Sexual Misconduct Exclusion Applies to School District Settlement

The United States Court of Appeals for the Seventh Circuit, in an opinion by Judge Easterbrook, applying Illinois law, held that a policy exclusion for sexual misconduct barred coverage of liability against a school district, thus reversing a ruling by the district court. The district court had found that the exclusion was ambiguous and that the school district’s “reactions” to the sexual misconduct fell outside of the exclusion. The Seventh Circuit rejected both of these rationales.

The underlying suit concerns the responses of Macomb School District, an assistant principal, and a principal (collectively, the “School District”) to allegations from two female students of sexual misconduct by a male student. The School District received notice of the female students’ negligence claims under state law and alleged violations of Title IX of the Education Amendments Act of 1972 in February 2018. After the School District settled these claims, it brought suit against its insurer, Netherlands Insurance Company (“Netherlands”), seeking a declaration of Netherlands’ rights and obligations under the policy.

The Netherlands policy contained a combination of occurrence-based and claims-based coverage. Coverage for general liability related to sexual misconduct was occurrence-based, while the claims-based coverage was for liability for school leaders’ errors and omissions. The parties did not dispute that the sexual misconduct itself occurred prior to the policy period, and thus did not trigger coverage under the general liability occurrence-based portion of the policy. The dispute, then, was whether a sexual misconduct exclusion to the claims-based errors and omissions provision barred coverage.

The Seventh Circuit ruled that it did. First, the Seventh Circuit held that the provision is unambiguously predicated on sexual misconduct by any party, not just by school district employees. Therefore, school leaders’ errors and omissions that fostered, failed to prevent, or failed to respond to the misconduct fall within the purview of the exclusion. Second, the Seventh Circuit found that the district court’s characterization of the School District’s “reactions” to the sexual misconduct did not change their legal nature. In other words, the School District could not escape the scope of the exclusion merely by describing the factual circumstances with other words. Overall, the Seventh Circuit recognized how both the sexual misconduct occurrence-based coverage and the errors and omissions claims-based coverage worked to constitute a whole policy, and refused to allow the School District to convert the former into a sexual misconduct claims-based policy merely by referencing the latter instead. As such, the Seventh Circuit reversed the district court, and ruled against the School District’s claim for coverage. The Netherlands Ins. Co. v. Macomb Comm. Unit. School Dist. No. 185, No. 20-3510 (7th Cir. Aug. 6, 2021).