AMERICAN FAMILY MUTUAL INSURANCE COMPANY v. BOWER

to defend has arisen. American Family's Second Motion for Summary Judgment is therefore DENIED.

American Family asserts that even if an "occurrence" under the insuring clause creates coverage, a host of exclusion provisions apply, all of which preclude coverage for the Bowers in the underlying state suit.

Generally, "insurers are free to limit coverage; however, all exceptions, limitations and exclusions must be plainly expressed. An exclusionary clause must clearly and unmistakably express the particular act or omission that will bring the exclusion into play." Wells v. Auto Owners Ins. Co., 864 N.E.2d 356, 358 (Ind.Ct.App. 2007) (citing Jackson v. Jones, 804 N.E.2d 155, 158 (Ind.Ct.App. 2004)). The court now examines each of the exclusions.

A. Sexual Molestation, Intentional Acts, and Violation of Law Exclusions

In Count II of her amended state court complaint, Butler asserts that the Bowers were aware of the danger from Jonathan but did not intervene to stop the molestation. American Family asserts that by virtue of these allegations, the Bowers's claim is excluded under one or all of the following exclusions: (1) the sexual molestation exclusion; (2) the intentional acts exclusion; and (3) the violation of law exclusion. Because each of these exclusions beg the question of whether they apply with the same force to innocent co-insureds as they would to a perpetrator, the court considers them in tandem.

All three exclusion preclude claims for bodily injury arising out of the particular excluded act:

Section II — Exclusions 1. Abuse. We will not cover bodily injury or property damage arising out of or resulting from any actual or alleged: a. sexual molestation or contact; . . . 10. Intentional Injury. We will not cover bodily injury or property damage caused intentionally by or at the direction of any insured even if the actual bodily injury or property damage is different than that which was expected or intended from the standpoint of any insured. 17. Violation of Law. We will not cover bodily injury or property damage arising out of: a. violation of any criminal law for which any insured is convicted According to American Family, there is no question that Butler's claims for battery and emotional distress arise from an intentional act of sexual molestation by Jonathan, or, alternatively, from Jonathan's criminal act. Thus, American Family seizes upon these undisputed facts to assert that because Butler's claims against Jonathan are clearly foreclosed by the above exclusions, so too, are her claims against the Bowers.

In response, the Bowers first point to evidentiary materials from the state court case which they argue demonstrate that the undisputed evidence is that the Bowers were unaware of the sexual molestation occurring to Butler. ( See Response Brief, p. 2 and deposition citations therein). According to the deposition testimony cited, both Butler and Jonathan indicate that the Bowers had no actual knowledge of the molestation. Thus, the Bowers contend that the factual underpinnings of the claim demonstrate that the case is solely one of negligent supervision. Because the claims against them are ones of negligence and the parties agree that they did not commit a criminal act, the Bowers assert there is an open question of Indiana law as to whether they are precluded by any of the above three exclusions.

