Opinion
No. 5-221 / 04-0822
Filed April 28, 2005
Appeal from the Iowa District Court for Black Hawk County, Thomas N. Bower, Judge.
American Family Mutual Insurance Company appeals from adverse rulings on summary judgment. REVERSED AND REMANDED WITH INSTRUCTIONS.
Ted J. Wallace, Davenport, for appellant.
H. Daniel Holm and Jen Bries of Ball, Kirk Holm, P.C., Waterloo, for appellee J.B.
Dale E. Goeke of Hagemann Goeke, Waverly, for appellee T.J.H.
Cheryl L. Weber of Dutton, Braun, Stack Helleman, P.L.C., Waterloo, for appellee M.C.
Edward J. Gallagher Jr. of Gallagher, Langlas Gallagher, P.C., Waterloo, for appellee K.J.
Craig C. Arment of Arment Law Firm, Waterloo, for appellee Deborah Eastman.
Heard by Vogel, P.J., and Miller and Hecht, JJ.
American Family Mutual Insurance Company appeals from adverse rulings on summary judgment. We now reverse.
I. Background Facts and Proceedings.
Deborah Eastman operated a day care business in her Cedar Falls home. She and her husband Robert purchased a homeowner's insurance policy from American Family Mutual Insurance Company (American Family). The policy defined "insured" to include not only the Eastmans, but also relatives residing in the Eastman household. The coverage included a Home Day Care endorsement covering, with exceptions, the negligence of "an insured" providing home day care services for which "an insured receives monetary or other compensation" in the Eastman residence.
The Eastmans' son, an insured under the policy, was found guilty of six counts of second-degree sexual abuse against minor children in Deborah Eastman's day care. The victims of the sexual abuse then brought suits against Deborah Eastman (Eastman) alleging her negligent supervision caused injuries. On July 22, 2003, American Family filed a petition requesting the district court to declare the rights and obligations of the parties under the policy, and to determine whether American Family had a duty to defend and indemnify Eastman against the negligent supervision claims.
Eastman and her husband are named insureds. Their son is also an insured under the policy's general definition of "insured" because he was a resident at the insured premises, and is a relative.
American Family's petition named Eastman and the parties who had sued her for negligent supervision as defendants in the declaratory judgment action.
American Family filed a motion for summary judgment claiming three exclusions found in Eastman's policy precluded coverage. The district court concluded genuine issues of material fact as to Eastman's negligent supervision of her son remained for trial, and denied American Family's motion. American Family filed a Motion to Reconsider the district court's ruling. The ruling which denied that motion also determined American Family owes a duty under the policy to defend Eastman in the underlying cases against her.
American Family appeals, asserting three coverage exclusions require reversal. The exclusions read in relevant part as follows:
(1) Abuse. We will not cover bodily injury or property damage arising out of or resulting from any actual or alleged: (a) sexual molestation or contact. . . .
. . . .
(10) Intentional Injury. We will not cover bodily injury or property damage caused intentionally by or at the direction of any insured even if the actual bodily injury or property damage is different than that which was expected or intended from the standpoint of the insured.
. . . .
(17) Violation of Law. We will not cover bodily injury or property damage arising out of (a) violation of any criminal law for which any insured is convicted. . . .
(Emphasis supplied).
American Family contends the facts surrounding the sexual abuse committed by Eastman's son fit squarely within each of the exclusions above, and the district court erred in failing to grant its summary judgment motion.
II. Scope and Standard of Review.
We review the district court's ruling on summary judgment for correction of errors at law. Iowa R. App. P. 6.4; Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d 637, 641 (Iowa 2001). "Summary judgment is appropriate only when the moving party shows there are no genuine issues of material fact, and in deciding that issue, we review the record in the light most favorable to the party opposing the motion." Campbell v. Delbridge, 670 N.W.2d 108, 109 (Iowa 2003).
III. Discussion.
A. Interpretation of Exclusion Clauses, Generally.
We begin our analysis by noting that our rules of contract interpretation and construction peculiar to insurance policies apply. Ferguson v. Allied Mut. Ins. Co., 512 N.W.2d 296, 298 (Iowa 1994). Because of the adhesionary nature of insurance policies, the policy's provisions are construed in the light most favorable to the insured. Id. at 299. Exclusions from coverage are construed strictly against the insurer. Id. Except in cases of ambiguity, the intent of the parties is determined by the language of the policy. Cairns v. Grinnell Mut. Reins. Co., 398 N.W.2d 821, 823 (Iowa 1987). We will give effect to the exclusions in an insurance policy where no ambiguity is found, especially where the words to be interpreted are subject to a settled meaning. Indianola Country Club v. Fireman's Fund Ins. Co., 92 N.W.2d 402, 405 (Iowa 1958).
