By Blake Stafford
On July 10, 2015, the Fourth Circuit issued its published opinion in Liberty Univ., Inc. v. Citizens Ins. Co. of Am., a civil case on appeal from the District Court for the Western District of Virginia. In this case, Liberty University, Inc. (“Liberty”) contended that Citizens Insurance Company of America (“Citizens”) breached its duty to defend and indemnify Liberty against claims that Liberty was directly and vicariously liable for participation in conspiracies to commit kidnapping and racketeering. The district court granted summary judgment in favor of Liberty, holding that Citizens had a duty to defend Liberty in the underlying action. The Fourth Circuit reversed, holding that the allegations in the underlying action triggered exclusions in the insurance policy; thus, Citizens had no duty to defend.
Underlying Complaint: Jenkins Complaint
The core of the underlying complaint involved a child that was allegedly kidnapped by one of the child’s parents. Janet Jenkins and Lisa Miller were joined in Vermont in a same-sex civil union and had one child. Miller was the child’s biological mother, and Jenkins was the child’s legal parent as of 2004. Miller subsequently converted to Christianity; moved to Virginia; and, believing homosexuality to be sinful, barred Jenkins from having contact with her daughter. Miller defied court visitation orders for years and, facing the possibility that custody of the child would be transferred to Jenkins, Miller absconded to Nicaragua with the child in 2009. Jenkins has not seen her daughter since.
Jenkins filed suit in 2012 against Liberty and a student worker at Liberty, among others, alleging that Liberty participated—both directly and vicariously—in the scheme to kidnap Jenkins’s daughter in order to disrupt the parent-child relationship. In this complaint (“Jenkins Complaint”), Jenkins alleged that Liberty and its agents helped Miller defy court visitation orders and abscond with the child to Nicaragua, all conducted through an alleged pattern of racketeering by Liberty and its agents that included various transportation schemes and guidance by Liberty University School of Law administrators. Moreover, the Jenkins Complaint alleged that Liberty and its agents enabled Miller to remain outside of the country through fundraising via social media. Finally, the Jenkins Complaint alleged that Liberty routinely instructed its law students that the correct course of action for a person in Miller’s situation would be to engage in civil disobedience and defy court orders.
Based on these facts, the Jenkins Complaint alleges that Liberty was (1) directly liable for its involvement in the kidnapping scheme, and (2) vicariously liable because it “promoted, condoned, and explicitly ratified its agents’ tortious racketeering activity.”
Insurance Policy Provisions
Coverage Provisions. The policy at issue contained two coverage forms: (1) Commercial and General Liability coverage (“CGL”) and (2) School and Educators Legal Liability coverage (“SELL”). The CGL itself had two subsidiary coverage forms: “CGL A” and “CGL B.”
- CGL A. Under CGL A, Citizens was required to defend suits against Liberty seeking damages for “bodily injury” and “property damage” arising from an “occurrence.” An “occurrence” was defined in the policy as “an incident that was unexpected from the viewpoint of the insured.” This would necessarily exclude intentional torts from the scope of an “occurrence,” and CGL A specifically excluded injury or damage “expected or intended from the standpoint of the insured.”
- CGL B. Under CGL B, Citizens was required to defend suits against Liberty alleging “personal and advertising injury,” including false arrest, detention, or imprisonment. CGL B contained two exclusions: (1) a Criminal Acts Exclusion, which excluded any injury arising out of a criminal act committed by or at the direction of the insured; and (2) a Knowing Violation Exclusion, which excluded any injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict the personal or advertising injury.
- SELL. Under SELL, Citizens was required to defend suits against Liberty alleging injury arising out of a wrongful act and seeking loss because of such injury. SELL contained an Intentional and Criminal Acts Exclusion, which excluded coverage for any claim arising out of an intentional, dishonest, fraudulent, criminal, or malicious act or omission or any willful violation of law by the insured. This exclusion applied regardless of whether the person seeking coverage actually participation in the intentional or criminal acts or omissions.
Separation of Insureds Provision. The insurance policy also contained a Separation of Insureds provision. When multiple named insureds claim the right to a defense against the same suit, this provision requires the insurer to evaluate the claims against each insured individually, treating each as if he or she has separate coverage. Thus, excluded conduct by one insured does not preclude claims brought by other insureds. In this case, the policy named Liberty’s employees, volunteers, student groups, and officers as additional named insureds.
The district court granted summary judgment in favor of Liberty, finding that a duty to defend existed under all three coverage forms given the Separation of Insureds provision. The district court reasoned that the separation provision displaced the ordinary respondeat superior rule that imputes an agent’s intent onto the principal. Thus, while the allegations against the Liberty agents solely consisted of intentional acts, this intent should not be imputed to Liberty for the purposes of determining policy coverage. The Fourth Circuit held that this interpretation was erroneous and reversed the district court’s grant of summary judgment.
