Coverage for Punitive Damages
Royal argues, and AGH does not contest, that Royal's obligation to defend or indemnify AGH does not extend to any punitive damages that might be assessed. The New York State Court of Appeals has established that the public policy of the state "precludes indemnification for punitive damages." Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 613 N.Y.S.2d 352, 354, 635 N.E.2d 1222 (1994). The Court of Appeals noted that since punitive damages operate not to compensate the victim but to punish and deter the wrongdoer, it would be inconsistent with this goal to permit the insurer to bear the cost. Soto, 613 N.Y.S.2d at 355. Summary judgment for plaintiff is therefore appropriate on this ground.
Number of Occurrences
Royal asserts that the incidents alleged in the Thomas complaint constitute one "occurrence" under its policies covering AGH and that its liability should be limited accordingly. Its position, as stated in Mooney's letter of October 19, 1992, is that the covered "event" was AGH's negligent placement of the children in inappropriate homes. AGH responds that the claims must be examined from the point of view of the victims, who allege several distinct acts of negligence. Furthermore, it argues that Royal issued three policies and that the occurrences should be considered separately under each policy.
In construing the language of an insurance contract, the court's primary obligation is to implement the intent of the parties. Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir. 1986). With respect to the type of liability AGH would foreseeably face, such as that alleged in the Thomas action, the definition of "occurrence" is ambiguous. See Society of Roman Catholic Church of Diocese of Lafayette & Lake Charles, Inc. v. Interstate Fire & Cas. Co., 26 F.3d 1359, 1364 (5th Cir. 1994) (" RCC "); Uniroyal, Inc. v. Home Ins. Co., 707 F. Supp. 1368, 1373 (E.D.N.Y. 1988)
In Uniroyal, Judge Weinstein found language identical to that in the Royal policy to be ambiguous with respect to the injuries incurred from the spraying of Agent Orange in Vietnam. Id. at 1380-82. He held that "the terms of the definition of 'occurrence' are partly ambiguous: they identify a set of possible occurrences, but give little assistance in selecting the proper item from that set. More than one interpretation can reasonably be placed on the terms." Id. The parties' positions in this case make the ambiguity plain; Royal contends that the negligent placement of the children constitutes a single occurrence, while AGH contends that any negligent placement and failure to supervise must be viewed with respect to each individual plaintiff or each individual act of negligence. See generally RCC, 26 F.3d 1368 at 1373.
When interpreting the definition of "occurrence," New York courts have held it proper to look not at the individual injuries or claims but at the underlying cause of the injuries. See id.; Champion Int'l Corp. v. Continental Cas. Co., 546 F.2d 502, 505-06 (2d Cir. 1976), cert. denied, 434 U.S. 819, 54 L. Ed. 2d 75, 98 S. Ct. 59 (1977); Newmont Mines, 784 F.2d at 135 (citing cases). In Uniroyal, Judge Weinstein found the "occurrence" to be the delivery of the herbicides to the military, which was a daily and ongoing process, and thus found one occurrence under the policy. Uniroyal, 707 F. Supp. at 1384-87. Courts have reached similar conclusions in products liability or environmental cases. See Champion Int'l Corp. v. Liberty Mut. Ins. Co., 701 F. Supp. 409, 413, amended by 758 F. Supp. 127 (S.D.N.Y. 1988) (separate consumer claims for peeling apart of plywood constitute one occurrence because of single cause of product defect); Champion Int'l Corp. v. Continental Cas. Co., 546 F.2d 502 (delivery of defective vinyl to 1400 consumers via twenty-six distributors constitutes one occurrence).
In the case of Michigan Chemical Corp. v. American Home Assur. Co., the Sixth Circuit Court of Appeals considered insurance coverage for the distribution and sale of contaminated livestock feed. That court declined to follow Champion Int'l Corp. because the Second Circuit had failed to consider the shipments to the twenty-six distributors as discrete occurrences, and thus it found that each shipment of contaminated feed to the distributors was a separate occurrence. 728 F.2d 374, 383 n.10 (6th Cir. 1984). In Uniroyal, Judge Weinstein in turn distinguished Michigan Chemical because that court likely had little information about the pattern of shipments, whereas the shipments of Agent Orange he considered were "so numerous, uniform, routinized and regularized, at such steady and frequent intervals, that they merged into one continuous and repeated event." 707 F. Supp. at 1368.
