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Montville Township Board of Education v. Zurich American Insurance Co.

United States District Court, D. New Jersey

June 1, 2017



          KEVIN MCNULTY United States District Judge

         This is an insurance coverage dispute between an insured, Montville Township Board of Education ("Montville"), and its insurer, Zurich American Insurance Co. ("Zurich").[1] For twelve years, Montville employed Jason Fennes as a teacher. In June 2010, Fennes resigned. About two years later, while working at another school, Cedar Hill Prep ("Cedar Hill"), Fennes was arrested and indicted. The charges were that he had sexually abused a number of Montville students between 2005 and 2008, and a Cedar Hill student in 2010 and 2011. In 2012, one of Fennes's alleged victims, Child M, a Cedar Hill student, sued (among others) Montville. She alleges that Montville not only knew about Fennes's inappropriate conduct and failed to notify the authorities, but also agreed not to tell potential future employers about that conduct in order to induce Fennes to resign. Montville, she claims, thus enabled and facilitated Fennes's acts of abuse at Cedar Hill. Montville says that Zurich is obligated to defend it against these allegations under its general commercial liability ("GCL") policy. Zurich has declined to do so based on a coverage exception for "abusive acts." Now before the Court are cross-motions for summary judgment on the issue of Zurich's duty to defend Montville in the Child M litigation. For the reasons stated below, I will deny Montville's motion but grant Zurich's. Because the claims asserted against Montville by Child M are not covered by Montville's policy, Zurich has no duty to defend Montville.

         I. BACKGROUND [2]

         Below is a statement of the factual and procedural posture of this case, as well as the underlying Child M lawsuit. The parties generally agree as to the terms of their insurance contract and the allegations of Child M's complaint, although each draws a different legal conclusion from those facts.

         A. Child M Sues Montville

         Montville employed Fennes as a first-grade teacher from September 1998 to June 30, 2010. After his resignation, he was hired by Cedar Hills, where he also worked as a teacher. In March 2012, while employed by Cedar Hills, Fennes was arrested for sexually abusing a Montville student in 2005. Montville notified Zurich of the potential for a claim, and Zurich responded with a general reservation of rights. (PI. SUMF ¶¶ 5-8 Def. Resp. SUMF ¶¶ 5-8)

         In August 2012, Child M and her parents sued Fennes and Cedar Hill.[3] On January 23, 2015, Child M filed a third amended complaint that named Fennes, Cedar Hill, Montville, and others as defendants. In that complaint, Child M alleges that Fennes, her teacher, sexually abused her in February 2012. She was then six years old. (PI. SUMF ¶¶ 13; Def. Resp. SUMF ¶ 13; Compl. p.l)

         As to Montville, here are the pertinent allegations of the Child M complaint:

• Prior to working at Cedar Hill, Montville employed Fennes as a teacher and track coach at William Mason Elementary School. During the 12 years he worked at Montville, Fennes sexually abused minor students. (Compl. p. 11)
• Montville knew about, or was on notice of, such sexual abuse. Montville nevertheless failed to report Fennes to the appropriate authorities as required by law. (Id.)
• Montville entered into an agreement, dated May 4, 2010, with Fennes, in which Montville agreed to "limit the scope of information" it would communicate to potential employers "in exchange for" his resignation. (Id. at 12)
• Fennes "performed various acts of sexual molestation against" Child M. (Id. at 5)
• But for Montville's failure to report and "provide pertinent and highly relevant information" about Fennes to potential employers, such as Cedar Hills, Child M would not have been sexually abused by Fennes. (Id. at 12-15)

         Based on the same allegations, Cedar Hill filed a cross-claim against Montville for contribution and indemnification.[4] (PI. SUMF ¶ 14; Def. Resp. SUMF ¶ 14)

         B. Montville's Insurance Policy

         Child M's allegations potentially implicate two coverage parts of Montville's General Commercial Liability ("GCL") policy with Zurich.

         The first is the "GCL Coverage Part." This part broadly provides insurance for "bodily injury" caused by an "occurrence." A "bodily injury" is a "bodily injury, sickness or disease sustained by a person. This includes mental anguish, mental injury, shock, fright or death resulting from bodily injury, sickness, or disease." Excluded from coverage, however, is any claim for bodily injury "arising out of or relating in any way to an 'abusive act" or "any loss, cost or expense arising out of or relating in any way to an 'abusive act." (Def. SUMF ¶¶ 12-13, 15; PL Resp. SUMF ¶¶ 12-13, 15; Policy at U-GL-1250-A CW 09/05).

