Buckeye Ranch, Inc. v. Northfield Ins. Co.

Page 94

839 N.E.2d 94

134 Ohio Misc.2d 10

2005-Ohio-5316

The BUCKEYE RANCH, INC., Plaintiff, v. NORTHFIELD INSURANCE CO. et al., Defendants.

No. 04CVH-07-7914.

Court of Common Pleas of Ohio, Franklin County.

Decided September 30, 2005.

COPYRIGHT MATERIAL OMITTED

Vorys, Sater, Seymour & Pease L.L.P., William J. Pohlman, and Lisa Pierce Reisz, Columbus, for plaintiff.

Roetzel & Andress and Bradley L. Snyder, Columbus, for defendant Hylant MacLean of Columbus, Inc. Ulmer & Berne L.L.P., Harold Reader, Cleveland, and David L. Eidelberg, Columbus, for defendant Northfield Insurance Company.

FRYE, Judge.

I. Introduction

{¶ 1} This case primarily concerns the meaning of an insurance-policy exclusion incorporating, in substance, the "known loss" doctrine. In 1996, one boy sexually assaulted his younger roommate while both were long-term residents receiving treatment at The Buckeye Ranch, Inc. ("the Ranch"). The Ranch is a nonprofit institution that provides services, including a residential program, for children and families struggling with emotional, behavioral, and mental health issues. It had liability insurance coverage in force during 1996, written on a "claims-made" basis. Three years later, the Ranch changed 1to a traditional occurrence-based format for its insurance. Seeking to assure that there was no inadvertent gap in coverage, the Ranch consulted a broker. It then purchased a prior acts coverage endorsement from Northfield Insurance in exchange for an additional premium of $13,600. Several years later, roughly six years after the assault, the victim first presented a multimillion-dollar tort claim against the Ranch. Northfield Insurance denied coverage under the prior acts endorsement, and the Ranch thereafter settled the boy's claim. This coverage lawsuit followed.

II. The Factual Setting

1. The Parties

{¶ 2} As documented in a stipulation of facts relative to Counts 1 and 2,¹ the Ranch is an Ohio not-for-profit corporation operating a facility offering "treatment for at-risk children and adolescents." Defendant Hylant MacLean is an independent insurance agency in the Columbus area. MacLean serviced the Ranch's insurance needs. Defendant Northfield Insurance Co. is an insurer licensed in Ohio.

{¶ 3} At all times relevant to this case, the Ranch carried both commercial general liability ("CGL") and professional liability ("PL") coverages. Between March 1996 and March 1999, successive annual claims-made CGL and PL coverage was purchased from Scottsdale Insurance Co. Effective January 1, 1999, the Ranch switched insurers to Northfield. It also changed the type of CGL and PL coverages from claims-made to occurrence-based. Five months after Northfield bound coverage under Policy No. KA 990011, the Ranch completed an application for the new carrier.

{¶ 4} Northfield Insurance knew it was binding coverage on a business dealing with "adolescent counseling, rehabilitation and support groups" and that the Ranch was a "Behavioral Healthcare Facility." The new policy included several endorsements, the third of which was a one-page prior-acts coverage endorsement. That endorsement was governed by the general terms of Northfield's Policy. Paragraph 15 of the parties' stipulation states that the endorsement modified both the CGL and the PL coverages. The prior-acts coverage endorsement was purchased for an additional premium of $13,600. Northfield continued to insure the Ranch for a number of years after 1999.

2. The 1996 Incident

{¶ 5} Andrew C. was 9 years old when he was sexually assaulted in the fall of 1996. The perpetrator was another resident of the Ranch, a 14-year-old boy named David M. The Ranch assigned Andrew C. as David M.'s roommate. For brevity, this tragic event is referenced as the "incident."

{¶ 6} Paragraph 19 of the parties' stipulation records that the Ranch "was aware" of the incident in 1996. The Ranch conducted its own internal review, and the incident was fully investigated by local police and Franklin County Children Services. In fact, David M. admitted the assault to Ranch staff three weeks after it occurred. The Ranch prepared two incident reports and cooperated with the criminal investigation leading to David M.'s conviction in juvenile court. Franklin County Children Services apparently initially found allegations of neglect attributable to the Ranch itself, but following an appeal, all specific allegations against the Ranch were withdrawn and/or vacated.

