April 2, 2010
Written By Attorneys: John T. Salvucci and Paulyne A. Gardner-Smith
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
The Appellate Division of the Superior Court of New Jersey recently determined that an insurer was barred from asserting the bodily injury exclusion in a D&O policy issued to its insured when the underlying claims made against the insured were based upon professional negligence rather than the criminal conviction of its employee. In Somerset Medical Center v. Executive Risk Indemnity, Inc., No. A-6214-08T2, slip op. (N.J. Super. Ct. App. Div. March 22, 2010), the Appellate Division concluded that Executive Risk Indemnity, Inc. could not deny coverage under a D&O policy issued to its insured, Somerset Medical Center, when Somerset Medical Center and its executives sought coverage for claims brought against them by the families of the victims of mass murderer Charles Cullen.
In 2006, Somerset County Superior Court sentenced Charles Cullen to 11 consecutive life terms, with no hope for parole. Cullen, a nurse who had been employed at nine different hospitals and one nursing home, had previously pled guilty to killing 29 patients, thirteen of whom were residents of Somerset Medical Center. The families of those victims subsequently brought suit against Somerset Medical Center and its officers for the allegedly negligent hiring and supervision of Cullen. Somerset and its officers, in turn, sought coverage under a D&O policy issued by Executive Risk Indemnity, Inc.
In the subsequent coverage action brought by Somerset Medical Center against Executive Risk Indemnity, Inc., the trial court granted Somerset's motion for summary judgment, finding that Executive Risk was precluded from denying coverage under the bodily injury exclusion because (a) this issue was unsuccessfully asserted in a separate coverage action filed against Executive Risk by Warren Hospital such that collateral estoppel barred the claim and (b) the exclusion did not bar coverage for the underlying claims. On appeal, the Appellate Division disagreed with the trial court that collateral estoppel could bar the application of the exclusion but agreed that the exclusion did not bar coverage for the underlying claims.
In reaching its decision on coverage, the Appellate Division initially analyzed the argument that collateral estoppel barred the application of the bodily injury exclusion. Although the language of the bodily injury exclusion at issue in this coverage matter was the same as that at issue in previous litigation against Executive Risk, the Appellate Division noted that because the case against Warren Hospital settled before an appeal of the interlocutory coverage determination was taken, there was no final judgment on the merits in order for collateral estoppel to apply. Because Executive Risk was not collaterally estopped from asserting the application of the bodily injury exclusion in the coverage action, the Appellate Division next looked to the language of this exclusion and the issue of whether it, in fact, applied to the facts of this case.
In analyzing whether or not the bodily injury exclusion could be applied to bar coverage, the Appellate Division looked to the language of the bodily injury exclusion, and initially concluded that the exclusion conflicted with policy language extending coverage for "wrongful acts." In reconciling this language, the Appellate Division relied upon previous precedent which held that "the purpose of an errors and omissions policy, which directly protects an insured against professional negligence, but which excludes coverage for bodily injury, was to protect an insured who commits an act of professional negligence." Id. at 18-19 (citing Search EDP, Inc. v. American Home Assurance Co., 267 N.J. Super. 537, 545 (App. Div. 1993), certif. denied, 135 N.J. 466 (1994)). Although the Search EDP decision dealt with an E&O policy, rather than a D&O policy, the Appellate Division found that this distinction did not result in a different outcome because, in both cases, there was an expectation by the insured of coverage for underlying claims.
Finally, because the underlying claims against Somerset Medical Center stemmed from the negligent hiring and supervision of Cullen, and not from Cullen's subsequent illegal acts, the bodily injury exclusion could not be used to deny coverage. This opinion serves as a reminder to insurers that, when applying policy exclusions, one must look not only to potentially conflicting language addressing risks covered and those not covered, but also to the proximate cause of the entire loss as pled in the underlying complaint.
