USA GYMNASTICS, Plaintiff-Appellee, v. LIBERTY INSURANCE UNDERWRITERS, INC., Defendant-Appellant.
No. 20-1245
United States Court of Appeals, Seventh Circuit
ARGUED NOVEMBER 9, 2020 — DECIDED FEBRUARY 25, 2022
No. 20-1245
USA GYMNASTICS, Plaintiff-Appellee, v. LIBERTY INSURANCE UNDERWRITERS, INC., Defendant-Appellant.
Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division.
No. 1:18-cv-01306-RLY-MPB — Richard L. Young, Judge.
ARGUED NOVEMBER 9, 2020 — DECIDED FEBRUARY 25, 2022
Before SYKES, Chief Judge, and HAMILTON and BRENNAN, Circuit Judges.
PER CURIAM. Larry Nassar sexually assaulted hundreds of girls and young women over decades during his involvement with USA Gymnastics, Inc. (USAG), the non-profit organization which governs the sport in the United States. As a result of Nassar’s abuse, USAG has been sued numerous times and investigated by Congress and federal and state authorities. USAG sought financial help with its defense from various
USAG’s claims ripened into an insurance-coverage lawsuit in Indiana state court which was removed to federal court under diversity jurisdiction. The Nassar-related litigation and investigations forced USAG into bankruptcy. In an adversary proceeding, the bankruptcy court issued proposed findings and conclusions, including that the initial Nassar-related claims were timely made and that a wrongful-conduct exclusion applied to only those claims for which Nassar was criminally convicted. The district court adopted those findings and conclusions in a January 13, 2020 order.
Liberty appeals, and we have jurisdiction because that order has the “practical effect” of an injunction under
A. Factual1
Larry Nassar was a physician and professor at Michigan State University (MSU). In 1987, he began to volunteer in a medical capacity for USAG. Over the decades, his involvement in the organization grew, and he became a central figure in USAG’s program, drafting medical guidelines, lecturing at conferences, assisting other medical personnel, treating hundreds of athletes, and traveling with the U.S. Olympic team.
The world now knows that instead of generosity or patriotism, Nassar’s involvement with USAG was motivated by his desire to gain access to female athletes whom he victimized. He persuaded his victims that his methods of abuse were medically necessary, and on thousands of occasions over almost 30 years, Nassar sexually assaulted and abused hundreds of young women and girls under the guise of medical treatments.
Some dispute exists about when and to whom allegations against Nassar were first made. Several athletes allege they filed complaints against him as early as 1998 and in the early 2000s. USAG says those allegations were made to individual member gyms, not to USAG. In June 2015, a coach notified USAG’s senior vice president that an athlete had complained about how and where Nassar had touched her. This allegation
In September 2016, the Indianapolis Star published an article in which two former gymnasts accused Nassar of sexual abuse. That month, MSU terminated Nassar. The day before he was fired, Nassar took his work laptop to a computer store and paid to wipe all its content. The next day, hard drives containing thousands of images of child pornography were found in Nassar’s trash. Nassar was arrested in December 2016, and the next year he was convicted in federal court of possessing child pornography, including recordings he had made of his abuse. He received consecutive sentences totaling 60 years.
Nassar was also prosecuted in Michigan state court for criminal sexual conduct in two counties. He signed written plea agreements in Ingham County and in Eaton County, and he agreed under oath to their terms on the record. In Ingham County, he pleaded guilty to seven counts of first degree criminal sexual conduct, and in Eaton County he pleaded guilty to three counts of first degree criminal sexual conduct. Other charges were dismissed in exchange for compliance with the plea agreements.2 The state also agreed not to further prosecute Nassar for 115 other criminal sexual conduct charges reported to the MSU police, listed in an appendix to the plea agreements.
The plea agreements also provided that Nassar waived any and all defenses, including that his criminal conduct was
Nassar was sentenced to 40–175 years in Ingham County, and to 40–125 years in Eaton County. These state sentences were ordered to be served concurrently, but consecutive to Nassar’s federal sentence. Both the federal and state convictions resulted in effective life sentences for Nassar.
As a result of Nassar’s sexual abuse, USAG has faced numerous Congressional, federal, and state investigations. USAG has also been named in numerous lawsuits and is at risk of decertification as the national governing body of gymnastics by the United States Olympic & Paralympic Committee (“USOPC”).
This appeal concerns USAG’s claims against one insurer, Liberty. USAG purchased a claims-made D&O policy from Liberty, which had a coverage period of May 16, 2016 through May 16, 2017. That policy, the coverage of which is at issue here, defines many of the terms the parties dispute. The policy also contains what has been termed a wrongful conduct exclusion (also called an intentional-acts exclusion) which bars coverage for claims “made against any Insured”3 “based upon, arising from, or in any way related to” “any deliberately dishonest, malicious, or fraudulent act,” “or any willful
B. Procedural
In 2018, USAG sued seven insurers, including Liberty, in Indiana state court, alleging they had a duty to defend the lawsuits USAG faced and to pay expenses incurred from the investigations. The insurers removed the case to the U.S. District Court for the Southern District of Indiana under diversity jurisdiction,
The parties cross-moved for summary judgment. USAG sought coverage on various claims, including what are termed, cumulatively, the “Nassar-related claims”: “athlete lawsuits” by hundreds of gymnasts seeking to hold USAG responsible for allowing the abuse to take place, causing them to suffer physical, mental, and emotional damage; “revocation lawsuits” by coaches and owners of gyms affiliated with USAG alleging financial losses due to USAG’s handling of Nassar; the costs of complying with Indiana, Congressional, and USOPC investigations; and the costs related to the deposition of and grand jury testimony by a USAG employee, Amy White.
In response, and in its own motion, Liberty argued (among other things) that none of the Nassar-related claims are covered under the policy. Liberty also contended that the first of the claims predated the coverage period. To Liberty,
In non-core matters, a bankruptcy court is tasked with preparing proposed findings of fact and conclusions of law for the district court’s review.
The court also considered other disputes now before us. The policy includes a bodily injury exclusion that barred coverage for physical, emotional, and mental damages, but an exception limits the exclusion to certain types of cases. The policy also had a $250,000 sublimit for “Third-Party EPL” (Employment Practices Liability, although the acronym is not defined in the policy). The bankruptcy court concluded that the third-party claim exception to the bodily injury exclusion preserved coverage for the “athlete lawsuits”; that the various investigations were both formal and for wrongful acts, placing them within the scope of coverage; and that the $250,000 sublimit for such claims was ambiguous and unenforceable.
Under Federal Rule of Bankruptcy Procedure 9033(b), Liberty objected to the bankruptcy court’s findings and
C. Jurisdiction
The order Liberty challenges before us is not a final decision appealable pursuant to
To determine whether an order is injunctive, the nature of the order’s relief is assessed. See Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660, 669–70 (3d Cir. 2016) (applying functional test to determine whether order directing insurer to defend insured was injunction and immediately appealable). The order here includes legal relief, as the bankruptcy court ruled that Liberty must reimburse USAG for its defense costs and interest. But the primary effect of the order is to render equitable relief, declaring Liberty’s duty to defend the Nassar-related claims against USAG and mandating that Liberty provide USAG a complete defense.
An order “is properly characterized as an ‘injunction’ when it substantially and obviously alters the parties’ preexisting legal relationship.” Jamie S., 668 F.3d at 490 (quoting Jones-El v. Berge, 374 F.3d 541, 544 (7th Cir. 2004)). The order here does so by granting equitable relief, directing the prospective duty to defend with undetermined fees and costs, and resulting in serious and perhaps irreparable harm warranting immediate review. While cautious not to overread this exception, see Chicago Joe’s Tea Room, 894 F.3d at 812, the nature of the equitable relief granted here effectively renders
Litigation in the bankruptcy and district courts is ongoing. During the pendency of this appeal, the district court denied Liberty’s motion for partial judgment under Federal Rule of Civil Procedure 54(b), or in the alternative to certify the order now before us as an interlocutory appeal under
D. Indiana Insurance Law
The parties agree that Indiana substantive law controls, and given that this case comes to us under diversity jurisdiction, we follow that law. Medical Protective Co. of Fort Wayne v. American Int’l Specialty Lines Ins. Co., 911 F.3d 438, 445 (7th Cir. 2018).
