Article Archives >> Lead Stories >> April 1-15, 2005

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Concealment of Sex Charges
Negates Insurance When Sued
Carrier has no duty to defend where organization
failed to report prior allegations in application

An insurance carrier that sold a policy to protect a nonprofit against charges of sexual misconduct has no duty to defend against such charges when the organization knowingly concealed information about prior allegations in its application for insurance.

The Sixth Circuit Court of Appeals has affirmed a summary judgment dismissing a demand by a Michigan church for defense and indemnification, if necessary, in a suit by a former employee for sexual harassment. (Zion Christian Church v. Brotherhood Mutual Insurance Company, No. 03-2396, 3/8/05.)

Zion Christian Church applied for a combination insurance policy in 1998, providing a broad range of coverages, including general liability, sexual abuse, directors and officers, and umbrella protection. The application contained a “fraud warning” stating that the company did not provide coverage to an insured who “willfully concealed or misrepresented a material fact or circumstance with respect to this insurance.”

When the church filed the application, the business manager asked the Senior Pastor for information to complete the form, including questions about any prior allegations of sexual misconduct. The Senior Pastor did not report a prior suit against the church, himself and another pastor for sexual misconduct, and information about sexual misconduct by his son, another pastor of the church.

When the church, the Senior Pastor and his son were sued for sexual harassment and the carrier learned of the prior incidents, it denied coverage, claiming it would never have provided coverage if it had known of the history.

The trial court dismissed the church’s declaratory judgment claim for protection. The Court of Appeals has affirmed.

“When the application for insurance was completed … using information supplied by [the Senior Pastor], it was well-known that there were many claims of sexual improprieties by Zion’s employees that should have been, but were not, disclosed,” the Court wrote. It found no error in the trial court’s determination that the misrepresentations and concealment in the application were “material to [the carrier’s] decision to issue Sexual Acts Liability Coverage” and the policy was therefore “void.”

The trial court agreed with the church that the entire policy was not voided by the concealment, but held that the claims were not covered under the general liability section, which contained a specific exclusion for claims arising out of an actual or alleged “sexual act.”

YOU NEED TO KNOW

Nonprofits often fail to understand the significance of the questions on an application for insurance, but it makes no sense to conceal information on a theory that it may raise the rates if known to the carrier. It is a waste to pay for coverage that might not be there at all if it is ever necessary. It is better to disclose the information and try to negotiate with several carriers on the premium or the limits of the coverage.

The case does not discuss why no coverage is provided for the Pastor’s son who was apparently not involved in the concealment and may have known nothing about it. Some cases have been decided in favor of coverage of individual insureds who have not been involved in misrepresentation, even where the entity has been. It seems less likely in this case, however, when similar claims have been made against the son who is now seeking coverage, and where there is no showing that the organization had taken action to prevent future instances after the original charges were filed.

Article Archives >> Lead Stories >> April 1-15, 2005