AIG Property Casualty Co. v. Cosby, 892 F.3d 25

Background

William H. Cosby, Jr. was sued in multiple defamation actions by several women who had accused him of sexual assault; Cosby denied the accusations and allegedly made defamatory statements.
Cosby held two AIG policies: a homeowners policy and a personal excess (umbrella) policy; both defined "personal injury" to include defamation and obligated AIG to defend suits seeking covered damages.
AIG initially defended under a reservation of rights and then filed this declaratory-judgment action seeking to avoid defense/indemnity under "sexual misconduct" exclusions in both policies.
The homeowners exclusion barred coverage for claims "arising out of any actual, alleged, or threatened ... sexual molestation, misconduct or harassment"; the umbrella policy had a materially broader separate exclusion applying to claims "arising out of, or in any way involving, directly or indirectly, any alleged sexual misconduct."
The district court treated Cosby’s motion as for judgment on the pleadings and held that the exclusions were at least ambiguous, creating a duty to defend; AIG appealed.

Issues

Issue	Plaintiff's Argument (AIG)	Defendant's Argument (Cosby)	Held
Whether AIG has a duty to defend Cosby against the defamation suits	The defamation claims "arise out of" Cosby’s alleged sexual misconduct, so exclusions bar defense	The alleged injury stems from defamatory statements, an independent source, so exclusions do not apply	Court affirmed duty to defend (ambiguity resolved for insured)
Proper meaning of "arising out of" in the exclusions	Should be read broadly (but-for causation) to capture denials prompted by alleged misconduct	Should be read more narrowly (sufficiently close/causal link required)	Court found ambiguity; context (umbrella policy language) supports reading closer to proximate causation or ambiguous
Effect of differing exclusion language across policies issued by same insurer	No material difference; exclusions should be read to achieve insurer’s intent to exclude related claims	Discrepancy creates ambiguity that favors insured	Court relied on the broader umbrella exclusion’s wording to find ambiguity in the general exclusion, favoring insured
Choice of law (Massachusetts vs. California)	Massachusetts law should apply and yield no coverage	California law applies or otherwise estop AIG from invoking Massachusetts	Court applied Massachusetts law (as AIG requested) and still found a duty to defend; did not resolve choice-of-law dispute further

Key Cases Cited

Brazas Sporting Arms, Inc. v. Am. Empire Surplus Lines Ins. Co., 220 F.3d 1 (1st Cir. 2000) (contract interpretation begins with policy language)
Valley Forge Ins. Co. v. Field, 670 F.3d 93 (1st Cir. 2012) (insurer bears burden to show exclusion; ambiguities construed against insurer)
Scottsdale Ins. Co. v. Torres, 561 F.3d 74 (1st Cir. 2009) (ambiguous policy terms construed in favor of insured)
Commerce Ins. Co. v. Ultimate Livery Serv., Inc., 897 N.E.2d 50 (Mass. 2008) ("arising out of" indicates broader causation than proximate cause)
Fuller v. First Fin. Ins. Co., 858 N.E.2d 288 (Mass. 2006) ("arising out of" suggests but-for causation)
Rischitelli v. Safety Ins. Co., 671 N.E.2d 1243 (Mass. 1996) ("arising out of" requires a sufficiently close/"reasonably apparent" causal relationship)
Am. Home Assur. Co. v. First Specialty Ins. Corp., 894 N.E.2d 1167 (Mass. App. Ct. 2008) (placement along causation continuum requires judgment)
Metro. Life Ins. Co. v. Cotter, 984 N.E.2d 835 (Mass. 2013) (every contract term must be given effect; duty to defend broader than duty to indemnify)
Bagley v. Monticello Ins. Co., 720 N.E.2d 813 (Mass. 1999) (duty to defend depends on source from which injury originates)
U.S. Liab. Ins. Co. v. Benchmark Const. Servs., Inc., 797 F.3d 116 (1st Cir. 2015) (exclusionary provisions construed strictly against insurer)
Safeco Ins. Co. of Am. v. Robert S., 28 P.3d 889 (Cal. 2001) (ambiguities resolved for insured)
Palmer v. Truck Ins. Exch., 988 P.2d 568 (Cal. 1999) (give effect to each policy clause; clauses interpret each other)