Hamilton Specialty Insurance Company, Inc. v. Kinsale Insurance Company

Background

Hamilton sought a declaratory judgment requiring Kinsale to reimburse Hamilton for a share of the settlement and defense costs Hamilton paid for Sway Lounge, LLC, doing business as Paul’s Casablanca. The dispute arose from claims brought by Sylvia Eliasson, a former bottle server at Sway, against Sway, its owners Paul Sevigny and Brian McPeck, and its general manager Joshua Menendez.

The underlying complaints alleged that Menendez drugged and sexually assaulted Eliasson. They also alleged that Sway and its owners mishandled Eliasson’s report, including by delaying an investigation, continuing to employ Menendez for a period of time, and taking actions that affected Eliasson’s work. The federal lawsuit asserted claims under Title VII, New York State law, and New York City law, as well as assault and battery claims against Menendez.

Hamilton’s policy covered November 11, 2016 through November 11, 2017, including the date of the alleged assault. It provided commercial general liability and liquor liability coverage, each with a $1 million per-occurrence limit, and included limited coverage for claims related to assault or battery. The policy also contained an other-insurance provision addressing how insurers would share costs when another policy provided primary insurance.

Kinsale’s policy covered January 23, 2018 through January 23, 2019. It provided employment-practices liability coverage of up to $500,000 for covered employment-related wrongful acts, including discrimination, harassment, hostile work environment, wrongful termination, and retaliation. The policy also required Kinsale to defend covered claims. But it excluded any claim for loss “[b]ased upon, arising out of or in any way involving any criminal act.”

Kinsale refused to defend or indemnify Sway in the state and federal actions, relying in part on the criminal-act exclusion and a separate exclusion for prior knowledge of a wrongful act. Hamilton defended the actions and fully funded Eliasson’s $850,000 settlement. Hamilton also paid $34,273.04 in defense costs.

Legal standard and analysis

The parties did not expressly address which law governed the insurance-contract dispute, but both relied on New York law. The court therefore applied New York law. Under that law, courts interpret an insurance policy according to its clear language. An insurer relying on an exclusion must show that the exclusion is clear, has no reasonable alternative interpretation, and applies to the particular claim.

The court held that the criminal-act exclusion was unambiguous. New York law uses a “but-for” test for exclusions covering claims based on or arising out of specified conduct: if the claim would not exist without that conduct, the exclusion applies. The Kinsale exclusion was even broader because it also covered claims “in any way involving” a criminal act.

Applying that language, the court concluded that Eliasson’s claims would not exist without the alleged sexual assault. The claims for hostile work environment, sexual harassment, gender discrimination, retaliation, assault, and battery all involved the alleged assault in some way. The court therefore held that the exclusion barred coverage of the underlying action.

Hamilton relied on a New York Appellate Division decision involving an assault-related exclusion in an errors-and-omissions policy. The court found that decision distinguishable because Kinsale’s policy was not an errors-and-omissions policy, applying the exclusion here would not eliminate the purpose of Kinsale’s employment-practices coverage, and Kinsale’s exclusion used broader language.

Hamilton also argued that the exclusion could not apply because Menendez was not indicted or convicted. The court rejected that argument, explaining that the policy referred to a criminal act rather than an indictment or conviction. According to the court, the nature of the conduct—not whether a prosecutor brought charges or obtained a conviction—controlled.

Finally, Hamilton argued that some allegations about Sway’s treatment of female workers were unrelated to the alleged assault. The court rejected that argument because the assault prompted the lawsuit and stood at the center of each claim pleaded in the underlying complaint.

The court did not decide Kinsale’s separate argument that coverage was excluded because an insured knew of the alleged wrongful act before the Kinsale policy began, because the criminal-act exclusion was sufficient to resolve the case.

Disposition

Judge Denise Cote held that Kinsale was not required to cover the settlement and defense costs sought by Hamilton because the Kinsale policy’s criminal-act exclusion applied. The court granted judgment to Kinsale, directed the Clerk of Court to enter judgment and close the case.