         An "abusive act" means:

any act or series of acts of actual or threatened abuse or molestation done to any person, including any act or series of acts of actual or threatened sexual abuse or molestation done to any person by anyone who causes or attempts to cause the person to engage in a sexual act:
a. Without the consent of or by threatening the person, placing the person in fear or asserting undue influence over the person;
b. If that person is incapable of appraising the nature of the conduct or is physically incapable of declining participation in or communicating unwillingness to engage in the sexual act; or
c. By engaging in or attempting to engage in lewd exposure of the body done with intent to arouse or to satisfy the sexual desire of any person.

(Def. SUMF ¶ 16; PL Resp. SUMF ¶ 16)

         A second provision, the Abusive Act ("AA") Coverage Part, does provide insurance for "loss because of 'injury' resulting from an 'abusive act.™ The definitions of "abusive act" in the CGL Coverage Part and the AA Coverage Part are identical, with one exception: the AA Coverage Part definition (because it grants, rather than excludes, coverage) requires that the abuse or molestation result in injury.[5] The AA Coverage Part, however, contains an exclusion of its own. There is no coverage under the AA Coverage Part for "any claim or 'suit' based upon, arising out of or attributable, in whole or in part, to any 'abusive act' of which any insured, other than the insured actually committing the 'abusive act', has knowledge prior to the effective date of this Coverage Part."[6](Def. SUMF ¶¶ 18-20, quoting Policy § I.l.a., I.2.d., U-GL-1275-A CW (04/2006); PL Resp. SUMF ¶¶ 18-20; Policy § V.l, U-GL-1275-A CW (04/2006) The effective date of the policy at issue in this case, CPO 3701598-07, is July 1, 2011. (Policy p. 1 U-GL-D-1115-B CW (09/04)[7]

         C. Zurich Disclaims a Duty to Defend

         About a week after Child M filed her third amended complaint, on January 29, 2015, Zurich sent Montville a letter disclaiming and reserving its rights under the CGL and AA Coverage Parts. As Zurich saw things, it had no obligation to defend or indemnify Montville under the GCL Coverage Part because any "bodily injury" suffered by Child M arose out of or related to "abusive acts." As for the AA Coverage Part, Zurich observed that Child M alleged that Montville knew about prior abusive acts committed by Fennes against Montville students but failed to report to them to the proper authorities or disclose them to potential employers. That allegation, according to Zurich, brought Child M's lawsuit within the "prior known abusive acts" exclusion of the AA Coverage Part. (Def. SUMF ¶¶ 25-26; PI. Resp. SUMF ¶¶ 25-26)

         For the same reasons, Zurich again stated that it had no duty to defend Montville in two more disclaimer letters, dated March 6, 2015, and April 8, 2015. (Def. SUMF ¶ 27; PI. Resp. SUMF ¶ 27)

         D. The Child M Litigation Proceeds

         On August 14, 2015, Montville filed a motion for summary judgment in the Child M litigation. Although Montville succeeded in obtaining dismissal of all claims against it, the Appellate Division reversed that summary judgment ruling in part.

         With some understatement, the Appellate Division called the facts of the case "troubling" and summarized them thus:

Viewed in a light most favorable to plaintiffs and Cedar Hill, the record reveals that as of 2005, Montville knew that Fennes was engaged in inappropriate physical contact with female students. Among other things, Fennes had female students sit on his lap; allowed them to touch his legs, thighs and buttocks; kissed them and allowed them to kiss him; threatened them not to tell anyone; and told them they would get into trouble or he would not like them anymore or hold their hands if they told anyone. Fennes received several warnings from his supervisors that his conduct was inappropriate and must be corrected, but Fennes responded that he was an "affectionate person and [cannot] change" and "was not going to stop cold turkey."
Fennes' inappropriate conduct continued despite his supervisors' warnings and three reports to the New Jersey Department of Children and Families, Division of Youth and Family Services (Division) about his inappropriate conduct made prior to his suspension in March 2010. The first report was on June 20, 2008 by an anonymous caller. Although the Division determined the allegation of child abuse was unfounded and closed the case, the principal of Williams Mason, Stephanie Adams, met with Fennes in September 2008, and warned him that his conduct was "inappropriate and unacceptable" and that "under no conditions was it appropriate" to have physical contact with students.
Fennes did not heed Adams' warning because eight months later, on June 5, 2009, she entered his classroom and saw three female students sitting on his lap. Adams also received a message from a staff member reporting a similar encounter with Fennes, and a letter from a parent reporting that Fennes had inappropriately touched her daughter. On July 14, 2009, Adams contacted the Division. She reported what she saw on June 5, 2009, and what the staff member said, but did not mention the parent's letter. Adams also indicated that "[t]he children didn't disclose any sexual abuse." The Division concluded that no action was required and closed the case.
On July 15, 2009, Adams issued a letter of reprimand to Fennes and advised him she was recommending the withholding of his salary increment for the 2009-2010 school year. On August 20, 2009, Montville notified Fennes that his salary increment for the 2009-2010 school year was being withheld because of ...

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