontjudiciary.org/20112015%20Tcdecisioncvl/2011-5-27-1.pdf, in support of
its claimed right to appoint independent counsel to represent the School in the tort litigation. The
School argues that Pratt is distinguishable from this case.

        Pratt is well reasoned. The court reads it to stand for the general proposition that, absent
peculiar circumstances suggesting otherwise, when the insurer provides a defense, it has the right
to select independent counsel to represent its insured. The court sees no reason to deviate from
that rule in this case. Moreover, in the complaint, Plaintiffs expressly requested that Mass Bay
provide a defense. In other words, they voluntarily chose an insurer-provided defense in
circumstances in which they may have had alternative remedies available. The court concludes
that Mass Bay retains the right to select and appoint independent defense counsel.

                                             ORDER

      For the foregoing reasons, Plaintiffs’ and Mass Bay’s cross-motions for summary
judgment are granted in part and denied in part as set forth above.

       The School is entitled to a defense in the underlying tort suit at Mass Bay’s expense by
independent counsel selected by Mass Bay and to damages for its reasonable defense expenses
incurred to date.

       Dated at Montpelier, Vermont this ____ day of February 2015.


                                                     _____________________________
                                                     Brian J. Grearson
                                                     Superior Judge




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