There was nothing ambiguous in former U.S. Supreme Court Justice David Souter’s ruling in AIG Property Cas. Co. v. Cosby, No. 17-1505 (1st Cir. June 7, 2018), where, sitting by designation, Justice Souter ruled that AIG Property and Casualty Co. (“AIG”) must defend Bill Cosby in suits brought by eight women alleging that Cosby defamed them after they accused him of sexual misconduct. Cosby held two insurance policies issued by AIG: a homeowner’s policy and a personal excess liability policy (the “umbrella policy””). Under each policy, AIG has a duty to “pay damages [Cosby] is legally obligated to pay [due to] personal injury or property damage caused by an occurrence covered by this policy anywhere in the world . . . .” Both policies define “personal injury” to include “[d]efamation” and require AIG to pay the cost of defending against suits seeking covered damages. Both policies also contain so-called “sexual misconduct” exclusions. The homeowner’s policy’s exclusion bars coverage for liability or defense costs “arising out of any actual, alleged[,] or threatened . . . [s]exual molestation, misconduct or harassment[,] . . . or . . . [s]exual, physical or mental abuse.” The umbrella policy contained similar wording. However, that policy also contained another “sexual misconduct” exclusion under the “Limited Charitable Board Directors and Trustees Liability” coverage part. That exclusion applied more broadly to claims for damages “[a]rising out of, or in any way involving, directly or indirectly, any alleged sexual misconduct” (emphasis added).
AIG argued that because Cosby’s allegedly defamatory denials were prompted by the women’s sexual-assault allegations, the defamation injury and the excluded conduct are so “inextricably intertwined” as to trigger the sexual misconduct exclusions. Cosby argued in response that the source of the women’s claimed injuries is not any alleged sexual misconduct but, rather. the allegedly defamatory statements; and that the causal link between the excluded conduct and the defamation claims is too attenuated to trigger the exclusions. The Court agreed with Cosby, finding the policies’ exclusionary provisions to be ambiguous on the issue of causation. As Justice Souter explained, , the Court was not required to deeply analyze the phrase “arising out of” under the applicable rules of construction, since the umbrella policy’s own wording supplied sufficient uncertainty to render the phrase ambiguous. Recognizing that “[e]very word in an insurance contract must be presumed to have been employed with a purpose and must be given meaning and effect whenever practicable,” Justice Souter concluded that because the second exclusion contained in the umbrella policy used additional wording to expand the causal scope of that exclusion, the inconsistent causal scopes rendered the phrase ambiguous in the instant context.
The Cosby decision underscores the importance of carefully selecting policy wording, particularly in limiting or exclusionary policy provisions. The decision also should serve as a reminder of the need to ensure concurrency in wording used across multiple lines of coverage. Doing so will help avoid gaps in coverage and potential pitfalls that may arise should one policy’s wording undermine or contradict the wording of another. Having skilled coverage counsel review your existing and renewal policies can help avoid such outcomes.