American Family agrees that there is no direct Indiana case addressing the question of whether any of the above clauses excludes coverage for an innocent co-insured. Other jurisdictions addressing the issue have come to opposing views. Compare Hingham Mut. Fire Ins. Co. v. Smith, 865 N.E.2d 1168 (Mass.App. 2007); Philbrick v. Liberty Mut. Fire Ins. Co. 934 A.2d 582, 585 (N.H., 2007); American Commerce Ins. Co. v. Porto, 811 A.2d 1185, 1196 (R.I. 2002) ("if the alleged sexual molestation is a cause of the claimed bodily injuries, then the existence of other alleged negligence claims and proximate causes is of no moment-the bodily injuries alleged are causally connected to or `arise out of' the sexual molestation, and are thereby excluded from coverage"); Allstate Ins. Co. v. Bates, 185 F.Supp.2d 607, 613 (E.D.N.C. 2000) (excluding coverage for negligent co-insureds reasoning that "[w]ithout the molestation there would be no injury and thus, no basis for the negligence claim"); with U.S. Fidelity Guar. Co. v. Open Sesame Child Care Ctr., 819 F.Supp. 756, 760 (N.D.Ill. 1993) ("In refusing to separate the employer's alleged negligence from the employee's intentional conduct, [other] courts impermissibly ignored the employer's independent acts which gave rise to the alleged tort"); Silverball Amusement, Inc. v. Utah Home Fire Ins. Co., 842 F.Supp 1151, 1159-1165 ("an insurer must provide coverage and a legal defense to an insured where a complaint alleges that an employer was negligent in hiring and supervision of an employee who subsequently committed an intentional tort. An insurance policy would require an exceedingly precise exclusionary clause to avoid that fundamental principle, and there is no such clause in the instant case"); St. Paul Fire Marine Insurance Co. v. Schrum, 149 F.3d 878 (8^th Cir. 1998); Doe v. Shaffer, 738 N.E.2d 1243 (Ohio 2000), C.P. v. Allstate Ins. Co., 996 P.2d 1216, 1225-1226 (Alaska 2000) ("From the perspective of insureds whose acts are alleged to have negligently, but not criminally or intentionally, been a cause of a claimant's injury, these exclusions do not apply to the negligence claims against them"); and Safeco Insurance, 913 N.E.2d at 434-436 (concluding that because the insured were held separately liable for their own actions, "which were neither intentional nor illegal;" the injuries they caused were distinct from the injuries caused by another insured's intentional and illegal acts. Therefore, "the intentional-act and illegal-act policy exclusions do not apply to the negligence claims."); Frankenmuth Mut. Ins. Co. v. Williams, 690 N.E.2d 675, 678-680 (the intentional-act exclusion does not apply to negligent co-insured's conduct).

In examining these sets of cases there appear to be two lines of reasoning applied by the various courts. In cases where courts determine that the sexual molestation or intentional act exclusions preclude coverage for all related claims, the courts have reasoned that without the molestation, the allegations of negligence would not have surfaced and thus, the injury would not have occurred. Thus, these courts conclude that the injuries from the negligent conduct related to an intentional tort are inextricably intertwined with the injuries arising from the intentional or illegal act. See Safeco Ins., 913 N.E.2d at 435 (discussing opposing view).

The line of authority reaching the opposite conclusion reasons that negligent supervision and negligent entrustment torts are separate in nature and create distinct injuries from the molestation itself. In Frankenmuth, the Indiana Supreme Court concluded that the insurer could not rely on the intentional acts exclusion because the insured's negligence caused a separate injury from the intentional act of another insured, i.e., the negligent supervision injured the plaintiff by creating an increased exposure to the risk of molestation which "must be considered separately from the injuries resulting from the molestation itself." Frankenmuth, 690 N.E.2d at 679. See also, U.S. Fidelity Guar. Co., 819 F.Supp. at 760 ("In refusing to separate the employer's alleged negligence from the employee's intentional conduct, [other] courts impermissibly ignored the employer's independent acts which gave rise to the alleged tort"); St. Paul Fire Marine Ins., 149 F.3d at 880-881 (applying Missouri law and noting that the intentional tort was "merely incidental" to the negligent-supervision claim, making the negligence a separate and nonexcluded cause of the victim's injuries); Bd. of Public Edn. of the School Dist. of Pittsburgh v. Natl. Union Fire Ins. Co. 709 A.2d 910, 916-917 (Pa.Super 1998) ("Where it is alleged that negligence allowed a crime to occur, does the claim against the negligent arise from the negligence or from the criminality? We believe it is the former").

In light of the absence of controlling Indiana authority, American Family attempts to circumvent the issue of whether the Bowers can be liable despite their status as innocent co-insured altogether by making an alternative argument that the exclusions for intentional and criminal acts apply to acts by "any insured." Since Jonathan was an insured under the Policies, they contend that any intentional or criminal acts by him exclude coverage for his parents. It follows then, that if this language in the intentional or criminal acts exclusions applies to preclude coverage, it matters not whether the Bowers are innocent co-insureds under any of the exclusions.

It is true that a review of the intentional acts and violation of law exclusions in the Policies state that the Policies do not cover "bodily injury . . . caused intentionally by. . . . any insured . . . even if the actual bodily injury or property damage is different than that which was expected or intended from the standpoint of any insured' or "bodily injury . . . arising out of . . . violation of any criminal law for which any insured is convicted." (See Policy Exclusions, #s 10, 17). Yet, as the Bowers point out, there also exists in the Policies the severability clause which requires each insured to be considered separately. Thus, they contend that the severability clause cannot be reconciled with the "any insured" language of the intentional and criminal acts exclusions when the severability clause demands that the insurance applies separately to each insured.