{¶ 7} No civil claim was made, formally or informally, on behalf of Andrew C. for nearly six years following the incident. Andrew C. remained in treatment at the Ranch until August 1997, when his family relocated to Georgia. Neither he nor his family ever complained during that time about the Ranch's responsibility for the incident or his treatment. No one suggested that a legal claim would be brought. In July 2002, however, an attorney sent a demand letter to the Ranch. Once that claim was presented, the Ranch retained counsel and submitted Andrew C.'s claim to MacLean and Northfield. Neither MacLean nor Northfield was aware of the incident prior to that time. By letter dated October 15, 2002, Northfield denied any obligation for Andrew C.'s claim and refused to defend the Ranch against it. Andrew C. never filed suit. He did pursue what was, apparently, a multimillion-dollar claim. Following negotiations, that claim was settled in September 2003 with the approval of a probate court in Georgia.

{¶ 8} Before the court are cross-motions for summary judgment filed by the Ranch and Northfield. The Ranch moved for partial summary judgment on counts one and two of the complaint. Count one sought a declaratory judgment that Northfield was obligated to defend the Ranch and indemnify it for defense costs and settlement expense. Count two was a claim for breach of contract alleging that the Ranch satisfied all preconditions for coverage.

3. The Prior-Acts-Coverage Endorsement

{¶ 9} On January 28, 1999, Northfield issued liability insurance for the Ranch, retroactive to the first day of January. It is undisputed that from 1993 until 1999, the Ranch had maintained claims-made liability insurance with Scottsdale. The policy issued by Northfield was an occurrence-based policy. Both Northfield and the Ranch used insurance brokers as intermediaries to negotiate new coverage for the Ranch, according to the affidavit of Northfield's underwriter. The Ranch used MacLean; "Northfield worked directly with Westrope & Associates."

{¶ 10} Occurrence-based policies and claims-made policies are materially different. A claims-made policy provides protection when claims are brought against an insured during the life of the policy, while an occurrence-based policy provides coverage when allegedly wrongful acts occur during the policy period without regard to when a claim is presented or a suit is filed. See Mueller v. Taylor Rental Ctr. (1995), 106 Ohio App.3d 806, 810-11, 667 N.E.2d 427, citing United States v. A.C. Strip (C.A.6, 1989), 868 F.2d 181. Claims-made policies were developed in an attempt by the insurance industry to simplify underwriting and the setting of reserves. See Montrose Chem. Corp. v. Admiral Ins. Co. (1995), 10 Cal.4th 645, 42 Cal.Rptr.2d 324, 913 P.2d 878, 903, fn. 24.

{¶11} Due to the conceptual difference in coverage, an insured switching from a claims-made to an occurrence-based policy can experience a gap in protection. As fully explained in the stipulation of the parties, such a gap may arise if a third-party claim is first made after a claims-made policy has expired, but arises from an event that occurred before the new occurrence-based policy took effect. To bridge this potential gap, so-called "tail" and "nose" coverages may be purchased. "Tail" coverage is generally purchased from the expiring claims-made insurer. Tail coverage has been known in the industry for several decades and is intended to allow a policyholder to report third-party claims that arise after the claims-made policy expires. See also, Pemco, Inc. v. Tiarks (July 28, 1977), Cuyahoga App. No. 36285, 1977 WL 201475 (upholding claims-made policies against the contention they should be void as against public policy because "tail" coverage is available to assure continuing protection). So-called "nose" coverage is usually purchased from the new occurrence-based insurer. It treats prior acts as "occurrences" within the new policy period. Thus, Northfield's prior-acts coverage endorsement purports to provide protection against "damages for covered `bodily injury' or `property damage' that have been deemed to have occurred during the policy period between 03/05/1993 and 01/01/1999."

III. Analysis

1. General Rules for Policy Interpretation in Ohio

{¶12} Under Ohio law, the interpretation of an insurance contract is, ordinarily, a question of law to be decided by the court. Costanzo v. Nationwide Mut. Ins. Co., 161 Ohio App.3d 759, 2005-Ohio-3170, 832 N.E.2d 71, at ¶ 19; Gaffney v. Powell (1995), 107 Ohio App.3d 315, 319, 668 N.E.2d 951. The role of a court is to determine the intentions of the parties and to construe the contract in a manner that effectuates that intent. Hamilton Ins. Serv., Inc. v. Nationwide Ins. Cos. (1999), 86 Ohio St.3d 270, 273, 714 N.E.2d 898; Costanzo, supra, at ¶20. If the language is unclear, then circumstances surrounding an agreement may be considered to the extent they "invest the language of the contract with a special meaning ... in an effort to give effect to the parties' intentions." Id.

{¶ 13} A contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer when the meaning of the language used is uncertain. Faruque v. Provident Life & Acc. Ins. Co. (1987), 31 Ohio St.3d 34, 31 OBR 83, 508 N.E.2d 949, syllabus; Moorman v. Prudential Ins. Co. (1983), 4 Ohio St.3d 20, 22, 4 OBR 17, 445 N.E.2d 1122. A corollary rule long recognized in Ohio is that in reading exclusions...