The phrase "arising out of" as used in two of the exclusions upon which American Family's summary judgment motion relies has a settled meaning in this jurisdiction. In Essex Insurance Co. v. The Fieldhouse, Inc., 506 N.W.2d 772, 774 (Iowa 1993), an injured patron who was hit with a glass pitcher by another patron sued the bar in which the incident occurred alleging negligence. The bar's insurance policy contained an exclusion clause for any injury "arising out of" an assault or battery. Essex Ins. Co., 506 N.W.2d at 773. In holding the negligence claim was excluded by the policy, our supreme court stated that "[a]lthough we require a narrow or restrictive construction of exclusion clauses in insurance policies, the claims against the Fieldhouse are clearly casually connected to the assault, thus triggering the exclusion." Id. at 776 (emphasis supplied). "Arising out of" clearly connotes some direct causal connection between the injury claimed and the acts or omissions for which coverage is excluded.
The question of whether coverage for an innocent insured may be excluded as a consequence of the acts of a co-insured was addressed by our Supreme Court in Vance v. Pekin Ins. Co., 457 N.W.2d 589 (Iowa 1990). The critical determination as to whether coverage for an innocent co-insured will survive notwithstanding conduct of a culpable insured turns on whether the relevant policy exclusion employs "an" or "any insured" as opposed to "the insured" phraseology when identifying the actor whose claim-producing conduct shall trigger the exclusion. Vance, 457 N.W.2d at 593. Where "the insured" terminology is employed, the policy will vitiate coverage for only the principal actor causing the excluded occurrence. Id. Where the policy permits the insurer to invoke an exclusion as a consequence of the conduct of "an" or "any insured," the policy will be interpreted to exclude coverage for all insureds under the policy. Id.; Webb v. American Family Mut. Ins. Co., 493 N.W.2d 808, 812 (Iowa 1992). This rule of interpretation is known as the "best reasoned rule." Webb, 493 N.W.2d at 812.
B. Violation of Law and Intentional Injury Exclusions.
We note that both the Violation of Law and Intentional Injury exclusions apply to conduct of "any insured." Clearly the negligence claims against Eastman "arose out of" the sexual abuse committed by Eastman's son against children attending Eastman's daycare enterprise. The acts of sexual abuse constituted a violation of law for which Eastman's son was convicted. The plain meaning of the Violation of Law exclusion precludes coverage for Eastman if any insured has been convicted of violation of any criminal law. Webb, 493 N.W.2d at 812.
The sexual abuse committed by an insured in this case also fits comfortably within the Intentional Injury exclusion. Any injuries allegedly caused by the criminal conduct of Eastman's son would be considered intentional because "the intent to do the act and to cause the injury may be inferred by the nature of the act and the accompanying reasonable foreseeability of the harm." See Altena v. United Fire and Cas. Co., 422 N.W.2d 485, 488 (Iowa 1988) (stating injuries from acts of sexual abuse were intentional despite the fact sex abuse was a general intent crime). Were our analysis to terminate here, Eastman would be denied coverage under either exclusion.
The appellees suggest, however, the Home Day Care endorsement renders both of these exclusions ineffective as against Deborah Eastman. They argue the negligent supervision claims are covered only under the endorsement which limits coverage to the acts and omissions of an insured who provides day care for compensation. Eastman's son was not an insured for purposes of the day care coverage because, as the parties have stipulated, he was not providing day care services for compensation when the crimes were committed. As such, appellees contend the acts of Eastman's son were not the acts of an insured under the endorsement. Intentional injuries and law violations perpetrated by a non-insured person cannot, the appellees argue, vitiate coverage for Eastman who is the sole "insured" under the endorsement. In short, appellees contend American Family must provide coverage under the Home Day Care endorsement because no insured committed an act contemplated by the exclusions.