Virginia Insurance Law
This case arises out of diversity jurisdiction, requiring the application of Virginia law and its choice of law rules. Specifically, to determine an insurer’s duty to defend a lawsuit, Virginia applies the “Eight Corners Rule,” which compares the “four corners” of the underlying complaint with the “four corners” of the policy to determine whether the allegations in the underlying complaint come within the policy’s coverage.
The insured has the initial burden to establish a duty to defend, a duty that arises whenever the underlying complaint alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy. Even if only one of multiple alternative theories falls within the coverage agreement, the insurer has a duty to defend against all claims. If the insured demonstrates that the complaint alleges a covered injury, the burden shifts to the insurer to show that the policy’s exclusionary language clearly and unambiguously excludes the alleged act or omission from the policy’s coverage. Any ambiguities in the exclusions are construed against the insurer.
Analysis: No Duty Existed
Applying the above framework, the Fourth Circuit held that the district court erred in determining that a duty existed in this case given the language in the Jenkins Complaint and the various coverage exclusions.
No “Occurrence” for CGL A Coverage. Contrary to the district court’s assertion, the Fourth Circuit held that, because the Jenkins Complaint only alleged Liberty’s liability for intentional conduct, it did not plead an “occurrence” for coverage under CGL A. Under Virginia law, an agent’s state of mind is ordinarily imputed to the principal. Thus, an intentional tort cannot be considered unexpected, even when viewed from the standpoint of the employer, and it does not become an “occurrence” simply by operation of respondeat superior.
The Court noted that the Separation of Insureds provision did not displace Virginia’s rule that an agent’s intentionally tortious act cannot be “unexpected” by the principal who is vicariously liable for the act. The Court reasoned that, even if the only defendant in the action was Liberty (the principal), the Jenkins Complaint still frames Liberty’s liability in terms of respondeat superior, which requires an imputation of intent from Liberty’s agents. The separation provision did not affect this imputation.
Moreover, even if the language were ambiguous, Virginia law requires courts to interpret insurance policies consistent with the parties’ intent. This requires avoiding an absurd result that enlarges the obligations of the insurer in order to create a windfall to the insured. Here, the Fourth Circuit found that failing to impute the agent’s intent would impose a duty to defend that is enlarged from the parties’ original intent to only defend against claims of unintentional acts, thereby creating a windfall to Liberty by effectively nullifying the exclusion for intentional injuries. Because the Jenkins Complaint alleged only intentional acts, the Court found that it did not allege any damages that resulted from an “occurrence” as required under CGL A.
Finally, the Court also noted that, when determining whether coverage exists, Virginia courts do not evaluate whether a complaint sufficiently alleges facts to support a claim such that it would survive a motion to dismiss. Instead, the court should only determine whether the complaint alleges facts that fall within the four corners of the policy; the claim’s probability of success is inconsequential. Here, the Fourth Circuit found that the Jenkins Complaint alleged facts and circumstances that demonstrate liability for kidnapping and racketeering. Thus, the Court held that Citizens had no duty to defend Liberty under CGL A.
Excluded from CGL B Coverage. Coverage under CGL B required “personal and advertising injury.” The Fourth Circuit held that, even assuming the Jenkins Complaint alleged such an injury, the Criminal Acts Exclusion in CGL B, which excluded injuries “arising out of a criminal act,” clearly applied. The Court noted that an injury “arises out of” an event when there is a causal connection between the event and the injury. Here, the Court found that the Jenkins Complaint (1) clearly and unambiguously alleged that Liberty and its agents committed criminal acts, and (2) clearly and unambiguously alleged that Liberty was liable for injuries arising out of those acts. Thus, a casual connection between the alleged criminal acts and the claimed injuries was sufficiently alleged, and the Court thus held that Citizens had no duty to defend Liberty under CGL B given the Criminal Acts Exclusion.
Excluded from SELL Coverage. Similar to CGL B, the SELL coverage provision included an Intentional and Criminal Acts Exclusion, which excluded claims “arising out of any intentional, dishonest, fraudulent, criminal, or malicious act or omission or any willful violation of law by the insured.” As emphasized in the CGL B analysis, the Jenkins Complaint alleged Liberty’s liability for injuries arising from its direct involvement in conspiracies to commit kidnapping and racketeering, all of which carry criminal penalties. Thus, the Court held that these claims clearly and unambiguously triggered the Intentional and Criminal Acts Exclusion, and Citizens thus had no duty to defend Liberty under SELL.
Reversed, Vacated, and Remanded
In sum, the Fourth Circuit held that Citizens had no duty to defend Liberty against the Jenkins Complaint under any of the coverage provisions. The judgment of the district court was reversed, the awards of fees and costs vacated, and the case remanded for further proceedings.