Cindy Serecky and Shannon Gioia v. National Grange Mutual Insurance, et al.

Plaintiffs Cindy Serecky and Shannon Gioia
appeal from the trial court's order granting summary judgment for
defendants National Grange Mutual Insurance, Utica Mutual Insurance, and
Cooperative Insurance. Pursuant to an assignment of rights, plaintiffs
sued defendants for breach of contract and breach of the covenant of good
faith and fair dealing based on defendants' refusal to defend or indemnify
its insureds, Robert Harlow, Dynamic Discount, Inc., and The Grab Bag, in
an underlying sexual harassment action. The trial court granted summary
judgment for defendants after concluding that the insurance policies issued
by the defendant insurers did not provide coverage for intentional acts of
sexual harassment, and thus, they were not obligated to defend or indemnify
their insureds. Plaintiffs appealed, arguing that summary judgment was
improperly granted. We affirm.

2. The following facts are undisputed. Plaintiffs were employed
by Robert Harlow, the owner of Dynamic Discount and The Grab Bag (a
registered trade name). In April 1999, plaintiffs filed a complaint
against Harlow, Dynamic Discount, and The Grab Bag, alleging that Harlow,
their direct supervisor, made inappropriate sexual remarks and engaged in
inappropriate and offensive touching during working hours. In their
complaint, plaintiffs made claims of sexual harassment, intentional
infliction of emotional distress, negligent infliction of emotional
distress, wrongful discharge, and assault and battery.

3. At the time of the incidents in the complaint, Harlow,
Dynamic Discount, and The Grab Bag were insured under three policies issued
by defendants. Pursuant to the terms of a homeowner's policy, Cooperative
provided Harlow with personal liability coverage for sums owed because of
"bodily injury" caused by an "occurrence" to which coverage applied. The
policy defined an "occurrence" as "an accident, including repeated
exposures to similar conditions, that results in 'bodily injury' . . .
during the policy period." Cooperative denied Harlow's request for
coverage after concluding that there had not been an "occurrence" within
the meaning of its policy because plaintiffs' complaint alleged purposeful
conduct. Cooperative identified two exclusions that also supported its
decision to deny coverage: one that excluded coverage where bodily injury
resulted from "activities related to the 'business' of an insured" and the
second that excluded coverage for bodily injury that was "the result of an
intentional and malicious act by . . . an 'insured.'" Cooperative's policy
also excluded coverage for bodily injury "expected by . . . or intended by
an 'insured.'"

4. National Grange provided business liability coverage to Dynamic
Discount, doing business as The Grab Bag, for sums that it was legally
obligated to pay as damages because of "bodily injury" caused by an
"occurrence." The policy defined an "occurrence" as "an accident,
including continuous or repeated exposure to substantially the same general
harmful conditions." Like Cooperative, National Grange denied coverage
after determining that there had not been an "occurrence" within the
meaning of its policy. National Grange explained that, although
plaintiffs' complaint included a negligence claim, the facts alleged in the
complaint involved intentional acts. National Grange also pointed to two
exclusions in its policy that supported its denial of coverage: one that
precluded coverage for "bodily injury" "expected or intended from the
standpoint of the insured" and one that precluded coverage for "bodily
injury" to "[a]n employee of the insured arising out of and in the course
of employment by the insured."

5. Utica similarly provided business liability coverage to Dynamic
Discount for sums that it was legally obligated to pay as damages because
of "bodily injury" to which the insurance applied. Utica denied coverage
after concluding that plaintiffs' complaint did not allege "bodily injury"
caused by an "occurrence" within the meaning of its policy. Like the
policies of the other defendants, Utica's policy defined an "occurrence" as
"an accident, including continuous or repeated exposure to substantially
the same general harmful conditions." Utica's policy also excluded
coverage for "bodily injury" to "[a]n employee of the insured arising out
of and in the course of employment by the insured," as well as "bodily
injury" "expected or intended from the standpoint of the insured."

6. Approximately two years after defendants denied coverage,
plaintiffs and the underlying defendants entered into a stipulated
agreement pursuant to which the court entered judgment in favor of
plaintiffs for $100,000. Harlow, individually, and on behalf of Dynamic
Discount and The Grab Bag, later assigned plaintiffs all indemnification
rights under the three insurance policies.

