A specialty insurer wrongfully denied coverage to a behavioral health company facing sexual misconduct allegations, a federal appeals court ruled.
In Bramblett v. Allied World Specialty Insurance Co. the 9th U.S. Circuit Court of Appeals found Monday that Allied World “resolved ambiguities in the Policy in its own favor rather than in favor of the insured as Washington law requires.”
In the case, four former patients of American Behavioral Health Systems, a mental health facility in Spokane, Washington, alleged sexual harassment and abuse by a staffer. Allied World, a subsidiary of Fairfax, refused to defend the facility, arguing its sexual abuse exclusion barred coverage for the entire complaint.
The appeals court disagreed. Allied’s policy covered losses from sexual harassment and unwanted sexual advances but excluded sexual molestation and abuse. The key question was whether the exclusion swallowed the coverage entirely. The appeals court said no, finding that a complaint can contain both covered and excluded allegations, and that an insurer cannot use one excluded claim to escape its duty to defend the rest.
The panel found that some of the plaintiffs’ allegations, including verbal harassment, excessive strip searches involving no touching, and unwanted hugging, were not excluded because, narrowly construed, both “sexual molestation” and “sexual abuse” require sexual contact and force.
“Denying a duty to defend based on a questionable interpretation of policy language that gives the insurer rather than the insured the benefit of the doubt constitutes bad faith as a matter of law,” the panel wrote, quoting Washington precedent.
The panel reversed a summary judgment siding with Allied. Allied now faces not just a defense obligation but potential treble damages and attorney fees under Washington’s Insurance Fair Conduct Act, the ruling states. The case was remanded to the trial court for further proceedings.