Under Indiana law, insurance policies are interpreted “from the perspective of an ordinary policyholder of average intelligence.” Bradshaw v. Chandler, 916 N.E.2d 163, 166 (Ind. 2009) (citations and quotation omitted). “Although special rules of construction have developed for interpreting
“[C]lear and unambiguous language in an insurance policy should be given its plain and ordinary meaning.” Everett Cash Mut. Ins. Co., 926 N.E.2d at 1012 (citing Cinergy Corp. v. Assoc. Elec. & Gas Ins. Servs., Ltd., 865 N.E.2d 571, 574 (Ind. 2007)); see also Bradshaw, 916 N.E.2d at 166. “Ambiguity exists when a policy is susceptible to two or more reasonable interpretations.” Everett Cash Mut. Ins. Co., 926 N.E.2d at 1012–13 (citing Beam v. Wausau Ins. Co., 765 N.E.2d 524, 528 (Ind. 2002)). “That is, an insurance policy will be found to be ambiguous in cases where reasonable people would differ as to the meaning of its terms.” Id. “The fact that the parties disagree over the meaning of the contract does not, in and of itself, establish an ambiguity.” Id. (citation omitted); see also Beam, 765 N.E.2d at 528.
“[W]here there is ambiguity, insurance policies are to be construed strictly against the insurer and the policy language is viewed from the standpoint of the insured.” Nat’l Collegiate Athletic Ass’n v. Ace American Ins. Co., 151 N.E.3d 754, 761 (Ind. Ct. App. 2020) (quoting Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1056 (Ind. 2001)). “This is especially true where the language in question purports to exclude coverage.” Id. (citation omitted). “Insurers are free to limit the coverage of their policies, but such limitations must be clearly expressed to be enforceable.” Id. (citation omitted). “The exclusionary clause must clearly and unmistakably bring within its scope the particular act or omission that will bring the exclusion into
The parties brief and argue several issues in this appeal. We begin with whether USAG’s claims predate the policy period and therefore are not covered, and whether the policy’s wrongful conduct exclusion bars the Nassar-related claims. We continue with the policy’s bodily injury exclusion, and whether insurance coverage exists for government investigations and related matters. Then, we consider the parties’ argument concerning a $250,000 “Third Party EPL” sublimit in the policy.
II. Notice–When Claims Made
Liberty argues first that coverage under the claims-made D&O policy is excluded because the initial Nassar-related claims were made before the policy period of May 16, 2016 through May 16, 2017. On this question, the bankruptcy court agreed with USAG and concluded that Liberty had failed to designate evidence that any claims involving Nassar’s sexual abuse were made before the policy period began.
The relevant policy provision states:
Claim means:
…
…
A Claim will be deemed first made on the date an Insured receives a written demand, complaint, indictment, notice of charges, or order of formal investigation.
Liberty submits the first claim was made no later than 2015, when the FBI interviewed two athletes in response to a request by USAG. Those interviews constitute a formal investigation, Liberty contends, regardless of whether the FBI deemed them part of only a “preliminary investigation.” Liberty also asserts that even though Indiana law does not explain the meaning of a “formal investigation,” we should find guidance in Indiana case law giving “suit” a “broad interpretation.” To Liberty, given the FBI interviews, a Nassar-related claim was first made before the policy period. Because that claim arose from the same interrelated wrongful acts, none of the Nassar-related claims are covered.
As for any evidentiary deficiencies from which its position might suffer, Liberty criticizes the bankruptcy court for not giving it the chance to sufficiently develop the record through discovery. Liberty submits it did not file an affidavit under Federal Rule of Civil Procedure 56(d)—which provides that a litigant can show “that, for specified reasons, it cannot present facts essential to justify its opposition”—because there had never been a Federal Rule of Civil Procedure 26 conference. The insurer also faults the district court for not allowing it to conduct discovery or to present new evidence as part of its
USAG responds that the FBI did not conduct a “formal investigation” because it interviewed only a single witness twice during what it calls a “preliminary investigation.” The policy’s definition of claim requires USAG receive notice of a formal investigation during the policy period. Liberty’s only evidence that an athlete allegedly complained about Nassar in the 1990s, USAG contends, consists of allegations made on “information and belief” in some of the athlete lawsuits. As for other complaints that an investigative report suggested were made in the 1990s, USAG notes that they were made to gym owners and coaches, not to USAG, and thus do not qualify as claims under the policy. By Liberty missing its chance to file a Rule 56(d) affidavit in the bankruptcy court, USAG asserts, Liberty waived all arguments that more discovery was needed. USAG also contests Liberty’s interpretation of Bankruptcy Rule 9033(d).
We agree with USAG that the FBI’s actions before the policy period did not amount to a claim under the policy. The policy deems a claim made only once “an Insured receives a written demand, complaint, indictment, notice of charges, or order of formal investigation.” The FBI’s interview of one athlete twice, at USAG’s request, is not any of those things. Liberty asks us to look to the definition of “suit” under Indiana caselaw, but at issue here is whether there was a claim consisting of a formal investigation. The policy’s provisions regarding those terms are expressly defined and do not encompass FBI interviews.
Liberty complains it could have made that showing if only the bankruptcy and district courts had allowed it to engage in discovery. The insurer insists it was denied relief under Rule 56(d), and it argues that the district court incorrectly decided not to hear additional evidence in its review of the bankruptcy court’s recommendations. These decisions are reviewed for an abuse of discretion. Smith v. OSF HealthCare Sys., 933 F.3d 859, 861 (7th Cir. 2019).
Liberty missed its chance to seek discovery in bankruptcy court when it failed to file a Rule 56(d) affidavit explaining how the lack of discovery had prevented it from meeting its burden on summary judgment. That failure “alone justifies affirmance” when a party argues on appeal that it had insufficient opportunity for discovery below. Woods v. City of Chicago, 234 F.3d 979, 990 (7th Cir. 2000). This remains true even when a party argued below, like Liberty did, that it
On this point, Liberty offers two arguments. First, it contends Rule 26(d) barred it from filing a Rule 56(d) affidavit. Rule 26(d) provides “[a] party may not seek discovery from any source before the parties have conferred as required by Rule 26(f), except … or when authorized by these rules, by stipulation, or by court order.” Indeed, no Rule 26(f) conference had taken place when the bankruptcy court issued its proposed findings and conclusions. But while a court has the authority to oversee the discovery conference, the responsibility for organizing such a conference lies with the parties. See Rule 26(f)(2) (“The attorneys of record … are jointly responsible for arranging the conference, for attempting in good faith to agree on the proposed discovery plan, and for submitting to the court within 14 days after the conference a written report outlining the plan.”) So, Liberty bears at least some responsibility for a Rule 26(f) conference not occurring.
Moreover, Rule 26(d) is not related to whether a party can ask the court for the need or the right to conduct discovery under Rule 56(d). A Rule 56(d) filing does not require that a party ask the court for the right to conduct discovery. Such a filing need only explain that the lack of discovery was the reason for the party’s inability to carry its burden at summary judgment. If the court is satisfied with that explanation, Rule 56(d) enumerates the ways the court can grant relief.
Second, Liberty claims Bankruptcy Rule 9033(d) compelled the district court to consider new evidence, and that the district court erred by refusing to grant the Rule 56(d) motion that Liberty filed along with its objections to the
The district judge shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge’s findings of fact or conclusion of law to which specific written objection has been made in accordance with this rule. The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence or recommit the matter to the bankruptcy judge with instructions.
Liberty interprets Rule 9033(d) to mean that the bankruptcy court must review the whole record, or after receiving more evidence, of any portion of the bankruptcy court’s findings to which specific objections were filed. Because Liberty filed specific objections, it says the district court was required to accept new evidence.
