In light of the impact of reviver statutes, recent high-profile settlements (such as the Boy Scouts of America, various Dioceses of the Catholic Church, or USA Gymnastics), and the revised ISO endorsements (filed with a proposed September 2022 effective date), we provide a primer on the all too well-known exposure of abuse and molestation.

Underwriting Appetite

Abuse and molestation is certainly a tough, unique, and nuanced coverage offering to underwrite. In most standard markets, carriers tend to exclude abuse and molestation based on classes of business or they require an exclusion for all insureds. For risks looking for insurance protection, specialty markets have evolved over time to offer coverage. While we understand the market pressures to add abuse and molestation coverage to existing offerings as a matter of course, heightened awareness of the actual exposure is paramount. Indeed, abuse and molestation is a severity prone exposure, the characteristics of which have the potential for extreme balance sheet implications. For example, we often see periods of infrequent claim activity, potentially followed by a deluge of activity with long tail implications.

The first step is to define the overall philosophy, risk appetite, target business, and related limits of liability, as well as the terms and conditions for any product offering, starting with basic underwriting considerations, with questions such as these:

• Eligibility – What level of exposure (spectrum of risk) are you willing to accept? Is your tolerance no exposure? Would you consider classes of risk where youth or other vulnerable members of a community are under an insured’s care?
• Communication – How will you communicate to your producer base and underwriting staff risk you are willing to assume as well as risk you do not want to assume? Is your strategy to actively market the coverage or only offer coverage when it is requested?
• Information Gathering – How will you go about collecting the pertinent information needed for exposure and risk mitigating controls? Will you require a signed and dated supplemental application at each renewal? Will background checks on all staff/volunteers, security cameras monitoring, 1:1 access to minors, and/or overnight exposures be part of your supplemental questionnaire?
• Risk Selection and Analysis – What guidance must you provide your underwriters to help distinguish quality of risk? Are reviver laws and statute of limitations fully understood in all jurisdictions where coverage is available? How will your underwriters handle incomplete or unsatisfactory responses to exposure inquiries?
• Policy Form – What coverage triggers and defense obligations will form the basis of your coverage? Do you intend to provide coverage for acts of abuse or molestation which first take place before the policy period? Does your duty to defend encompass allegations of intentional conduct? Is coverage provided on a per perpetrator or per victim basis?
• Limit of Insurance – How much limit and under what coverage parts will this coverage be made available? Are abuse and molestation related limits, in whole or in part, included within General Liability aggregate or a standalone aggregate?
• Pricing – Does the premium development match with your expectations to cover loss activity across your portfolio? In this regard, are frequency, severity, and latency fully contemplated?
• Referrals or Authority Criteria – What, if any, binding authority is granted to agents? Will line underwriters (new and renewal) be required to refer the coverage as a matter of course? Are underwriting skill sets for this coverage consistent with those of a “specialist” or those of a “generalist”?
• Insured Profile – Will the insured have the capabilities to take the necessary actions to mitigate loss? Are reporting criteria and notification to authorities transparent and effective? What is the insured’s willingness to incorporate, execute, and monitor critical recommendations?
• Portfolio Management – Will monitoring capabilities be in place to assess portfolio relative to stated strategy?

Indeed, there can be many layers of complexity when addressing each of the above questions. All levels of underwriting require thoughtful consideration followed by a comprehensive coverage offering strategy. Any alternative approach has the potential to be quite costly.

Policy Wording Considerations

With respect to the policy forms themselves, and once the risk appetite has been defined, there are certain considerations at every level. Courts in the U.S. have routinely found coverage for abuse and molestation under standardized coverage forms without a specific exclusion. As such, if a carrier has made a business decision not to provide any coverage for abuse and molestation, the clear path is likely for the carrier to affirmatively exclude this coverage. Indeed, recent headlines, insurance coverage decisions, and overall social awareness indicate a strategy beyond “remaining silent.”

ISO Endorsements

Optional abuse and molestation exclusion endorsements have been available in the marketplace for some time. For example, ISO endorsement CG 21 46 – Abuse or Molestation Exclusion for CGL policies has been in place since its first edition in 1987, with Commercial Liability Umbrella and Businessowners counterparts having also been available since 2000 and 1996, respectively. The CG 21 46 exclusion explicitly addresses the bulk of traditional abuse- or sexual molestation-related allegations, including aspects concerning negligent employment, investigation, supervision, and reporting.

ISO is now expanding its abuse and molestation exclusionary options. In an optional endorsement filing earlier this year, with a proposed effective date of September 2022, ISO is withdrawing the CG 21 46 and offering new endorsements CG 40 28 09 22 – Broad Abuse Or Molestation Exclusion and CG 40 29 09 22 – Sexual Abuse Or Sexual Molestation Exclusion.