As with the initial inquiry as to whether negligent acts of co-insureds are barred by the exclusions, there is no direct Indiana law discussing this issue. Moreover, there is also a split of authority in other jurisdictions as to whether the language "any insured" American Family utilizes throughout its policies bars the Bowers from a defense when the policy also contains a severability provision. Compare McCauley Enters. v. N.H. Ins. Co., 716 F.Supp. 718, 721 (D.Conn. 1989) (holding that an exclusion referencing "any insured" barred recovery of losses by an innocent co-insured); Michael Carbone, Inc. v. Gen. Accident Ins. Co., 937 F.Supp. 413, 423 (E.D.Pa. 1996) (holding that an exclusion phrased "any insured" precluded coverage despite a severability clause); Chacon v. Am. Family Mut. Ins. Co., 788 P.2d 748, 752 (Colo. 1990) (holding that an exclusion for the intentional acts of "any insured" precluded a negligent supervision claim despite a severability clause); Oaks v. Dupuy, 653 So.2d 165, 168 (La.Ct.App. 1995) (concluding that a severability clause did not alter the scope of an exclusion clause phrased in terms of "any insured"); Am. Family Mut. Ins. Co. v. Copeland-Williams, 941 S.W.2d 625, 629 (Mo.Ct.App. 1997) ("The use of the phrase `any insured' makes the exclusionary clause unambiguous even in light of the severability clause."); Am. Family Mut. Ins. Co. v. Moore, 912 S.W.2d 531, 533-35 (Mo.Ct.App. 1995) (holding that a severability clause did not negate an exclusion for damages "arising out of business pursuits of any insured . . . by an insured"); Northwest G.F. Mut. Ins. Co. v. Norgard, 518 N.W.2d 179, 180, 184 (N.D. 1994) (holding that an exclusion for sexual molestation by "an insured, an insured's employee or any other person involved" precluded coverage for a negligent supervision claim against another insured, notwithstanding a severability clause); Great Cent. Ins. Co. v. Roemmich, 291 N.W.2d 772, 774 (S.D. 1980) (finding no ambiguity in the term "any insured" in an exclusionary clause, even when interpreted with a severability of insurance provision); Caroff v. Farmers Ins. Co. of Wash., 989 P.2d 1233, 1237 (Wash. App. 1999) (holding that exclusions of coverage for injury arising out of child molestation by "any insured" precluded coverage despite general severability clauses); Taryn E.F. v. Joshua M.C., 505 N.W.2d 418, 421 (Wis.App. 1993) (holding that an exclusionary clause referencing "any insured" precluded coverage even when read with a severability clause); with Am. Ins. Co. v. AV S, 145 F.3d 1224, 1229 (10th Cir. 1998) ("[T]he term `any insured' in an exclusion clause in a policy that also contains a severability clause does not exclude coverage for all insureds when only one insured is at fault."); Transp. Indem. Co. v. Wyatt, 417 So.2d 568, 571 (Ala. 1982) (applying a severability clause and finding the term "any insured" in an exclusion ambiguous); Premier Ins. Co. v. Adams, 632 So.2d 1054, 1057 (Fla.Dist.Ct.App. 1994) (holding that a severability clause limited an exclusion for intentional acts by "any insured" to exclude coverage only for the insured who intentionally caused the injury); Brumley v. Lee, 963 P.2d 1224, 1228 (Kan. 1998) (holding that a severability clause afforded each insured his or her own policy despite an exclusionary intentional act clause referencing "any insured"); Worcester Mut. Ins. Co. v. Marnell, 496 N.E.2d 158, 161 (Mass. 1986) (interpreting a severability clause to nullify a motor vehicle exclusion despite the exclusion's "any insured" language); Am. Nat'l Fire Ins. Co. v. Estate of Fournelle, 472 N.W.2d 292, 295 (Minn. 1991) (stating that a severability clause provided for separate coverage to named insureds despite a household exclusion applying to "any insured").