The 1987 Advisory Committee Notes on Rule 9033 inform its interpretation. The rule was “modeled on Rule 72 F. R. CIV. P.,” which governs a district judge’s review of a magistrate judge’s recommendations on pretrial motions. The Committee Notes state that Rule 9033(d) “adopts the de novo review provisions of Rule 72(b).” Rule 72(b)(3) provides:
The district judge must determine de novo any part of the magistrate judge’s disposition that has been properly objected to. The district judge may accept, reject, or modify the recommended disposition; receive further evidence; or return
This court has not addressed the question of when a district judge’s review under Rule 72(b) of a magistrate judge’s ruling should include new evidence. Other circuits have ruled on this issue that the district court has discretion whether to consider additional evidence not presented to the magistrate judge. United States v. Howell, 231 F.3d 615, 621 (9th Cir. 2000) (examining the statutory provision that Rule 72(b) implements—
On the closely related question of whether new arguments, rather than new evidence, can be made to a district judge reviewing a magistrate judge under Rule 72(b), nearly all the circuits have held either that those new arguments may not be made, or that the district court has discretion as to whether to allow them. See Williams v. McNeil, 557 F.3d 1287, 1291–92 (11th Cir. 2009) (noting and adopting the positions taken by the First, Fifth, Ninth, and Tenth Circuits). Only the
So, the overwhelming interpretation of Rule 72(b) is that the district court’s discretion is paramount when reviewing a magistrate judge’s proposal on whether to allow a party to make new arguments or to introduce new evidence. This meaning of Rule 72(b) informs our interpretation of Rule 9033(d). Two rules, both promulgated by the Supreme Court under the authority of the Rules Enabling Act,
Another reason to doubt Liberty’s position is the harmonious-reading canon—“t]he provisions of a text should be interpreted in a way that renders them compatible.” SCALIA & GARNER, supra, at 180. Liberty’s interpretation of the first
Whether a Rule 56(d) affidavit is evidence or an argument—it can have aspects of both—the result is the same: Liberty had no good reason for not filing such an affidavit with the bankruptcy court. Liberty’s position that it can present such evidence for the first-time during review of the bankruptcy court’s position would unduly limit the bankruptcy court’s role. We disagree with Liberty’s interpretation of Rule 9033 and conclude that the district court did not abuse its discretion by denying Liberty’s request.
In summary, the policy deems a claim made once there has been notice to an insured. Liberty has not shown a genuine issue of material fact that USAG had notice before the policy period commenced. Further, the district court did not abuse its discretion when it decided not to hear additional evidence in its review of the bankruptcy court’s recommendations. So USAG is correct that none of the activities before the policy period amounted to a claim made under the policy.
Next to consider are the parties’ arguments on the policy’s wrongful conduct exclusion and whether it precludes insurance coverage for the Nassar-related claims.
III. Wrongful Conduct Exclusion
The policy precludes coverage for claims in any way related to certain wrongful conduct by any insured. Liberty argues this exclusion bars coverage for all the Nassar-related
The wrongful conduct exclusion reads:
4. Claim Exclusions: This Policy does not apply to any Claim made against any Insured:
…
4.9 based upon, arising from, or in any way related to:
…
(b) any deliberately dishonest, malicious or fraudulent act or omission or any willful violation of law by any Insured;
provided, however, this exclusion shall only apply if it is finally adjudicated that such conduct in fact occurred.
Also included is what the parties call an anti-imputation clause, or carve-back, as amended by an endorsement. That provides: “For purposes of determining the applicability of Sections 4.1 through 4.9, the Wrongful Act of any Insured Person shall not be imputed to any other Insured Person.”
The bankruptcy court sided with USAG and concluded that the wrongful conduct exclusion does not apply to most of the Nassar-related claims. The exclusion is ambiguous, that court found, and in at least one reasonable interpretation the exclusion’s two mentions of “any Insured” must refer to the same party. Under this reading, Nassar’s illegal actions could affect coverage only for Nassar himself, not for USAG. The court also determined that even if the two instances of “any Insured” could refer to different people, the requirement that
On appeal, Liberty renews its argument that the wrongful conduct exclusion bars all the Nassar-related claims. To Liberty, Nassar, an “Insured Person,” committed a willful violation of law, and the bankruptcy court injected ambiguity where no reasonable person would find it. Even more, Nassar has pleaded guilty, so his wrongful conduct has been finally adjudicated in fact. Liberty maintains that all the Nassar-related claims qualify are “in any way related to” the ten instances of abuse for which he was criminally convicted. Liberty also argues USAG is not an “Insured Person” which the policy defines as only natural persons. In response, USAG reiterates the bankruptcy court’s reasoning: “any Insured” is ambiguous, only ten acts of sexual abuse were finally adjudicated as criminal convictions in Michigan state court, and the anti-imputation clause precludes applying the wrongful conduct exclusion to the Nassar-related claims.4
A. Application in a directors’ and officers’ policy
D&O policies commonly exclude insurance coverage for claims brought about or contributed to by fraudulent, dishonest, or criminal conduct. See generally S. Splitt, et al., 7A Couch on Insurance § 103.40; 9A COUCH ON INSURANCE, § 131:35; G. Lockwood, LAW OF CORPORATE OFFICERS & DIRECTORS: INDEMNIFICATION AND INSURANCE § 4.19. Some state laws mandate such an exclusion. See, e.g.,
Many wrongful conduct exclusions in D&O policies include a “final adjudication” requirement. L. Spector, “Insurance Coverage for Business Tort Claims Alleging Intentional Wrongdoing,” 51 TORT TRIAL & INS. PRAC. L.J. 91, 95 (2015). For the exclusion to apply, the wrongful conduct must have been determined to have occurred by court judgment or other final adjudication in a separate action in which the conduct was at issue. See Nat’l Union Fire Ins. Co. v. Continental Ill. Corp., 666 F. Supp. 1180, 1186, 1191 (N.D. Ill. 1987); cf. 14 COUCH ON INSURANCE, § 201:59. This requirement is strictly construed. If an underlying claim is settled, rather than adjudicated, then the exclusion does not apply. See Pendergest-Holt
Claims in which the intentional wrongdoing rises to the level of “criminal or deliberate fraud,” Spector, 51 TORT TRIAL & INS. PRAC. L.J. at 95, are typically not covered due to the wrongful conduct exclusion in a D&O policy. The line between intentional and predictably harmful conduct which may fall within an intentional-acts exclusion, and reckless conduct which may fall outside of it, can sometimes be difficult to draw. See California Amplifier, Inc. v. RLI Ins. Co., 94 Cal. App. 4th 102, 116 (Cal. Ct. App. 2002) (considering whether drunk driving is willful or reckless behavior for purposes of a statutory intentional-acts exclusion).
The wrongful conduct exclusion here includes each of these requirements common to a wrongful conduct exclusion in a claims-made D&O policy. Coverage is excluded for “any Claim made as to any Insured” “based upon, arising from, or in any way related to” “any deliberately dishonest, malicious or fraudulent act or omission or any willful violation of law by any Insured” “provided, however, this exclusion shall only apply if it is finally adjudicated that such conduct in fact
Our interpretation of this wrongful conduct exclusion is informed by the fortuity principle, which underlies all insurance. That principle addresses those situations where a loss is not accidental, as it is against public policy to allow an insured to collect insurance proceeds for a known or expected loss. Cf. 5200 Keystone Ltd. Realty, LLC v. Netherlands Ins. Comp., 29 N.E.3d 156, 161 (Ind. Ct. App. 2015) (explaining the “known loss” doctrine). It would be a moral hazard to insure against liability arising from intentional and inherently harmful conduct, such as criminal conduct. See Rimert v. Mortell, 680 N.E.2d 867, 873 (Ind. Ct. App. 1997).
With this background, we evaluate the various contested phrases in the wrongful conduct exclusion.
B. “any Insured”
To paraphrase, the policy does not apply to any claim against “any Insured” in any way related to wrongful conduct by “any Insured.” The bankruptcy court determined—and neither party disputes—that USAG and Nassar are each an “Insured” under the policy.
Liberty contends the only reasonable reading of the wrongful conduct exclusion is that the first “any Insured” encompasses anyone, including USAG, and that the second “any Insured” also encompasses anyone, including Nassar. Under this reading, the exclusion would reach all Nassar-
The parties spend much of their briefing on this issue discussing two decisions which interpret policies that include the phrase “any insured”—Frankenmuth Mut. Ins. Co. v. Williams by Stevens, 690 N.E.2d 675 (Ind. 1997), and Holiday Hospitality Franchising, Inc. v. AMCO Ins. Co., 983 N.E.2d 574 (Ind. 2013). Neither case presents a controlling interpretation of the phrase, however.
