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Ninth Circuit:
Failure to Disclose Potential Suit Voided Obligations Under Insurance Policy
Opinion Says Former Employee’s Conviction Is Sufficient Notice of Possible Claim; VanDyke Dissents Saying Factual Dispute Exists
By a MetNews Staff Writer
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—Multnomah County Sheriff's Office ABIGAIL KIM convict |
The failure by a company to disclose the possibility of a lawsuit against it on an insurance renewal form voided obligations of the insurer under the policy, the Ninth U.S. Circuit Court of Appeals has held, over a dissent.
Senior Circuit Judge William A. Fletcher and Circuit Judge Morgan Christen joined in the memorandum opinion, filed Tuesday, affirming a summary judgment by Senior District Court Judge James V. Selna in favor of Evanston Insurance Company.
Circuit Judge Lawrence VanDyke dissented, saying there exists a triable issue of fact as to whether the insured misrepresented its knowledge, noting that the question about potential suits referred to about malpractice claims, which is not the nature of the suit against the insured, Footprints Behavioral Interventions, Inc. The company is a multi-state company, headquartered in Santa Ana, that provides in-home educational services to children with autism.
Rather, it was sued for battery and related torts.
Renewal Application
Abigail Kim, a former behavioral technician employed by Footprints at an Oregon location, was convicted in March 2019 of rape, sodomy and sexual abuse of Footprints’ teenage client, K.B. In June 2019, Footprints’ Director of Human Resources and Administration Kristine Carillo submitted a renewal application to Evanston Insurance Company.
Carillo answered “no” to question 7(e) which asked, “Are you aware of any circumstances which may result in a malpractice claim or suit being made or brought against you or any of your employees?”
In November 2019, Footprints was served with a lawsuit brought on behalf of K.B. by his guardian ad litem. Footprints tendered the lawsuit to Evanston for a defense.
On March 24, 2020, Evanston disclaimed coverage under the policy and a few weeks later filed a complaint against Footprints for breach of contract and seeking declaratory relief as to its obligations under the policy.
Selna ordered entry of summary judgment for Evanston, declaring:
“There is no coverage because the condition precedent to coverage was not satisfied….[N]o reasonable jury could find Footprints’ did not have any prior knowledge a claim was likely.”
Breach of Contract
Fletcher and Christen found that Selna “properly granted summary judgment on Evanston’s breach of contract claim because Footprints made a material misrepresentation in its renewal application.” They noted:
“It is undisputed that, at the time Footprints filled out this renewal application, Footprints’ former employee Abigail Kim had been criminally convicted of charges arising from her sexual abuse of a Footprints client, a minor with autism. It is also undisputed that Footprints knew about Kim’s conviction….Based on the undisputed facts, no reasonable jury could conclude that Footprints was unaware of circumstances that might result in a malpractice claim being brought against it.”
Footprints contends that the term “malpractice” in question 7(e) narrows the scope to only those claims and points out that the lawsuit by K.B. asserts causes of action for battery, negligence, discrimination, and vulnerable person abuse. Unpersuaded, the judges said:
“Question 7(e) did not ask whether Footprints would be liable—the question was whether a suit was likely. Footprints’ arguments regarding the merits of such a claim are inapposite.”
They reasoned that “a former employee’s criminal conviction for sexually abusing a minor client could indicate negligent hiring or failure to supervise, for which her employer might be susceptible to a malpractice claim under Oregon law.”
Prior Knowledge Provision
Evanston argues that coverage is also precluded based on a prior knowledge provision which provides:
“Prior to the effective date of this policy the Insured had no knowledge of such act, error or omission or any fact, circumstance, situation or incident which may lead a reasonable person in the Insured’s position to conclude that a Claim was likely.”
The jurists rejected Footprints’ argument that it knew of no facts that would open the facility to liability. They acknowledged “California’s strong…preference” for construing ambiguities in favor of the insured but said:
“Footprints again equates liability with likeliness of a claim….[U]nder the egregious facts of this case, any reasonable employer could expect to be sued—regardless of whether that claim would succeed. The district court properly concluded that no reasonable jury could find that Footprints had no prior knowledge of a likely claim.”
Fletcher and Christen noted that an insurer has a duty to defend if the policy is ambiguous and the insured would reasonably expect coverage but found that the policy was clear.
A “Representations Clause” in the policy provides that the insured agrees “[t]hat the information and statements contained in the application(s) are their representations, that they shall be deemed material to the acceptance of the risk or hazard assumed by the Company under this policy, and that this policy is issued in reliance upon the truth of such representations.”
Based on this clause, they declared that “[b]ecause we have concluded that Footprints’ renewal application misrepresented the risk of such claims, Evanston established that it did not have a duty to indemnify or defend.”
VanDyke’s View
VanDyke agreed with Footprints that the “malpractice” modifier in the application put at issue the question of whether the provider knew a lawsuit was likely. He wrote:
“The key assumption driving both the majority and the district court in this case is that, given the egregious nature of Kim’s conduction, Footprints obviously had to be aware that it could be sued. But that intuition should not resolve this case. Regarding Footprints’s representation in Question 7(e) of its renewal application, factual disputes preclude the conclusion at summary judgment that Footprints misrepresented its knowledge as to the likelihood of a malpractice claim being brought.”
He continued:
“[W]hether Footprints could be held liable for any intentional torts committed by Kim is a different question than whether her conduct might give rise to Footprints’s own liability for malpractice.”
Turning to the prior knowledge provision, he reasoned:
“The Prior Knowledge Clause does not clearly apply to the duty to defend. The policy discusses Evanston’s duties to indemnify and defend in two separate sections. And the Prior Knowledge Clause, by its terms, only applies to Evanston’s duty to pay the monetary portion of any judgment, award, or settlement as a result of a Claim. Given California law’s general preference for construing policies in favor of the insured,…the Prior Knowledge Clause should be construed as only disclaiming Evanston’s duty to indemnify—not its duty to defend.”
He concluded:
“Given California’s construction preferences and the factual disputes at issue here, the district court erred in granting summary judgment on both the basis of Footprints’s representations in its application and the Prior Knowledge Clause. I therefore would reverse and remand to the district court for further proceedings.”
The case is Evanston Insurance Company v. Footprints Behavioral Interventions, Inc., 23-55706.
Multnomah County (Ore.) Circuit Judge David Rees last year sentenced Kim to eight years and four months in prison.
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