No New York case has considered the term "occurrence" with respect to liability for child abuse or molestation. The cases from other jurisdictions that the parties cite are inconclusive. In Interstate Fire & Cas. Co. v. Archdiocese of Portland in Oregon, the Ninth Circuit Court of Appeals found one occurrence per term of the liability policy when one individual had been sexually molested several times throughout the course of several policies. 35 F.3d 1325 (9th Cir. 1994).
Applying Louisiana law, the Fifth Circuit Court of Appeals found that when thirty-one children were molested by two priests, the cumulative injury to each child constituted a separate occurrence with respect to claims against the Church. Society of Roman Catholic Church v. Interstate Fire & Cas. Co., 26 F.3d 1359, 1364, (5th Cir. 1994); see also Worcester Ins. v. Fells Acres Day Sch., Inc., 408 Mass. 393, 558 N.E.2d 958, 973-74 (Mass. 1990) (numerous discrete acts of abuse by several different defendants at different locations comprise more than one occurrence). However, in State Farm Fire & Casualty Co. v. Elizabeth N., a California court appears to have held that the abuse of several children in a home constituted one occurrence with respect to a parent's negligence in allowing the abuse to continue. 9 Cal. App. 4th 1232, 1236, 12 Cal. Rptr. 2d 327 (1992).
Reading the definition of occurrence into the coverage clause of the policy, as the court did in Archdiocese of Portland, the Royal policy must be interpreted to cover "damages because of bodily injury . . . to which this insurance applies caused by ['an accident, including repeated or continuous exposure to conditions.']" Royal's contract further states that in consideration for the premium it would provide insurance "for the term of years specified" in an entry marked "Policy Period."
The cause of the bodily injury in this case is the "exposure to conditions" of sexual abuse. Each child suffering injury was exposed to such conditions in each policy period. The exposure is linked to the actions of AGH, which, as alleged in the Thomas complaint, were made with respect to the children as a group rather than individually. The complaint also alleges ongoing involvement by AGH directed toward maintaining the children in the Webb home and minimizing interaction with Ms. Thomas, an effort which eventually culminated in Webb's adoption of the children. Other than the complaint, there is no evidence in the stipulated record as to what role AGH played in continuing the "exposure" of the children to injurious conditions over the course of their residence at the Webb home. Based on the complaint and Sheps' log notes, which reveal at least some involvement by AGH in the adoption, the Court concludes that AGH participated in the "exposure" in each of the Royal policy periods. Thus, the number of occurrences equals the number of policy periods; apportionment of the loss among those periods is not an issue in this action.
Counterclaims for Breach of Contract and Bad Faith
Defendant points the Court to the following facts to support both its allegations of breach of contract and bad faith. First, of course, it points to the disclaimer itself. Second, it points to the untimeliness of the disclaimer, arguing that Royal breached the contract in not providing a timely disclaimer. Third, it points to Royal's actions in appointing and working with attorney DeMarco, in that Royal repeatedly sought and eventually obtained information regarding coverage issues from him, and further misinformed Royal of its right to choose independent counsel when a conflict exists between the insurer and the insured. Finally, it argues that Royal has failed to provide all of its insureds, i.e., the individual AGH employees sued in Thomas, with copies of the reservation of rights letters.
If Royal had disclaimed coverage and ceased to defend AGH in the underlying action, a breach of contract action might arise out of the disclaimer itself. However, Royal has continued to provide AGH with a defense in the Thomas action pending resolution of this declaratory judgment action, and thus Royal has not breached its obligations because it is still performing under the contract. AGH's claims of bad faith also fail.
With respect to punitive damages, it has been consistently held that plaintiffs may not recover such damages without submitting factual allegations that defendant, in its dealings with the general public, engaged in a fraudulent scheme which demonstrates "such wanton dishonesty as to imply a criminal indifference to civil obligations. Allegations of breach of an insurance contract, even a breach committed willfully and without justification are insufficient to authorize recovery of punitive damages."