USAG likes Frankenmuth, in which the Indiana Supreme Court concluded that an intentional injury exclusion did not bar coverage for a claim against a wife whose alleged negligence allowed her husband to intentionally carry out a sexual molestation. 690 N.E.2d at 678. The exclusion in that case said that the policy did not cover liability “caused intentionally by or at the direction of any insured.” Id. The Indiana Supreme Court reasoned that the exclusion applied to “liability,” not “personal injury,” and that the liability was for the wife’s negligence, not for the husband’s intentional wrongdoing. Id. at 679. Under Frankenmuth, USAG submits that the wrongful conduct exclusion does not apply to any claims regarding Nassar’s assaults.
Liberty asks us to focus on Holiday Hospitality. There, a minor guest was molested by a hotel employee who entered the guest’s locked room at night. 983 N.E.2d at 576. The minor’s mother sued the hotel franchisor, the franchisee, and the franchisee’s owner for battery, emotional distress, and various negligent employment practices. The defendants were all
Despite some superficial appeal, neither decision controls. The policies in each case lack the clauses central to the meaning of this wrongful conduct exclusion. Unlike the claims-made D&O policy here, the homeowner’s policy in Frankenmuth is an occurrence policy, which did not bar coverage of “any Claim” against “any Insured” “in any way related to” the conduct of “any Insured.” Just so, in Holiday Hospitality the court analyzed an occurrence-based rather than claims-made policy, 983 N.E.2d at 576, 578, that included the phrase “any insured” as part of an express exclusion for negligent-supervision liability, a provision absent here. Id. at 581 & n.10.
With this gap in controlling Indiana authority, we focus on the text of the policy. The wrongful conduct exclusion’s plain and ordinary meaning, see Everett Cash Mut. Ins. Co., 926 N.E.2d at 1012, is that the modifier “any” before the dedicated term “Insured” means “any”—not “an,” “the,” or “that.” The
Substituting “Nassar” and “USAG” for the term “Insured” shows how the term “any Insured” should be read here. Nassar is “any Insured,” so the exclusion applies based on his wrongful conduct. USAG is also “any Insured,” so the exclusion precludes coverage for “any Claim” against USAG (subject, of course, to the remainder of the requirements of the wrongful conduct exclusion). USAG is not correct that if the second “any Insured” refers to Nassar, that the first “any Insured” is necessarily limited to Nassar. “Any” is defined as “one, some, or all indiscriminately of whatever quantity.”6
“Any” cannot be defined as the bankruptcy court did, so the exclusion bars coverage only for the offending person. USAG’s interpretation essentially asks us to rewrite the exclusion, which would not be proper. Keckler v. Meridian Sec. Ins. Co., 967 N.E.2d 18, 28 (Ind. App. 2012) (“[w]e may not rewrite an insurance contract”) (quoting Bowen v. Monroe Guar. Ins. Co., 758 N.E.2d 976, 980 (Ind. App. 2001)).
The double use of “any Insured”—negotiated by sophisticated parties—is broad language that does not present
For these reasons, Liberty correctly reads the “any Insured” language of the wrongful conduct exclusion. The bankruptcy court’s recommendation incorrectly found ambiguity in this portion of the policy.
C. “finally adjudicated … conduct in fact occurred“
The wrongful conduct exclusion “shall only apply if it is finally adjudicated that such conduct in fact occurred.”
To the bankruptcy court, “USAG’s interpretation of the ‘final adjudication’ requirement is reasonable and an ordinary policy holder of average intelligence would conclude that the exclusion only bars coverage for indemnity for costs arising from a finally adjudicated intentional wrongful act.” “Nassar’s conduct has only been adjudicated as to the ten crimes
The resolution of Nassar’s state criminal cases informs whether, and how much of, his wrongful conduct has been “finally adjudicated” for purposes of the wrongful conduct exclusion. His prosecution culminated in Nassar and Michigan entering into two written plea agreements, one in Eaton County and one in Ingham County. Nassar signed the agreements and during his guilty plea colloquies under oath he orally admitted their terms.
Nassar pleaded guilty to and was sentenced on ten counts of first degree criminal sexual conduct in violation of Michigan Combined Law 750.520b, three in Eaton County and seven in Ingham County. Twenty-nine other counts—10 in Eaton County and 19 in Ingham County—were dismissed, a majority of those when Nassar pleaded guilty (with some dismissed earlier at a preliminary hearing). Per the dockets in these cases, the counts dismissed at the guilty plea hearings were nolle prosequi—“will no longer prosecute”—a prosecutor’s formal notice of abandonment of those charges. In Michigan, a nolle prosequi is a dismissal without prejudice, which does not preclude initiation of a later prosecution. But the entry of the order of nolle prosequi may be the final act of a binding agreement in a case on which a defendant may rely. 1A GILLESPIE MICH. CRIM. L. & PROC. § 16:52 (2d ed. April 2021).
The plea agreements between Michigan and Nassar include several provisions relevant to the “final adjudication” requirement. Nassar also admitted to these provisions during
- charged and he pleaded guilty to ten counts, for which he was sentenced;
- charged and dismissed (mostly nolle prosequi) pursuant to the plea agreements; or
- not charged but included in the non-prosecution agreements with the list of cases attached.
Given these specifics of how Nassar’s state criminal sexual abuse cases were resolved, the wrongful conduct that was finally adjudicated encompassed the ten counts on which he pleaded guilty. But the Michigan state courts adjudicated Nassar as formally guilty—beyond a reasonable doubt—of only ten of his scores of charged and uncharged acts of sexual abuse. The remaining wrongful conduct was dismissed without prejudice or is subject to a non-prosecution agreement but not adjudicated. So, a portion, but not all, of Nassar’s wrongful conduct satisfies this “finally adjudicated … conduct in fact occurred“ clause in the wrongful conduct exclusion.
D. “based upon, arising from, or in any way related to”
The wrongful conduct exclusion begins by prohibiting coverage for a “claim” that is “based upon, arising from, or in any way related to” wrongful conduct, provided that conduct is finally adjudicated to have in fact occurred. The phrase “based upon, arising from, or in any way related to” is not defined in the policy. We consider its plain meaning, whether it is ambiguous, and how courts have interpreted it and similar phrases.
dishonesty exclusion and holding that judgment of conviction for fraudulent conduct was sufficient to preclude coverage under that exclusion).
Under Indiana law, “if a contract is clear and unambiguous, the language therein must be given its plain meaning.” Beam, 765 N.E.2d at 528; see also Abstract & Title Guar. Co. v. Chicago Ins. Co., 489 F.3d 808, 811–12 (7th Cir. 2007). The plain meaning of “based upon, arising from, or in any way related to” includes nearly any type of connection between the claim and the insured’s wrongful acts. That includes a wide array of logical connections. See Gregory v. Home Ins. Co., 876 F.2d 602, 606 (7th Cir. 1989) (interpreting Indiana law and concluding that “related” covers “a very broad range of connections, both causal and logical”); RLI Ins. Co. v. Conseco, Inc., 543 F.3d 384, 391 (7th Cir. 2008) (same).
Indiana law also provides that “the text of a disputed provision may be understood by reference to other provisions within the four corners of the document.” Claire’s Boutiques, Inc. v. Brownsburg Station Partners LLC, 997 N.E.2d 1093, 1098 (Ind. Ct. App. 2013) (citing City of Portage v. S. Haven Sewer Works, Inc., 880 N.E.2d 706, 711 (Ind. Ct. App. 2008)). In the policy here, the phrase “based upon, arising from, or in any way related to” is used five times when delineating the policy’s claim exclusions and another four times in an endorsement to the policy that adds further exclusions. In each of these nine instances, the phrase introduces the exclusion and broadens the circumstances that fall within it.
At each reference, its use includes most logical connections. For example, § 4.5 of the policy excludes coverage for any claim “based upon, arising from, or in any way related to” “any demand, suit, or other proceeding against any Insured which has been made, which existed, or was pending prior to the applicable Prior Litigation Date” or “the same or
Read in the context of the entire insurance policy, the plain meaning of “based upon, arising from, or in any way related to” includes a logical connection between the claim and the insured’s wrongful acts.