Under the doctrine of Erie R.R. v. Tompkins, 304 U.S. 64 (1938), a federal court sitting in diversity is bound by state substantive law. Where, as here, the parties assert there is no controlling state law, the court has the obligation to apply the law of the state as it believes the highest court of the state would apply it if presented with the issue. See Lexington Ins. Co. v. Rugg Knopp, Inc., 165 F.3d 1087, 1090 (7th Cir. 1999).

Here, the Court's review of the cases demonstrates that the Indiana Supreme Court has provided some guidance (albeit not on facts identical to the present case but not far removed), as to Indiana's position on issues such as the one in this case. In Frankenmuth Mutual, a minor child was molested by her babysitter's husband. 690 N.E.2d at 676. The victim and her mother pursued a civil battery claim against the molester. Neither the babysitter, White, nor her husband officially notified their homeowners's carrier, Frankenmuth, of the claim, although Frankenmuth was generally aware of the litigation and sent a reservation of rights letter. Frankenmuth sent a letter to the attorney who represented the babysitter and her husband, indicating that there was no coverage afforded for damages resulting from the molestation of a child and requesting copies of the lawsuit filings so that it could determine if it had a duty to defend. Frankenmuth refused to defend White and eventually she entered into a consent judgment with the plaintiff. The Plaintiff's attorney then sought to execute a judgment against Frankenmuth pursuant to the Homeowner's policy.

Frankenmuth moved for summary judgment arguing, among other things, that the claim was excluded from the policy because the injuries had resulted from the intentional acts committed by the babysitter's husband. Frankenmuth, 690 N.E.2d at 677. In response, the Indiana Supreme Court concluded:

Frankenmuth's intentional act arguments are essentially an attempt to conflate the conduct of White with that of her husband in order to bring the consent judgment within the intentional act exclusion. The fundamental problem with this strategy is that [the plaintiff] never alleged that White engaged in any intentional conduct or participated in the molestation. [The plaintiff's] complaint accused White of only negligent supervision, which supposedly exposed [the plaintiff] to the risk that White's husband would molest [the plaintiff].

Notably, Frankenmuth does not involve the sexual molestation or criminal acts exclusions and focuses solely on the intentional acts exclusion in that particular policy. However, American Family makes no argument that the fundamental principle relied upon by the Indiana Supreme Court, i.e., that insurance policy exclusions that preclude coverage for intentional or illegal acts do not preclude coverage for the negligent actions of other insureds under the same policy, would not equally apply here. And, based upon the facts of this case and the holding in Frankenmuth the rationale applies equally to all three exclusions. Indeed, it would make little sense to delineate among the three exclusions where the underlying premise is identical in all three scenarios. Thus, this court holds that under Indiana law, the sexual molestation, the criminal law, or the intentional acts exclusions in American Family's policies do not apply to preclude coverage for the alleged negligent acts of a co-insured.

This court's conclusion is also not altered by American Family's contention that because the language in the criminal law and intentional acts exclusions bars coverage for criminal or intentional acts of "any insured" it bars coverage for innocent co-insured's such as the Bowers. American Family asserts that its exclusions are unambiguous and apply where "any insured" covered by the Policies commits an intentional or criminal act. Thus, it attempts, once again, to conflate Jonathan Bower's intentional conduct with the alleged negligence of his parents thereby foreclosing coverage and a duty to defend for the parents. American Family further contends that the existence of the severability provision is irrelevant because the intentional and criminal acts exclusions contain specific unambiguous language which disallows coverage.

This argument is similar to the one presented at the outset as to whether an "occurrence" to trigger coverage could be found and, as numerous courts have concluded, (see list supra), adopting American Family's reasoning in the confines of this case would make the severability provision superfluous. This is precisely the result the Indiana Court of Appeals sought to avoid in its holding in Wayne Township. The Policies provide that the insurance applies separately to each insured. Yet, it then attempts to exclude from the coverage intentional or criminal acts by another insured. The Indiana Supreme Court in construing insurance policies has held that an insurance contract should be interpreted to harmonize the contract's provisions rather than place them in conflict. Allgood v. Meridian Security Insurance Co., 836 N.E.2d 243 (Ind. 2005). Here, a reasonable insured would believe from the severability provision that their insurance coverage and any exclusion of coverage would be judged on the basis of their particular conduct and acts within their control. To then exclude coverage on the basis of another insured's conduct creates a conflict between the two provisions and denies the reasonable insured the coverage protection which the severability provision affords. Accordingly, this court believes that Indiana would follow the reasoning of those courts that hold that a severability clause providing for separate coverage to named insureds applies despite language in an exclusion applying to "any insured."

