Appeal court upholds insurer’s policy exclusion for ‘sexual misconduct’

New Brunswick’s Court of Appeal has upheld a broad exclusion for claims “in any way involving, directly or indirectly,” sexual misconduct, as written in a D&O insurance policy issued by AIG Canada to Crandall University.

The university is defending itself against a claim for wrongful dismissal and defamation brought by one of its former professors and his wife.

Crandall received an investigative report in November 2023 concluding that, among other things, the professor had sexually harassed a female student. The university terminated his employment for cause, effective immediately. Additionally, Crandall posted a news item on its website reporting the professor’s termination and included a summary of the report’s findings.

The former professor sued Crandall, claiming damages for wrongful dismissal and defamation. His wife later joined his action, and the claim was amended to assert additional privacy-related claims.

AIG denied coverage to the university for the lawsuit. The insurer pointed to language in its policy stating coverage is excluded for D&O and employment practices liability (EPL) claims “alleging, arising out of, based upon or attributable to, or in any way involving, directly or indirectly, any sexual misconduct.”

A lower court upheld the exclusion, concluding in part that “sexual harassment” does in fact fall within the insurance policy’s definition of “sexual misconduct,” even if the policy did not explicitly define sexual harassment.

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The university appealed the decision on three grounds. First, it claimed the lower court judge did not read the language of the sexual misconduct exclusion in the context of the entire policy, which otherwise would have covered EPL claims. The Appeal Court found otherwise.

“Crandall seems to be suggesting that, because they purchased coverage for wrongful dismissal and defamation claims, the exclusion must be read in a manner that preserves that coverage,” the Appeal Court wrote in a decision released last Wednesday. “No authority is provided in support of such a contention.

“Reading an exclusion in light of a policy’s coverages does not mean that an exclusion cannot negate coverage that would otherwise exist under the coverage sections. After all, the object of an exclusion is generally to do just that.”

Second, the university said the language of the exclusion was ambiguous because it did not include a definition of the term “sexual harassment.” The lower court ruled otherwise, and the Appeal Court upheld this finding.

“A plain reading of the full endorsement, in context, undoubtedly leads to the conclusion that the Sexual Misconduct Exclusion is intended to have a far more expansive application than ‘sexual harassment,’” the Appeal Court found. “Additionally, the exclusion’s broad definition of ‘sexual misconduct’ provides a solid basis for the determination that ‘sexual misconduct’ includes conduct that may be described as ‘sexual harassment.’”

Finally, Crandall challenged the policy’s expansive exclusion of any claim “involving Indirectly sexual misconduct.” Specifically, it maintained the former professor’s claim against the university was for wrongful dismissal and defamation. His lawsuit did not accuse the university of sexual misconduct, and so AIG’s policy exclusion did not apply.

“In my view, the [lower court] judge correctly determined that the plain meaning of claims involving, indirectly, sexual misconduct included claims that do not allege sexual misconduct against Crandall (or an individual insured under the policy), contrary to Crandall’s submission,” New Brunswick Court of Appeal Justice Raymond T. French wrote for the 3-0 majority.

“Indeed, I find it difficult to imagine a claim, which is not based on or alleges sexual misconduct, that ‘involves’ sexual misconduct more readily than the present case. Unlike the hypotheticals presented by Crandall, the [professor and his wife’s] claims involve sexual misconduct that has a direct connection to the operations of the insured, in this case, Crandall.”

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.