2. Causal Connection
USAG implies that “in any way related to” should be interpreted more narrowly, as requiring a causal rather than logical connection between the claim and the insured’s wrongful acts. This would limit the scope of the wrongful conduct exclusion. Even if that interpretation did not
for risks not assumed”) (quoting United States v. A.C. Strip, 868 F.2d 181, 187 (6th Cir. 1989)).
Yet, there is no indication here that a causal connection is required for a claim to be “in any way related to” wrongful conduct. If the parties had meant to limit the wrongful conduct exclusion to claims caused by an insured’s wrongful acts, they would have used the terms “caused by” or “causal.” The parties knew how to use those terms where they intended that meaning. The policy, at § 23.13, defines “Interrelated Wrongful Acts,” as those “that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of causally connected facts, circumstances, situations, events, transactions, or causes.”9
That same definition also uses the phrase “common nexus,” which generally includes a causal link. See Pac. Operators Offshore, LLP v. Valladolid, 565 U.S. 207, 222 (2012) (endorsing a lower court’s “substantial-nexus” test that requires a “significant causal link” between two events); Black’s Law Dictionary (11th ed. 2019) (defining “nexus” as “[a] connection or link, often a causal one”).
The wrongful conduct exclusion does not use the phrases “caused by” or “causally connected.” If the parties had intended to specify that the relationship between the wrongful conduct and the claim must be causal for coverage to be excluded, they would have done so. Nor does the wrongful conduct exclusion use the phrase “common nexus,” which would have had a similar effect. “[I]n construing a contract we presume that all provisions were included for a purpose, and if possible we reconcile seemingly conflicting provisions to give
3. Ambiguity
The phrase “in any way related to” is quite broad. As this court recognized in Gregory, the phrase is so broad that it should not be taken literally: “At some point, of course, a logical connection may be too tenuous reasonably to be called a relationship, and the rule of restrictive reading of broad language would come into play.” 876 F.2d at 606. USAG has presented a good argument on the facts that such a principle applies here.
There are two primary similarities among these claims: All victims accuse the same wrongdoer, Nassar, and they all accuse him of abusing his role as a doctor to sexually assault them. But there are also several important differences between the claims. Dozens of different individual victims suffered assaults on separate occasions. Each of those assaults stands alone as a separate and independent crime. Many of the young women recount abuse that occurred dozens of times over several years. Overall, the claims stem from
Sexual assaults are distinguishable from economic wrongdoing. Claims by shareholders or consumers may be “related” to one another when they arise from the same course of conduct, such as fraudulently concealing bad news about either a company or a product that does not work as promised. Compare, for example, how the U.S. Sentencing Guidelines aggregate economic harms suffered by multiple claimants and victims of financial crimes but treat sexual and violent assaults separately in evaluating harm from multiple counts. See
Consider a hypothetical variation on this case. Suppose Nassar had been convicted of sexually assaulting just one victim on just one occasion. One hundred other gymnasts then sue USA Gymnastics and its officers and directors, alleging that he sexually assaulted them too, over the past 20 years. And suppose further that there were room to doubt the veracity of some of those additional claims. Should the insured be denied a defense and possible indemnification on all those claims because Nassar had been convicted of one assault? That would be an improbable result, and one that would be unjust to the insured.
Only a common wrongdoer, or only a common victim, or only a common modus operandi by different wrongdoers against different victims, is not enough to establish a sufficient relationship. This case is in the grey territory where the policy’s broad language becomes ambiguous as applied to these unique facts. While the insurer has a reasonable argument for excluding coverage of the other victims’ claims, the insured also has a reasonable argument for not excluding them. Accordingly, under the general principles of Indiana insurance law—including that ambiguous policy language is construed against the insurer, especially when it comes to policy exclusions—the insured, USAG, prevails on this point.
4. Case Law
Case law is sparse on this problem of relatedness for purpose of the wrongful conduct exclusions in D&O policies. What case law exists does not help determine when “related to” is “related enough.” Those cases that confront this question stem from relationships that were much stronger and closer than those at issue here, making those cases more
Our dissenting colleague cites a number of these cases on this question of relatedness, but we find them all distinguishable. Those cases presented multiple claims arising from one financial transaction or cluster of connected transactions. Insurers and insureds understand, for example, that an accounting scandal or a corrupt merger is likely to generate related lawsuits by shareholders, securities purchasers, and others.
Gregory, 876 F.2d 602, involved claims under a legal malpractice insurance policy. The “relatedness” question concerned whether there was just one, or more than one, “occurrence” for purposes of a per-occurrence coverage cap. The defendant law firm had offered advice about the tax and securities law consequences of an abusive tax-shelter scheme involving investments in videotapes. When the scheme fell apart, investors sued for securities fraud, common-law fraud, and RICO violations. All their claims, whether based on tax advice or securities advice for the scheme, were treated as one claim. Id. at 604–06. The straightforward determination in Gregory of relatedness lends little to our analysis.
RLI Ins. v. Conseco, 543 F.3d 384 (7th Cir. 2008), regarding a D&O policy, presented a similar question. A round of securities-fraud litigation against Conseco was settled with release language that covered class members’ claims arising out of the facts alleged in the complaint. Id. at 386. A few months later, a dispute about insurance coverage for that underlying settlement was resolved by another settlement. The insureds released RLI from coverage of any claim “in any way related to” the underlying actions that had been settled. Id. at 386–87.
Then another investor filed a new putative class action under ERISA arising from the same course of conduct. Conseco defended on the ground that the ERISA plaintiffs were all members of the earlier class and could have asserted their ERISA claims in that earlier case. The insurer said the new case was so related to the earlier case that the insureds’ release of the insurer applied. Id. at 388–89. Not surprisingly, the district court—and this court—held that the ERISA claims were sufficiently related to the earlier case to be covered by Conseco’s release of RLI. 543 F.3d at 391. While it is difficult to disagree with the result in RLI Ins. v. Conseco, that case offers little help in determining the outer bounds of “relatedness.”
Bay Cities Paving & Grading, Inc., v. Lawyers Mutual Ins. Co., 855 P.2d 1263 (Cal. 1993), which like Gregory concerned legal malpractice insurance, was also, by comparison, a straightforward case. The dispute involved claims that the same lawyer made two distinct errors in trying to enforce one mechanic’s lien for one construction project. The single victim suffered one injury—its lien was not enforced. The claims based on two supposedly separate errors were so closely related that the “per claim” policy limit could not be doubled on the theory that there were two claims. (Nor could an insurer try to separate out such closely related claims to require the insured to pay multiple deductibles for them. 855 P.2d at 1267.)
In Bay Cities Paving, the Supreme Court of California made the critical point that clarity or ambiguity must be decided not in the abstract but “in the context of this policy and the circumstances of this case.” Id. at 1271. We interpret the passage, together with the case law we have already discussed, to mean that relatedness can be readily decided in many cases—including Bay Cities Paving itself—but that policy language on
In Am. Com. Ins. Brokers, Inc. v. Minnesota Mut. Fire & Cas. Co., 551 N.W.2d 224 (Minn. 1996), an insurance policy covered losses from employee dishonesty. It included a per-occurrence limit of $10,000, and it said that all loss “involving a [] series of related acts” would be considered one occurrence for purposes of that limit. One employee embezzled $190,000 in 155 individual transactions by using two distinct methods: taking customers’ cash payments for herself and issuing unauthorized checks to herself. The Minnesota court rejected the insured’s argument that there were 155 occurrences. The court held that there were two, but only two, occurrences for purposes of the limit. The phrase “series of related acts” signaled an intent to encompass a continuous embezzlement scheme with the same method on a continuous basis. Id. at 228. In that case, however, there was only one victim and one location where the acts occurred. Moreover, the different transactions inflicted a cumulative financial harm on the employer, making the situation there very different from the facts presented here.
The dissent states it is not dispositive that Nassar’s acts targeted different victims. It cites decisions in which courts have decided that the fact that an insured’s acts impact different victims does not create an ambiguity as to whether those acts are logically connected.
The best case the dissent cites for this point is Kilcher v. Continental Casualty Co., 747 F.3d 983 (8th Cir. 2014), in which
Kilcher is distinguishable from this case based on its much smaller numbers of (related) victims and the economic nature of the harm that was perpetrated, as well as the fact that it was not excluding coverage entirely but deciding only how to apply coverage limits. Even if we were to conclude that Kilcher was correctly decided and instructive, it is a narrow ground on which to say the policy language here is unambiguous as applied to such different victims.
