Criminal Act Exclusion Bars EPL Coverage for Sexual Harassment, Discrimination, and Assault Suits

Applying New York law, the United States District Court for the Southern District of New York has held that an EPL insurer need not reimburse a CGL insurer for a settlement and defense costs incurred in connection with two lawsuits alleging sexual harassment, discrimination, and assault, concluding that the policy’s criminal act exclusion barred coverage because the suits both arose from alleged sexual assault.  Hamilton Specialty Ins. Co. v. Kinsale Ins. Co., 2020 WL 1876358 (S.D.N.Y Apr. 15, 2020).

In 2018, a former server sued her former employer, the insured nightclub, alleging that she was sexually assaulted by another employee in October 2017.  Later in 2018, several additional women filed suit in federal court against the nightclub alleging claims for sexual harassment, discrimination, and assault based upon the same employee’s pattern of sexually violent and predatory behavior.  The nightclub’s CGL policy was in force at the time of the alleged October 2017 assault, and its EPL policy was in force when each lawsuit was filed.  The CGL insurer funded a six-figure settlement with the former server and paid for the nightclub’s defense in the federal suit.

The CGL insurer filed an action seeking reimbursement from the EPL insurer for the EPL insurer’s proportional share of the settlement and defense costs.  The EPL insurer argued that its criminal act exclusion, which applied to any claim for loss “[b]ased upon, arising out of or in any way involving a criminal act,” barred coverage.  Applying New York’s “but for” test used to interpret exclusions containing “based upon” or “arising out of” lead-in language, the court concluded that the criminal act exclusion unambiguously barred coverage for both underlying suits because neither action would have existed but for the employee’s sexual assault.  The court supported its conclusion by noting that the EPL policy covered similar discrimination and harassment claims so long as the claims did not involve a criminal act.  Additionally, the court responded to the CGL insurer’s argument that the exclusion did not apply because the employee had not been criminally prosecuted for the alleged sexual assault, observing that the exclusion was triggered by a criminal act, not a criminal indictment or conviction.