Accordingly, the court concludes that the sexual molestation, criminal acts, and intentional acts exclusions do not apply to preclude coverage under the Policies to the Bowers for their alleged negligence. American Family's Motion for Summary Judgment on this issue is therefore DENIED.

In her state court complaint, Butler alleges that the Bowers stood "in loco parentis" to her during the period in which she was sexually molested by Jonathan. In loco parentis means "in the place of a parent." Black's Law Dictionary 803 (8th ed. 2004). The doctrine generally "refers to a person who has put himself in the situation of a lawful parent by assuming the obligations incident to the parental relation without going through the formalities necessary to legal adoption. It embodies the two ideas of assuming the parental status and discharging the parental duties." In re M.W., 913 N.E.2d 784, 788 (Ind.App., 2009) (quoting Niewiadomski v. United States, 159 F.2d 683, 686 (6th Cir. 1947).

As a result of the allegation that the Bowers were "stand-in" parents for Butler, American Family asserts that it has no duty to defend because the Policies exclude coverage for bodily injury to any insured. (Policy Exclusions #11, p. 11). This provision seeks to exclude coverage for bodily injury between insureds. The Policies further define "insured" as follows:

a. Insured means you and, if residents of your household:

(1) your relatives; and

(2) any other person under the age of 21 in your care or in the care of your resident relatives

(Policy, p. 1). According to American Family's analysis, because Butler has sued under the theory of "in loco parentis," she qualifies as an additional insured and the intra-insured exclusion bars coverage.

Oddly, however, both American Family and the Bowers agree that although the state court complaint alleges that Butler was "in loco parentis," the evidence does not support such a finding. In its reply brief American Family writes:

Plaintiff American Family and Defendants Michael and Anne Bower are in agreement that Michael and Anne Bower did not assume parental duties as to Defendant Gabriel Butler under the facts of this case. Plaintiff American Family also agrees that in order for the intra-insured exclusion in the American Family homeowners policies to apply to Gabrielle Butler, she would have to be considered a resident of the Bower household during the times she was molested by Jonathan . . . American Family also agrees that it is unlikely that evidence in the underlying trial of this matter will establish that Gabrielle Butler was a resident of the Bower household during the times she was molested . . . For purposes of Plaintiff American Family's second motion for summary judgment, it will be assumed that there are questions of fact as to the issue of "in loco parentis" as raised in Defendant Gabrielle Butler's amended complaint in the underlying tort litigation.

(Reply, pp. 3-4).

American Family's position above acknowledges one of the basic obligations on insurers when determining whether it will provide coverage and a defense to a particular claim. Indeed, because "the duty to defend . . . arises before all the facts can be determined at trial[,] an insurer [must] examine the allegations of the complaint and make a reasonably complete investigation of the facts [] before it can deny coverage and consequent defense." Am. States Ins. Co. v. Aetna Life Cas. Co., 177 Ind.App. 299, 379 N.E.2d 510, 518 (Ind.Ct.App. 1978). In turn, it is incumbent on the insured to present facts that indicate coverage. In this case, American Family appears to concede that there are disputed facts which are indicative of the coverage issue thereby making summary judgment on whether the exclusion applies impossible at this stage. Accordingly, American Family's Second Motion for Summary Judgment is DENIED as to the issue of whether the intra-insured exclusion bars coverage in this case.

Next, American Family seeks summary judgment on the issue of whether it owes a duty to defend Michael Bower in his capacity as the Pastor of The Church on Fire based on Count V of Butler's state law complaint. In Count V, Butler alleges as follows:

13. That the Defendant Church and its Pastor, Defendant Michael Bower, had duties to its members, and specifically to the minor Plaintiff herein . . .

14. That the Defendants, the Church and Michael Bower, knowing Jonathan Bower's history and predilections, were negligent in the supervision, hiring, and retention of Jonathan Bower, II.

From these allegations, Butler seeks to hold the Church and Michael Bower accountable for acts that occurred at the Church.