On this issue of a single versus multiple victims, the dissent also cites Continental Cas. Co. v. Wendt, 205 F.3d 1258 (11th Cir. 2000), where a legal malpractice insurer had already paid its liability policy limits in one lawsuit arising out of its
Our dissenting colleague also cites HR Acquisition I Corp. v. Twin City Fire Ins. Co., 547 F.3d 1309 (11th Cir. 2008), which involved the HealthSouth accounting fraud and self-dealing scheme and a “prior litigation” exclusion in a D&O policy. The first lawsuit was a qui tam action filed in 1997. The insured then bought a “claims made” D&O policy that covered the period from 2000 to 2004. When a shareholder derivative action was filed in 2002 alleging the same accounting fraud, the insurer denied coverage because the new action was “in any way related to” the prior litigation. Id. at 1311–12. The Eleventh Circuit adopted a broad interpretation of the phrase and found that the exclusion applied despite the insureds’ arguments that the allegations in the two cases were not specific enough to show they arose from the same events. Id. at 1315–16. Although those different suits by different plaintiffs stemming from the same scheme seem related, the self-dealing and accounting fraud at issue in HR Acquisition I Corp. is substantially different from Nassar’s conduct.
5. Larger Implications
The incentives for participants in the market for insurance may differ depending on whether the liability policy at issue is “occurrence-based” or “claims-made.” For the insurer, an occurrence-based policy can have a long “tail” of potential liability. The insurance industry’s answer to that long risk is to offer a claims-made policy covering claims asserted within a specified time period. See Nat’l Union Fire Ins. Co. v. Baker & McKenzie, 997 F.2d 305, 306 (7th Cir. 1993).
An insurer writing such a claims-made policy must exclude coverage for both pending claims and looming claims that the insured may know about, but which have not yet been asserted formally. Those policies are written to exclude both the pending and looming claims, but also new claims related to the pending and looming claims. But if an entirely new claim is asserted and coverage is provided, under a
In this case, the insurer wants a broad interpretation and the insured desires a narrow one. In other contexts, though, the incentives will be flipped, including to preserve for insurers the core advantage of claims-made liability policies. By interpreting “related” too broadly in the conduct policy exclusion here, we could inadvertently affect the economics of the claims-made insurance market by broadening the scope of coverage of these policies. These concerns about the implications of interpreting “related to” too broadly are substantial, and they factor into our analysis. We must bear in mind that this is a unique case. A holding that “related to” is unambiguous, even as applied in these unusual circumstances, could have unforeseen consequences for claims-made D&O coverage.
E. Anti-Imputation or Carve-Back Clause
The wrongful conduct exclusion’s final clause (which was amended by an endorsement) states that for purposes of determining its applicability, the wrongful act “of any Insured Person shall not be imputed to any other Insured Person.” The parties label this the anti-imputation, or carve-back, clause. Such a provision is typical in D&O policies and
Liberty contends the carve-back removes any imputation only as to an “Insured Person,” not an “Insured Organization” like USAG, so the bankruptcy court’s recommendation was in error. USAG responds that such an argument should not bar coverage, as any exclusion must be interpreted narrowly and against the insurer. The bankruptcy court is correct, USAG argues, that if Liberty wanted to impute Nassar’s acts to USAG, as the drafter of the policy it could have done so, yet the policy contains no express imputation.
As noted above, an insurance policy’s language is interpreted according to the plain meaning of its terms. See Beam, 765 N.E.2d at 528. The anti-imputation clause only bars imputing the wrongful conduct of one “Insured Person” to another “Insured Person.” Under the policy’s definitions, USAG qualifies as “any Insured,” and is the “Insured Organization.” But USAG is not an “Insured Person.” The policy’s definitions limit “Insured Person” to “one or more natural persons who were, now are, or shall hereafter be elected or appointed directors, trustees, officers, employees, committee members or volunteers of the Insured Organization … .” USAG does not fall within this definition, and thus would not qualify for this carve-back which brings some otherwise excluded claims back into the policy.
The anti-imputation clause could have been drafted to apply to “any other Insured” rather than how it was drafted—to not impute the wrongful act to “any other Insured Person.” The policy’s use of “Insured Person” must be read plainly, thus excluding USAG’s reading that would have us rewrite the insurance contract, which we cannot do. Estate of Eberhard v. Ill. Founders Ins. Co., 742 N.E.2d 1, 2 (Ind. Ct. App. 2000) (citations omitted). Our reading also follows logically—because of the carve-back, the policy provides coverage to an innocent “Insured Person,” but not to USAG, for which all “Insured Persons” work or provide services.
USAG is an “Insured Organization” but not an “Insured Person” under the policy, so the anti-imputation clause in the wrongful conduct exclusion does not bar the imputation of Nassar’s wrongful conduct to USAG.
* * *
In summary as to the wrongful conduct exclusion, Indiana law requires that an exclusionary clause be clear, precise, and specific as to the conduct it precludes. Everett Cash Mut. Ins. Co., 926 N.E.2d at 1012. “Any Insured” is broad, yet clear in its meaning, so it does not admit of ambiguity, contrary to the bankruptcy court’s conclusion. The wrongful conduct that was finally adjudicated included the ten counts on which Nassar pleaded guilty and was sentenced, but the remainder of his scores of charged and uncharged acts of sexual abuse were not finally adjudicated. So only a small portion of Nassar’s wrongful conduct satisfies the wrongful conduct exclusion’s “finally adjudicated” clause.
The policy excludes coverage for a claim that is “based upon, arising from, or in any way related to” wrongful conduct. While the plain meaning of that clause includes a logical connection between the claim and the insured’s wrongful acts, it is not cabined to causal relationships. Rather, we conclude that the phrase “in any way related to” is ambiguous as applied to these facts, and it should therefore be construed in favor of the insured. Case law is not to the contrary, and the
So, the wrongful conduct exclusion applies but only to the ten claims for which Nassar was found guilty, and not to the remaining Nassar-related claims, for which Liberty must provide insurance coverage.
IV. Bodily Injury Exclusion
Liberty’s next defense relies on a policy provision that the insurer argues excludes the athlete lawsuits—a subset of the Nassar-related claims—by hundreds of gymnasts seeking to hold USAG responsible for allowing the abuse to take place, causing them to suffer physical, mental, and emotional damage. The policy excludes claims “made against any insured for: (a) bodily injury, sickness, disease, death; or (b) emotional distress, mental anguish …” But an exception provides that part (b) of the exclusion “shall not apply to any claim brought by or on behalf of any Third Person, or any past, present, or prospective Insured Person for an Employment Practices Wrongful Act.” The parties dispute the scope of this exclusion.
The bankruptcy court held that the bodily injury exclusion did not apply for multiple reasons, including because the exception specifies that the exclusion does not apply to emotional distress claims brought by third parties. We review the bankruptcy court’s summary judgment decision de novo, and Indiana authority on the general principles for the interpretation of insurance contracts, described above, apply.
The only reasonable interpretation of the exception is that part (b) of the exclusion shall not apply to any claim brought by or on behalf of any third person, or any past, present, or prospective insured person for an employment practices wrongful act. The exception to the bodily injury exclusion is written broadly, so it is applied broadly. So, the exception requiring coverage for an Employment Practices Wrongful Act would apply to the “athlete lawsuits,” the bodily injury exclusion would not apply, and the exclusion would not relieve Liberty of its duty to defend those lawsuits.
Because the duty to defend applies even to claims that in part seek excluded relief, Liberty would have a duty to defend the athlete lawsuits seeking relief for emotional distress and/or mental anguish. Further, a potential argument
V. Coverage for Investigations and Other Matters
The parties also disagree about whether the policy covers claims for non-compulsory investigations and information gathering that did not specifically allege USAG committed a wrongful act. Two issues comprise this disagreement: (1) whether the Congressional and USOPC investigations were “formal investigations” or “formal proceedings” such that they satisfy the definition of a “claim” under the policy; and (2) whether the White deposition and investigation matters were “for a Wrongful Act.”