7. In April 2001, plaintiffs filed a complaint against defendants
alleging breach of contract and breach of the covenant of good faith and
fair dealing based on defendants' refusal to defend or indemnify the
underlying defendants. In support of their claims, plaintiffs alleged that
defendants acted in bad faith by failing to determine their obligation to
indemnify during the pendency of the underlying case, and denying coverage
without a reasonable basis for doing so. Defendants moved for summary
judgment in October and November 2001 and, after a hearing, the court
granted their request.

8. As an initial matter, the court rejected plaintiffs' argument
that the terms of defendants' insurance policies were ambiguous. It also
rejected plaintiffs' assertion that defendants had waived their present
right to dispute coverage by failing to defend or indemnify Harlow in the
underlying action. As the court explained, the underlying action involved
different defendants, it did not proceed to trial, and there was no
indication as to what issues had been determined. Turning to the merits of
plaintiffs' claims, and assuming for the purposes of argument that the
assignment of rights was valid, the court identified the gravamen of the
underlying complaint as intentional sexual harassment by Harlow against
plaintiffs. All of plaintiffs' other claims, the court explained, apart
from that of negligent infliction of emotional distress, were embraced by
or flowed from this intentional predatory behavior, and were themselves
intentional and deliberate acts. In addition, the court rejected
plaintiffs' negligent infliction of emotional distress claim as unsupported
by the facts alleged in the complaint.

9. Thus, comparing the allegations in the complaint with the terms
of defendants' policies, the court concluded that the complaint did not
allege an "occurrence" within the meaning of defendants' policies. The
court explained that all of the policies defined an "occurrence" as an
"accident," and the definition of "accident" was well-established under
Vermont case law. An "accident," the court stated, is "an unexpected
happening without intention or design." The court found that Harlow's
alleged sexual harassment of plaintiffs was a series of intentional acts
and these acts were the operative cause of plaintiffs' alleged harms. The
court therefore concluded that defendants' insurance policies, which
provided coverage "only if" the cause of such alleged harms was
"accidental," did not cover Harlow's intentional acts of sexual harassment.

10. The court found that certain exclusions within defendants'
policies offered an additional basis for denying coverage, assuming
arguendo that bodily injury, as defined by the policies, had occurred.
Cooperative's policy, for example, excluded coverage for "bodily injury"
that resulted directly or indirectly from "an intentional act of an
insured." The court explained that, given the intentional nature of the
insured's alleged acts, and because plaintiffs' alleged harms were a direct
result of these intentional acts, this exclusionary provision alone was
sufficient to deny coverage. The court also found that National Grange's
and Utica's exclusion for "bodily injury" that was "expected or intended
from the standpoint of the insured" independently supported a denial of
coverage as well. The court explained that because sexual harassment was
substantially certain to injure the person harassed, intent to injure could
be inferred as a matter of law from the intent to act. The court thus
concluded, as a matter of law, that defendants' insurance policies did not
provide coverage to the underlying defendants and therefore, by denying
coverage, defendants did not breach their duty to defend or indemnify their
insureds. The court consequently granted summary judgment for defendants.
In its order, the court also denied plaintiffs' request for further
discovery, finding the record sufficient to demonstrate that summary
judgment should be granted for defendants. This appeal followed.

11. On appeal, plaintiffs argue that the court erred in granting
summary judgment to defendants. Specifically, they contend that the court
erred by: (1) finding that defendants had not waived their present right to
dispute coverage by failing to participate in the defense or
indemnification of their insureds in the underlying action; (2) concluding,
as a matter of law, that defendants' insurance policies did not cover the
underlying claims; (3) rejecting plaintiffs' claim of bad faith as a matter
of law; and (4) resolving the coverage issue before discovery was complete.

12. We review a grant of summary judgment using the same standard
as the trial court. Richart v. Jackson, 171 Vt. 94, 97, 758 A.2d 319, 321
(2000). Summary judgment is appropriate when, taking all allegations made
by the nonmoving party as true, there are no genuine issues of material
fact and the movant is entitled to judgment as a matter of law. Id.;
V.R.C.P. 56(c). A party is entitled to summary judgment if he presents at
least one legally sufficient defense that would bar a plaintiff's claims.
Smith v. Day, 148 Vt. 595, 597, 538 A.2d 157, 158 (1987).

