Wade Clark Mulcahy LLP

<p style="text-align: justify;">In <em><a href="https://www.wcmlaw.com/wp-content/uploads/2021/02/School-excess.pdf">School Excess</a> Liability Joint Ins. Fund v. Illinois Union Ins. Co.</em>, the United States District Court for the District of New Jersey recently considered whether the plaintiffs, School Excess Liability Joint Insurance Fund (“SEL”), Diploma Joint Insurance Fund (“Diploma”), and School Alliance Insurance Fund’s (“SAIF”) sufficiently pled that they have incurred losses that eroded their retained risk and triggered coverage under the excess insurance policies issued by the defendant, Illinois Union Insurance Company (“Illinois”). The plaintiffs sought defense expenses and liability costs for defending sexual abuse claims.</p>
<p style="text-align: justify;">By way of brief background, the plaintiffs are joint insurance funds, i.e., public entities composed of “members” who pool resources to self-insure against losses for claims up to a specific amount, and purchase excess insurance from insurance companies to cover losses that exceed that amount. Defendant Illinois issued multiple excess insurance policies to the plaintiffs. Specifically, the excess policies provided Illinois will pay the “Ultimate Net Loss in excess of the Underlying Coverage that the Insured becomes legally obligated to pay as damages because of the injury or damage to which this insurance applies.”</p>
<p style="text-align: justify;">In their complaint, the plaintiffs averred that the policies provide coverage for general liability, which encompasses sexual abuse claims, as the policies specifically identify limits of insurance for “sexual abuse” in the Schedule of Underlying Coverage. Therefore, plaintiffs claimed that Illinois breached its contractual duty and duty of good faith and fair dealing by failing to indemnify the plaintiffs for defense expenses and amounts paid for liability and defense expenses for sexual abuse claims.</p>
<p style="text-align: justify;">Upon analyzing whether the plaintiffs asserted a valid breach of contract claim, the court the held that, since the plaintiffs are “self-insured”, i.e., without insurance, pursuant to <em>N.J.S.A.</em> 18A:18B-1 et seq., the plaintiffs have no Underlying Coverage as defined by the insurance policies. Therefore, the court reasoned that, by self-insuring, the plaintiffs bore the burden of paying defense expenses.</p>
<p style="text-align: justify;">With respect to whether the sexual abuse claims were covered under the policies, the court compared the averments of the complaint with the policies and, treating the factual averments as true and construing the complaint in the light most favorable to the plaintiffs, held the plaintiffs sufficiently pled the sexual abuse claims were covered by the policies and the plaintiffs payments towards those claims eroded their retained risk and triggered Illinois’ indemnification obligation. In denying Illinois’ motion with respect to the breach of contract claim, the Court focused on the policies’ definition of sexual abuse, which the plaintiffs pleaded fell within the ambit of “General Liability”, and identification of aggregate limits for sexual abuse claims.</p>
<p style="text-align: justify;">It is important to note that, upon rendering its decision, the court did not take a position as to whether the plaintiffs would ultimately succeed on the merits of their claims, as this determination could only take place after the completion of discovery.</p>
<p style="text-align: justify;">Thanks to Lauren Berenbaum for her contribution to this post. Please contact <a href="mailto:Haquino@wcmlaw.com">Heather Aquino</a> with any questions.</p>