The bankruptcy court ruled that the investigations were formal and therefore claims, but it did not speak to the second issue. We review that court’s decision on summary judgment de novo.
Under the policy, “‘Claim’ means:
(a) a written demand for monetary or non-monetary relief against an Insured;
(b) the commencement of a civil or criminal judicial proceeding or arbitration against an Insured;
(c) the commencement of a formal criminal, administrative or regulatory proceeding or formal investigation against an Insured, including any
…
“‘Wrongful Act’ means:
(a) any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, or Employment Practices Wrongful Act committed or attempted by the Insured Persons in their capacities as such or by the Insured Organization; or
(b) any matter claimed against the Insured Persons solely by reason of their status as Insured Persons.
Liberty argues that even if congressional investigations are “formal,” they are not all necessarily “formal investigations” or “formal proceedings” (as the policy requires) because they do not involve compulsory actions and involuntary requests for information. The Congressional investigation letter stated that Congress was “seeking” or “inviting” information from USAG, not requiring it.
Further, to Liberty, the investigations and the White deposition matter were not “for a Wrongful Act,” at least during the claims period. Liberty cites two unpublished decisions from other circuits, which say that investigations into merely whether a wrongful act occurred are not investigations of a wrongful act, because they lack an affirmative accusation of
USAG responds that the investigations were “formal” and that they concerned a “wrongful act,” as those terms and phrases are used in the policy. USAG distinguishes Liberty’s authority that purports to show that “formal” requires compulsory and involuntariness. Subsequent decisions have noted that in those unpublished decisions the notices at issue explicitly disclaimed any wrongdoing. E.g., Oceans Healthcare, LLC v. Ill. Union Ins. Co., 379 F. Supp. 3d 554, 562–63 (E.D. Tex. 2019). And other courts have rejected Liberty’s argument completely. For example, the First Circuit has held that “allege” is not “in and of itself so clearly restrictive that simply by virtue of that word” an initiating document must explicitly accuse someone of wrongdoing. BioChemics, Inc. v. AXIS Reins. Co., 924 F.3d 633, 643–44 (1st Cir. 2019).
USAG has the better of both these issues. The Congressional and USOPC investigations were “formal proceedings” or “formal investigations.” The claims made in those proceedings were adversarial, and they raised the specter of misconduct by USAG, resulting in very serious harm to hundreds of girls and women. “Formal” has been defined as “[o]f, relating to, or involving establishing procedural rules, customs, and practices.” GARNER, BLACK’S LAW DICTIONARY (11th ed. 2019).
As for a “wrongful act,” the USOPC investigation led to a quasi-judicial action brought by the USOPC before itself and against USAG. Additionally, the Congressional investigation accused USAG of misconduct, and the fact that the request for information was technically voluntary says little considering that subpoenas were almost certain to follow any refusal to cooperate. The Congressional letters were coercive, and USAG effectively had no choice but to cooperate, either voluntarily or by force of law. The U.S. Senate letter states, “recent reports and revelations … provide ample evidence that USAG and MSU were negligent in acting on reports of Nassar’s abuse …” and then lists specific allegations. The U.S. House letter also strongly suggests that USAG acted wrongfully. “[A] lack of action allowed Nassar’s offenses to infect nearly every level of gymnastics” … “USA Gymnastics … is at the center of many of these failures” … “[USAG] has a significant responsibility to its sport and athletes … Yet, the organization’s team doctor sexually abused young gymnasts unfettered for years.”
The Indiana Attorney General’s investigation was also accusatory. It opened with a letter stating he believed USAG was
in possession … of documentary material or may have knowledge of a fact that is relevant to an investigation … to determine whether (1) [USAG] has exceeded or abused the authority conferred on the corporation by law … (2) whether any corporate officer has violated his or
The Attorney General’s letter then demanded that USAG produce its rules and policies, records of background checks, information how sexual abuse complaints were handled, and other items.
Even by Liberty’s interpretations, the claims here concerned formal proceedings that investigated wrongful acts. The same is true for the deposition of the USAG employee, Amy White, and testimony in one of the lawsuits, which were both formal proceedings involving the same wrongful acts. We agree with USAG that insurance coverage exists for these investigations and proceedings.
VI. EPL Sublimit
In addition to an overall liability limit of $5 million, the policy here includes a $250,000 sublimit endorsement for “Third Party EPL.” The parties dispute whether this sublimit applies.11 The bankruptcy court found that it did not, and thus ruled against Liberty, but for a reason that was not argued. That court concluded that because the policy does not define “Third Party EPL,” and the term does not have a common meaning, it is ambiguous and void of legal effect.
We agree with Liberty that “Third Party EPL,” although not defined in the policy, is a term of art in the insurance
With this type of insurance term of art, used in a policy in which the parties have a history of negotiating the terms of coverage, parol evidence should be allowed and considered, see Dana, 759 N.E.2d at 1059–60; Cummins, Inc. v. Ace Am. Ins. Co., No. 1:09-CV-00738-JMS, 2011 WL 130158, at *6 (S.D. Ind. Jan. 14, 2011) (citing Dana for the same proposition), at least in a case involving a sophisticated insured that was able to negotiate the scope of the relevant coverage, notwithstanding the general principle that ambiguities are construed in favor of the insured. Everett Cash Mut. Ins. Co., 926 N.E.2d at 1012. There may be a $250,000 aggregate limit for some or all of the covered claims, subject to what the actual extrinsic evidence shows about the parties’ conduct and what the term they inserted into the policy meant. Because more fact finding is required to resolve this question, this portion of the case is remanded to the district court for that to be accomplished.
VII. Conclusion
None of the activities before the policy period amounted to a claim under the policy, and the district court did not
The policy’s wrongful conduct exclusion applies to only the ten claims for which Nassar was found guilty, and not to the remaining Nassar-related claims, for which Liberty must provide insurance coverage. And the policy’s bodily injury exclusion does not relieve Liberty of its duty to defend the athlete lawsuits. Further, the policy provides coverage for expenses and costs related to the various investigations and other matters. The district court’s ruling for USAG that the conduct exclusion does not apply to most of the Nassar-related claims is thus also AFFIRMED, albeit under partially different reasoning.
Finally, the bankruptcy court should have considered the extrinsic evidence offered as to the use and meaning of the “Third Party EPL” $250,000 sublimit in the policy. Accordingly, that portion of its ruling is REVERSED, and this case is REMANDED to the district court and bankruptcy court for those proceedings.
I largely agree with the per curiam opinion’s analysis and resolution of the issues presented in this complex appeal. I respectfully part ways with my colleagues regarding only one portion of the opinion—its evaluation of the phrase “based upon, arising from, or in any way related to” in the wrongful conduct exclusion. Per Curiam Op. § III.D.3–5.
The opinion notes that a wrongful conduct exclusion in a D&O policy typically precludes coverage for criminal acts. Nassar’s repeated sexual assaults and sexual abuse indisputably satisfy this requirement. The opinion also correctly concludes that the clause in the wrongful conduct exclusion naming to whom it applies—“any Insured”—is not ambiguous. I further agree that a causal connection is not required for a claim to be “in any way related to” wrongful conduct. Rather, “related to” includes most logical connections. My limited disagreement centers on how close that logical connection must be for claims to be “in any way related to” one another.
The plain meaning of “in any way related to” includes a logical connection between a claim and an insured’s wrongful conduct. But the opinion concludes that the logical connection between the Nassar-related claims and Nassar’s criminal convictions does not render them “in any way related to” each other. To me, the heavy weight of case law sets that degree of logical connection and provides that “related to” is not ambiguous. Because the facts here satisfy that unambiguous definition, I conclude that the wrongful conduct exclusion applies to all the Nassar-related conduct.
Two state supreme court decisions interpreting the term “related” support this interpretation from Gregory. In the first, Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 855 P.2d 1263 (Cal. 1993), the Supreme Court of California interpreted a provision of a professional-liability policy that treated multiple claims as a single claim where the claims arose out of “a series of related acts, error or omissions.” Id. at 1270. In interpreting that phrase, the court in Bay Cities endorsed Gregory’s conception of “related” as encompassing
The Supreme Court of California correctly reasoned that “related” extends beyond the facts of Gregory and those of Bay Cities itself. As that court stated, “[m]ultiple or broad meanings do not necessarily create ambiguity.” Id. at 1271. The Bay Cities court also offered an apt analogy. Assume an insurance policy excluded coverage for any claim arising from the operation of a “motor vehicle.” Obviously, a “motor vehicle” could be either an automobile or a truck, but that does not mean it must be only one or the other, rather than both. Likewise, the fact that “related” can encompass a wide variety of relationships does not necessarily render the word ambiguous. To the contrary, a word with a broad meaning, or multiple meanings, may be used for that very reason—its breadth—to achieve a broad purpose. Id.