According to American Family, the Policies at issue here cover only acts that occurred on the insured premises. Since it is undisputed in this case that the Church on Fire was not the insured premises, American Family asserts it has no obligation to defend Michael Bower for acts that occurred on the church premises. It further argues that to the extent that Butler contends that Michael Bower was negligent as the Pastor of the Church on Fire while acts of molestation was ongoing there, no coverage exists under the homeowners policies because of the Business Pursuits and Professional Liability exclusions in those policies: 4. Business. We will not cover bodily injury or property damage arising out of business pursuits or the rental or holding for rental of any part of any premises except: a. activities which are normally considered non- business *** 15. Professional Liability. We will not cover bodily injury or property damage arising out of the rendering or failing to render professional services. (Policies, p. 11).

In response, the Bowers assert that there are genuine issues of material fact as to whether these two exclusions can be applied to the facts of this case. According to them, there is absolutely no evidence that acts of molestation for which Butler seeks to hold the Church and Michael Bower as Pastor accountable occurred on the Church premises or whilst Michael Bower was acting as Pastor of the Church. Thus, if all the acts of molestation occurred at the insured premises, the Bowers argue that neither of the above exclusions can apply since Michael Bower was not rendering any professional services at the insured premises.

Again, the court is faced with the same basic tenet behind an insurer's duty to defend, i.e., that is the duty to examine the complaint and investigate the facts. Having said this, the court agrees with American Family that to the extent Butler is seeking to hold Michael Bower liable as Pastor of the Church on Fire for acts of molestation that occurred there, it would be entitled to summary judgment based upon the business pursuits and professional liability exclusions. However, as the Bowers point out, the facts in the underlying tort litigation suggest that no acts of molestation occurred at the Church while Michael Bower was employed as its Pastor and thus, the two exclusions are inapplicable to the claim against the Bowers. Thus, there exists a genuine issue of material fact as to whether the exclusions sought to be employed by American Family are applicable to preclude a defense. Thus, American Family's Second Motion for Summary judgment is DENIED as to application of the two business related exclusion but GRANTED as to whether the Church on Fire is covered as an insured under the Policies.

D. Punitive Damages Exclusion

American Family contends that it is entitled to summary judgment as to whether the Policies cover punitive or exemplary damages. The Policies clearly provide that they do not cover "punitive or exemplary damages." (Policies, p. 12). In their response brief, the Bowers do not address American Family's argument that the Policies clearly exclude punitive damages. Accordingly, based upon the plain language of the Policies, American Family is entitled to summary judgment on this issue. American Family's Second Motion for Summary Judgment is GRANTED as to the claim that the Policies exclude claims for punitive damages against the Bowers.

Based on the foregoing, American Family's Second Motion for Summary Judgment [DE 83] is GRANTED in part and DENIED in part as set out herein. Consistent with this Order, the court hereby DECLARES as follows:

Plaintiff American Family's homeowner's policies provide coverage to Defendants Michael and Anne Bower for the "occurrences" involving Jonathan L. Bower, II alleged to have caused bodily injury to Defendant Gabrielle L. Butler on the insured premises, subject to any applicable exclusions.

Plaintiff American Family owes a duty to defend Defendants Michael and Anne Bower for the "occurrences" involving Jonathan L. Bower, II alleged to have caused bodily injury to Defendant Gabrielle L. Butler on the insured premises, subject to any applicable exclusions.

Plaintiff American Family's homeowner's policies exclusions of coverage for acts of sexual molestation, intentional acts, or criminal acts do not exclude coverage for the negligent acts of a co-insured.

Plaintiff American Family's homeowners policies exclude coverage for punitive damages claimed in the underlying litigation.

Plaintiff American Family does not owe any coverage to Defendant The Church on Fire under the Policies for the events involving Jonathan L. Bower, II alleged to have caused bodily injury to Defendant Gabrielle L. Butler on the premises of The Church on Fire.

Plaintiff American Family does not owe a duty to defend The Church on Fire for the claims allegedly arising out of the sexual molestation of Defendant Gabrielle Butler on the premises of the Church on Fire.

The remainder of the issues in American Family's Motion for Summary Judgment require the resolution of genuine issues of material fact. Summary judgment is therefore DENIED as to those issues.

Entered: November 5, 2010