While substantially reflecting endorsement CG 21 46 in most regards, endorsement CG 40 28 does include a few differences which appear to potentially broaden the scope of the exclusion, including removal of the “care, custody or control of any insured” language found in the CG 21 46. As such, the CG 40 28 appears to be a very good replacement for endorsement CG 21 46. Conversely, with its explicit limitation to “Sexual Abuse or Sexual Molestation,” endorsement CG 40 29 only addresses “sexual” related abuse and molestation allegations; other aspects of abuse and molestation are not explicitly excluded. As to remaining aspects, such as allegations of physical or mental abuse, the lines can certainly be blurry, especially within the context of a well pled complaint. Nevertheless, prior to this new ISO filing, carriers had to utilize proprietary forms in looking to take this middle-of-the-road approach to exclude only sexual abuse or molestation.

On the other end of the spectrum, certain carriers may have a broad interest in providing coverage for sexual abuse or sexual molestation, or for abuse or molestation in general, either for entire books of business or, perhaps, for a limited number of classes. In providing this coverage, such carriers generally have used affirmative proprietary coverage forms or endorsements. Interestingly, along with the new exclusions referenced above, ISO has also filed several affirmative coverage endorsements related to sexual abuse and sexual molestation. The proprietary and ISO forms come with a host of varying provisions, exclusions and limitations.

Coverage Options

In looking at affirmative coverage options for abuse or molestation in general, it is important to pay special attention to the following provisions:

• Definition of Abuse or Molestation and Exclusion for other Insuring Agreements – Some abuse forms provide coverage for sexual abuse and molestation only, and others for all abuse and molestation. In either case, it’s important to ensure that the coverage form’s definition of abuse or molestation includes negligent supervision, hiring, and the like. That way, those types of allegations fall within the abuse coverage. Similarly, it’s important that the CGL or any other potentially applicable policy exclude abuse, molestation, and associated negligence allegations in order to prevent any overlap in coverage. A broad exclusion should be considered given that sexual abuse claims often include allegations of pure mental or physical abuse as well as employer negligence.
• Triggers of Coverage – While older forms affirmatively addressing abuse and molestation might have been issued on a traditional occurrence basis, most of the forms in the current marketplace use either a claims-made or modified occurrence type trigger. Modified occurrence forms retain traditional “occurrence” features but typically require that either the first or last act of abuse or molestation to have been committed during the policy period. This way, related claims can be grouped together, either according to the date the first claim is made (for claims-made forms) or the date the first or last act of abuse is committed (for modified occurrence forms), with the effect that one policy and one set of limits apply.
• Related Claims – The forms in the marketplace generally consider claims to be “related” in one of two ways, either “per perpetrator” or “per victim.” The “per-perpetrator” approach seeks to limit acts of abuse by the same perpetrator, or a group of perpetrators, to a single event – regardless of whether the abuse or molestation took place over a number of years or policy periods and/or involved multiple victims. Alternatively, “per victim” attempts to group all abuse or molestation to any one person as one event, regardless of the number of perpetrators, acts of abuse, or time period involved.
• Limits of Insurance – Abuse or molestation coverage typically has its own set of set of occurrence/aggregate limits, which may or may not be part of the policy’s overall occurrence/aggregate limits.
• Limited Coverage for Alleged Perpetrators – Generally, insurance coverage does not exist for individuals or entities that have admitted to committing intentional acts of abuse and molestation. In this regard, the coverage is designed to address negligence associated with acts of sexual abuse or sexual molestation. However, what about insurance coverage for allegations of intentional conduct, particularly when such allegations are coupled with allegations of otherwise covered negligence? We often see affirmative coverage for abuse and molestation include coverage for allegations of intentional conduct, with such coverage terminating upon an admission of guilt in a criminal proceeding or within an underlying civil proceeding. However, we also see more restrictive policies, which exclude allegations of intentional conduct regardless of whether the alleged perpetrator has admitted to the intentional conduct at issue.

The Inevitable Claims Scenario

For carriers that have been providing coverage for abuse or molestation, or have some degree of business interest in doing so in the future, claims handling best practices are paramount. In this regard, reviver statutes and extended statutes of limitation present significant challenges to adjustment of sexual abuse claims and defense of policyholders against potentially covered claims. Among those challenges are the fact that witnesses and policyholder records may no longer be available, memories may become increasingly unreliable over time, and insurance policies may have been destroyed or lost. Policyholders who face potential risk for abuse claims in such jurisdictions should be advised to mitigate their risk as much as possible.