Another state supreme court interpreted a policy’s limitation on liability for loss or damage “[i]nvolving a series of related acts,” similar to the phrase in Bay Cities. The Minnesota Supreme Court applied Gregory and Bay Cities, holding that phrase unambiguously limited the insurer’s liability, in Am.
There, an insured business’s employee committed 155 distinct acts of embezzlement, using two modus operandi: taking funds received from customers as insurance premiums and issuing unauthorized checks. Id. at 229–30. Citing Gregory, the court stated: “[w]e cannot so restrict the plain and ordinary meaning of the word ‘related’ such that acts of embezzlement which follow each other in time, take place at the same business, and are committed by the same employee are not ‘related’ as that word is commonly used.” Id. at 228. In determining whether wrongful acts are part of a “series of related acts,” the court further held that factors such as “whether the acts are connected by time, place, opportunity, pattern, and, most importantly, method or modus operandi” should be considered. Id. at 231.
This case law defines, unambiguously, the appropriate logical connection between claims such that they are “related to” one another in some manner. Applying that understanding to the facts here demonstrates that there is an unequivocal, non-tenuous logical connection between those criminal acts for which Nassar was convicted and sentenced and the rest of Nassar’s sexual assaults and sexual abuse.
All the claims for Nassar’s assaults of hundreds of female athletes share identical characteristics with his ten convictions for criminal sexual abuse. All Nassar’s sexual molestations involved the same perpetrator. All victims were girls or young women, and all gymnasts. All the victims visited Nassar under the guise of medical treatment, and in all Nassar’s sexual abuse he exploited his position as a physician. These highly similarly-situated victims saw Nassar under a purported “doctor–patient” relationship, which was actually between perpetrator and victim. All Nassar’s sexual abuse occurred during his volunteering for the USAG, and all his sexual assaults were perpetrated with the same modus operandi, as described in detail in an independent investigation report.
As Gregory states, “[a]t some point, of course, a logical connection may be too tenuous reasonably to be called a relationship.” 876 F.2d at 606. So, it is not the strength of the relationship between the claims, but whether that connection is “too tenuous” to fairly be called a relationship at all. The question is how attenuated must the connection be before the claimed or alleged relationship breaks down and ambiguity is created. See, e.g., Highwoods Props., Inc. v. Exec. Risk Indem., Inc., No. 03-0077-CV-W-NKL, 2004 WL 4986355, at *10 (W.D.
The Bay Cities decision is correct that “related” in an insurance policy—where not specifically defined—includes logical relationships, as stated in Gregory and RLI Ins. The use of “in any way related to” in the policy Liberty issued to USAG is not ambiguous and covers logical relationships, in accordance with the “broad purpose” alluded to in Bay Cities. Indeed, the per curiam opinion properly points out that the phrase “based upon, arising from, or in any way related to” is used five times in the policy when delineating claim exclusions, plus four more times in an endorsement to the policy that adds further exclusions. Every time that phrase introduces an exclusion, this language broadens the circumstances that fall within it. So, these sophisticated parties, in negotiating this policy, agreed upon and included this phrase nine times, in each instance to broaden the scope of an exclusion.
“Related to” under Indiana law, therefore, includes not just the ten counts in the two Michigan state criminal cases, but all the claims logically connected to them, which comprise Nassar’s sexually abusive conduct. Given the tight similarities involved in all this sexual abuse, there is no reasonable interpretation of the insurance contract under which the Nassar-related claims would not be “in any way related to” the ten criminal counts for which Nassar was finally adjudicated guilty. At no point has USAG advanced—or explained the contours of and analysis supporting—the purportedly reasonable alternative interpretation that is required, under Indiana law, to give rise to ambiguity.
Nassar’s acts targeted hundreds of victims. But that is not a distinguishing criterion when interpreting the wrongful
This analysis is also supported by the Eleventh Circuit’s decision in HR Acquisition I Corp. v. Twin City Fire Ins. Co., 547 F.3d 1309 (11th Cir. 2008). The policy at issue in that case had an exclusion for “prior litigation” that was “based upon, arising from, or in any way related to” any “demand, suit, or other proceeding against any Insured which was pending on or existed prior to the applicable Prior Litigation Date specified by endorsement to this Policy, or the same or substantially the same facts, circumstances or allegations which are the subject of or the basis for such demand, suit, or other proceeding.” Id. at 1312.
The question in HR Acquisition I Corp., under Alabama law, was whether a false claim qui tam action was “in any way
The same is true here, where the wrongful conduct exclusion uses the identical phrase to exclude coverage for claims “based upon, arising from, or in any way related to” an insured’s wrongful conduct. As in HR Acquisition I Corp., Nassar—the same perpetrator—used the same modus operandi by using his position of trust as a doctor to abuse vulnerable athletes. The Nassar-related claims allege those same wrongful acts, and they share both a common perpetrator and a common modus operandi with the ten acts that all agree were finally adjudicated.
The per curiam opinion concludes that the cases cited above present more straightforward facts than the difficult circumstances of this case; in my colleagues’ view, this case is unique. It is true that the scope of Nassar’s abuse and victimization is enormous. But as a court we must play the cards—here, the text of the insurance policy and the precedents that have interpreted identical or nearly identical language—we
Although the per curiam opinion warns of the unforeseen consequences of applying the plain language of “in any way related” to the facts of this case, Per Curiam Op. § III.D.3, I do not agree that such considerations should drive our analysis. As an analogy, in matters of statutory interpretation, federal courts must refuse “to soften the import of Congress’ chosen words even if we believe the words lead to a harsh outcome.” Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. 121, 134 (2015) (citation omitted). Likewise, when construing an insurance contract under state law, we should not interpret its terms to avoid what is deemed a harsh result—here, for the insured, but potentially for insurers in a future case. See Per Curiam Op. § III.D.3. Instead, we must apply the relevant legal principles to the specific contractual provision at issue. In this case, regardless of the outcome that follows, the contractual provision excluding coverage for claims that are “in any way related to” the finally adjudicated wrongful conduct of an insured “means what it says.” Wisniewski v. Bennett, 716 N.E.2d 892, 897 (Ind. 1999).
As the per curiam opinion recognizes, the failure to define a term or phrase in an insurance policy does not necessarily render that policy language ambiguous. Instead, an ambiguity exists only “where the provision is susceptible to more than one reasonable interpretation.” Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664, 667 (Ind. 1997) (citation omitted); accord Am. Home Assur. Co. v. Allen, 814 N.E.2d 662, 666–67 (Ind. Ct. App. 2004) (citing Guzorek, 690 N.E.2d at 667). USAG has
There is another aspect to this debate. If this claims-made D&O policy is a mismatch for this type of tremendously difficult and challenging loss, perhaps it is because USAG is trying, per the idiom, to “put a round peg in a square hole.” A mismatch between complex factual circumstances and policy language does not mean that language is ambiguous or must be viewed from the standpoint of the insured. The factual distinguishability of this case from the other decisions determining the scope of “related to” should be a signal that a claim has been made seeking coverage on a policy that is designed for circumstances far different than those presented here. Recall, Liberty is one of many insurers USAG sued, and the bankruptcy litigation implicates numerous insurance policies issued by those companies. That this specific policy, including its particular wrongful conduct exclusion, does not fit these facts does not mean that coverage follows.
Court decisions interpreting “related” in insurance policies, across a wide variety of contexts, support this analysis and the conclusion that the wrongful conduct exclusion’s language is unambiguous and applies to claims “based upon, arising from or in any way related to” Nassar’s sexual abuse that was finally adjudicated in his guilty pleas and for which he was sentenced. So, I CONCUR with the per curiam opinion, except that I respectfully DISSENT from § III.D.3–5. I would conclude that the wrongful conduct exclusion in the