The Roman Catholic Diocese of Rockville Centre v. Arrowood Indemnity Company

Background

The Diocese sued Arrowood for breach of contract and sought declarations about Arrowood’s duties to defend and indemnify the Diocese in claims connected to alleged childhood sexual abuse by clergy. New York’s Child Victims Act expanded the time for bringing certain civil abuse claims. The Diocese said it had identified insurance policies that covered periods when the alleged abuse occurred. Arrowood insured the Diocese from 1957 through 1976 and said the Diocese had asked it to defend 129 Child Victims Act lawsuits. Arrowood said it had agreed to defend 121 and had paid $620,000 toward defense costs.

The Diocese moved for partial judgment on the pleadings—a decision based on the pleadings rather than a full trial—and asked to stay proceedings concerning the duty to indemnify. Arrowood moved to amend its answer to convert nine affirmative defenses into counterclaims. The Committee of Unsecured Creditors, which represents alleged abuse victims with claims in the Diocese’s Chapter 11 bankruptcy case, moved to join the Diocese’s motion.

Diocese’s Motion for Partial Judgment on the Pleadings

The court denied the Diocese’s request for abstract declarations that Arrowood must defend an entire lawsuit whenever any claim is potentially covered and may not rely on materials outside the complaint to limit its defense duty. The court explained that defense-duty questions were better decided in connection with particular lawsuits and their specific facts.

The court granted the Diocese’s request concerning four lawsuits—G.C., Kelly, B.R., and F.C.—which alleged abuse by Romano Ferraro. Under New York law, an insurer generally must defend when the complaint potentially alleges a covered claim or when the insurer knows facts establishing a reasonable possibility of coverage. An insurer avoids that duty only when the allegations fall solely and entirely within a policy exclusion and cannot reasonably be interpreted another way. Although the complaints alleged that the Diocese had knowledge of Ferraro’s misconduct, the court found insufficient detail to conclude that the alleged injuries were necessarily expected or intended by the Diocese. Arrowood therefore had to defend the Diocese in all four lawsuits.

The court denied the Diocese’s request concerning 31 “straddle” lawsuits, which involved alleged abuse spanning more than one insurer’s policy period. The Diocese argued that Arrowood had to pay all defense costs under a joint-and-several approach; Arrowood argued that it should pay only its share under a pro-rata approach. The court held that the choice between those methods depends first on the relevant policy language. Because the Diocese had not analyzed or quoted that language in its opening submission, the court could not declare that Arrowood had to pay all defense costs.

The court also denied the Diocese’s request for a declaration requiring Arrowood to pay the full amount of defense costs charged by Jones Day. The pleadings did not identify the amount sought, the attorneys’ rates, the hours worked, the tasks performed, or the amount Arrowood had already reimbursed. Without that information, the court could not decide whether the requested fees were reasonable. The court denied the Diocese’s request for attorneys’ fees incurred in bringing its motion because the Diocese—not Arrowood—had filed the declaratory-judgment action and the Diocese had prevailed on only part of its motion.

Stay Concerning the Duty to Indemnify

The court granted the Diocese’s motion to stay proceedings concerning Arrowood’s duty to indemnify. Under New York law, that duty generally depends on a finding of liability, and the underlying lawsuits remained pending while abuse claimants participated in the bankruptcy case’s proof-of-claims process. The court concluded that indemnity questions concerning future, undetermined damages were premature. It also stayed discovery relating to indemnity, while permitting the parties to address discovery concerning the duty to defend.

Arrowood’s Motion to Amend

The court granted in part and denied in part Arrowood’s motion to amend its answer. It allowed Arrowood to add the portions of eight counterclaims concerning the duty to indemnify, but proceedings on those portions were stayed. It denied as futile the duty-to-defend portions of proposed Counterclaims One and Three insofar as they sought declarations that Arrowood had no duty to defend the four Ferraro lawsuits, including Kelly. The court had already determined that Arrowood had to defend those lawsuits.

The court granted Arrowood’s request to add the duty-to-defend portions of Counterclaims Two, Four, Five, Six, Seven, Eight, and Nine. Counterclaim Two concerned other clergy members and alleged prior knowledge; the underlying complaints were not in the record, so the court could not determine that the counterclaim was futile. Counterclaim Four concerned the Diocese’s alleged failure to cooperate. Counterclaim Five concerned allegedly untimely notice. Counterclaim Six concerned the known-loss or prior-knowledge defense. Counterclaim Seven sought reimbursement of defense costs and related damages. Counterclaim Eight concerned pro-rata allocation of defense costs. Counterclaim Nine concerned the Independent Reconciliation and Compensation Program. The court did not decide the merits of those counterclaims.

Other Disposition

The Committee of Unsecured Creditors’ motion to join the Diocese’s motions was denied. Overall, the Diocese’s motion for partial judgment on the pleadings was granted in part and denied in part; its motion to stay indemnity proceedings was granted; the committee’s motion was denied; and Arrowood’s motion to amend was granted in part and denied in part. Arrowood was ordered to file an amended answer by March 2, 2022, and the parties were ordered to meet and submit a proposed plan for next steps by March 11, 2022.