To begin with, insurers should encourage policyholders to reexamine their document retention policies to ensure that employment records, insurance policies and related records, and records related to investigation of past abuse claims are not inadvertently lost or destroyed. Allegations of sexual abuse or molestation should immediately be referred to the police, and insureds should fully cooperate with any law enforcement investigation. Policyholders should, of course, be aware that employment and claim records are sensitive and may be subject to confidentiality requirements. Careful thought should be given before commenting on any investigation.

There are many considerations that insurers must be aware of should an abuse- or molestation-related claim be made against a policyholder. First, the insurer should immediately commence an investigation of coverage and liability. The insurer should ensure that the policyholder has preserved all relevant records and identified all potential witnesses to the alleged abuse or molestation. Because sexual abuse often takes place over an extended period, the insurer should advise the policyholder to notify its other insurers of the claim. Next, and as with any claim, a full coverage evaluation should be conducted. Putting aside aspects of affirmative coverage, and in the context of a CGL policy without a sexual abuse or molestation exclusion (we still see many policies being issued without such exclusions), a key consideration should be that, in many states, and as mentioned above, an insured employer may be held liable for negligent hiring, supervision, and/or retention of the perpetrator. It would be a mistake to believe that the perpetrator of the abuse will bear the sole responsibility.

Further, an employer’s alleged negligence may be considered an “occurrence” under many states’ laws, resulting in bodily injury that was not expected or intended from the standpoint of the insured employer. Under these circumstances, allegations of negligence against an employer or supervisor will almost certainly be sufficient to trigger at least a duty to defend under an occurrence-based CGL policy. Finally, the company should consider that a duty to defend may be found to exist even when the employer can make a credible argument that it had no reason to believe the perpetrator presented a risk.

Moreover, and whether in the context of affirmative coverage or otherwise, the insurer should consider all potential coverage defenses or limitations that may apply to the claim. Such defenses may be related to trigger of coverage (as discussed above), or failure to provide notice to the insurer (although courts have limited this defense in some jurisdictions in the absence of prejudice). In some cases, there may be a basis to deny coverage altogether. In this regard, many insurers elect to consult with a coverage attorney, one well versed in sexual abuse or molestation coverage issues and jurisprudence, as to whether a declaratory judgment action should be filed. If a defense is to be provided, the insurer may elect to do so under a unilateral reservation of rights based on those defenses or limitations (in other words, the insurer would provide a defense, but reserve the right to deny coverage for any judgment or settlement if the facts establish that the specified coverage defenses apply). The insurer may also seek to negotiate a non-waiver agreement with the policyholder, under which the policyholder would agree that, by providing a defense, the insurer is not waiving its right to assert that the present claim or other claims are not covered.

If a defense is provided, the insurer should ensure that counsel is retained who has experience defending sexual abuse claims. This is not an area in which panel counsel should be used to save costs or handle claims in bulk. Depending on the circumstances, the insurer should investigate whether an early resolution of the claim is possible. Given the sensitive nature of sexual abuse- or molestation-related claims, consideration should be given to including confidentiality or non-disclosure provisions in any negotiated settlement. However, in the context of an exposure such as this one (one with the potential for a large number of victims and/or perpetrators), insurers must be aware that there is not likely to be a way to resolve all potential claims or prohibit a plaintiff’s attorney from taking on new clients. Thus, an early settlement may create incentive or set a floor for future claims.

To Sum It Up

Whether you’ve already defined your risk appetite for abuse or molestation or are considering your options in light of new statutes, troubling headlines, or the new ISO endorsements, we encourage you to thoroughly review all aspects of this exposure before proceeding in any direction. Indeed, whether you wish to exclude outright, provide limited coverage, or provide broad affirmative coverage, there are a host of highly nuanced underwriting, policy wording, and claims handling twists and turns at every corner. A wrong turn in one direction or another could prove quite costly.

If you have any questions regarding this exposure, please feel free to reach out to your Gen Re account executive.

Endnote

1. Crowell & Moring LLP, “These statutes vary by jurisdiction, but generally do one of three things: (1) eliminate the statute of limitations for such claims; (2) extend the statute of limitations for such claims; or (3) create a window (e.g., a period of a few years) in which otherwise time-barred claims can be filed.” January 27, 2020, https://www.crowell.com/NewsEvents/AlertsNewsletters/All/Legislation-Opening-up-the-Statute-of-Limitations-on-Sexual-Abuse-Claims-Will-Likely-Lead-to-More-Bankruptcies.