It is undisputedthat Eastman and her son are "insureds" as defined in the body of the Homeowner's policy. We are not persuaded that the definition of "insured" in the Home Day Care endorsement is distinguishable from the definition of that word found in the body of the policy. "In general, when a term used in the body of the policy is not redefined in an endorsement, it retains the definition set forth in the body of the policy." EMCASCO Ins. Co. v. Diedrich, 394 F.3d 1091, 1097 (8th Cir. 2005) ( citing 4Eric Mills Holmes, Appleman on Insurance § 20.1 (2d ed. Supp. 2004)). The policy states with reference to the Home Day Care endorsement, "[t]hese coverages are subject to all terms of this policy, except where modified by the option [endorsement] chosen." We find no evidence of an intent to redefine "insured" in the Home Day Care endorsement; indeed, the Home Day Care Endorsement states that "coverages are extended to cover "an insured who provides home day care" (emphasis supplied). We conclude the use of the article "an" in this context refers to all those defined as "insureds," not just a particular "insured" who is conducting business activities. Diedrich, 394 F.3d at 1097. Accordingly, we conclude the Violation of Law and Intentional Act exclusions preclude coverage for the claims against Eastman. We therefore need not address the application of the Abuse exclusion to these facts.
C. Severability Clause.
Appellees rest their final argument in support of the district court's summary judgment ruling on the severability clause in the policy. The provision, reads: "Severability of Insurance. This insurance applies separately to each insured. This condition will not increase our limit for any one occurrence." Appellees argue Eastman is entitled to coverage separate from her co-insured son, and that the severability clause insulates her generally from the application of the policy exclusions which vitiate coverage for her son's acts. The argument posits that (1) because Eastman's coverage is severable from that for her son, and (2) because no specific provision excludes coverage for her own alleged negligent acts or omissions of supervision, American Family should provide coverage and a defense for the claims levied against her by or on behalf of the injured children.
We believe the effect of a general severability clause on a specific policy exclusion designed to eliminate coverage for injuries caused by "any" insured is a question of first impression in Iowa. The issue has been decided, however, in several other jurisdictions. By far the majority of jurisdictions reaching the question have held the inclusion of a severability clause has no effect on those specific coverage exclusions referring to conduct of "any" insured. See e.g., Michael Carbone, Inc., v. Gen. Acc. Ins. Co., 937 F. Supp 413, 419-20 (E.D. Pa 1996) (explaining the origin of the severability clause as a standard policy term in employment insurance context, and suggesting the clause only modifies "the insured," not "any insured"); accord McCauley v. New Hampshire Ins. Co., 716 F. Supp. 718, 721 (D.Conn. 1989); American Family Mut. Ins. Co. v. White, 65 P.3d 449, 456 (Az.App. 2003); American Fam. Mut. Ins. Co. v. Moore, 912 S.W.2d 531, 535 (Mo.Ct.App. 1995); Northwest G.F. Mut. Ins. Co. v. Norgard, 518 N.W.2d 179, 184 (N.D. 1994).
Adhering as we must to general principles of contract interpretation, we view insurance contracts as a whole, employing a reasonable interpretation that avoids making portions of the contract superfluous. Fashion Fabrics of Iowa, Inc. v. Retail Investors Corp., 266 N.W.2d 22, 26 (Iowa 1978). Appellees forward an interpretation of the severability clause that would vitiate specific exclusions, which when triggered are calculated to eliminate coverage for both culpable and innocent co-insureds. We decline to adopt the appellees' position which urges us to hold that severability clauses trump and render superfluous coverage exclusions triggered by the act or omission of "any insured." Rather, where a general provision such as the severability clause conflicts with a specific provision such as an exclusion clause, the specific term modifies and controls the general term. Iowa Fuel Minerals, Inc. v. Iowa State Bd. of Regents, 471 N.W.2d 859, 863 (Iowa 1991); Mopper v. Circle Key Life Ins. Co., 172 N.W.2d 118, 126 (Iowa 1969); Schlosser v. Van Dusseldorp, 251 Iowa 521, 526, 101 N.W.2d 715, 718 (1960). We therefore conclude the severability clause does not shield Eastman's coverage from the application of the exclusions. In making the decision, we join the vast majority of jurisdictions holding a standard severability clause protects coverage for an innocent co-insured only where the specific exclusion limits its application to the conduct of "the insured." Michael Carbone, 937 F. Supp at 419-20.
IV. Conclusion.
We find no genuine material fact remains for trial. American Family is entitled to summary judgment in its favor because at least two exclusions eliminate coverage for Eastman in the underlying cases. The district court therefore erred in ruling American Family had a duty to defend Eastman in lawsuits arising out of her negligent supervision of her son during her operation of a day-care facility in her home. We reverse the district court's ruling and remand to the district court for entry of summary judgment in favor of American Family.