13. First, we reject plaintiffs' assertion that defendants waived
their present right to dispute coverage by failing to participate in the
underlying action. Plaintiffs maintain that the underlying judgment
against Harlow and his business is binding on the present defendants "as to
issues which were or might have been litigated therein." While we have
stated that, as a general rule, "an insurer who refuses to defend is bound
by issues actually or necessarily litigated in the first trial," Orleans
Village v. Union Mut. Fire Ins. Co., 133 Vt. 217, 219, 335 A.2d 315, 317
(1975), in this case, the underlying action did not proceed to trial - it
was settled by a stipulated agreement between plaintiffs and the underlying
defendants. The stipulation reflects that no issues were determined other
than Harlow's agreement that judgment for a sum certain could be entered
for plaintiffs. Moreover, as discussed below, defendants had no duty to
indemnify the underlying defendants, and thus, defendants justifiably
denied coverage. See Garneau v. Curtis & Bedell, Inc., 158 Vt. 363, 366,
610 A.2d 132, 134 (1992) (insurer's duty to defend does not extend to
circumstances where, as a matter of law, there is no duty to indemnify).
We therefore reject plaintiffs' assertion that defendants waived their
right to dispute coverage by failing to participate in the underlying
action.

14. We turn next to plaintiffs' assertion that the trial court
erred in concluding as a matter of law that defendants' insurance policies
did not cover their claims. Plaintiffs argue that coverage should apply to
Harlow's intentional acts of sexual harassment if the harm that he
inflicted was unintended or unexpected. According to plaintiffs,
determining Harlow's intent presents a question of fact, and the court
therefore erred in inferring his intent to harm as a matter of law.
Plaintiffs also argue for the first time on appeal that the rule of
inferred intent is inapplicable where the named insured is a business, as
in the policies issued by National Grange and Utica, because a business
cannot form an intent to harm.

15. We are asked to determine whether Harlow's intentional acts of
sexual harassment constitute an "occurrence" within the meaning of
defendants' policies. Although plaintiffs included a negligence claim in
their underlying complaint, we do not consider this claim because the facts
alleged in the complaint are inconsistent with unintentional conduct or
injury. See TBH v. Meyer, 168 Vt. 149, 153, 716 A.2d 31, 34 (1998) ("We
must focus on the factual allegations in [the underlying complaint] and
not on the legal theories asserted, and unless the complaint alleges facts
within the coverage of the policies, [the insurer] has no duty to defend or
indemnify."); Nationwide Mut. Fire Ins. Co. v. Lajoie, 163 Vt. 619, 620,
661 A.2d 85, 86 (1995) (mem.) (rejecting negligent infliction of emotional
distress claim stemming from insured's alleged sexual abuse of a minor as
"simply a disingenuous attempt to create a factual dispute").

16. Additionally, we need not determine whether the trial court
erred by failing to distinguish between the named insured in the business
liability policies and the named insured in the homeowner's policy.
Plaintiffs waived this argument by failing to raise it below. See Lane v.
Town of Grafton, 166 Vt. 148, 153, 689 A.2d 455, 457 (1997) ("Failure to
raise a reason why summary judgment should not be granted at the trial
level precludes raising it on appeal."). In any event, plaintiffs did not
make distinct claims against Harlow's business; all of their claims against
the business are derivative of their claims against Harlow. Therefore,
under all of the policies at issue, the question of whether defendants
breached their duty to indemnify their insureds turns on whether Harlow's
intentional acts of sexual harassment constitute an "occurrence" within the
meaning of defendants' policies.

17. As previously noted, defendants' policies provide coverage for
sums that its insureds owe because of "bodily injury" [FN1] caused by an
"occurrence;" each policy defines an "occurrence" as an "accident." We
construe an insurance policy "according to its terms and the evident intent
of the parties as expressed in the policy language." N. § Ins. Co. v.
Perron, 172 Vt. 204, 209, 777 A.2d 151, 154 (2001). We give disputed terms
their "plain, ordinary and popular meaning." Id. If a disputed term is
susceptible to two or more reasonable interpretations, the ambiguity must
be resolved in favor of the insured. Id. The term "accident" is not
ambiguous, and in the absence of a specific definition, we give the term
its plain meaning. See id. at 210, 777 A.2d at 156. Thus, as we have
explained, "an accident is generally understood to be an event that is
undesigned and unforeseen. It is an unexpected happening." Id. at 211,
777 A.2d at 156 (internal quotation marks and citations omitted).

18. In Perron, we considered the terms of an insurance policy that
similarly defined an "occurrence" as an "accident." See id. at 209, 777
A.2d at 155 (policy defined an "occurrence" as "an accident, including
exposure to conditions, which results, during the policy period, in a
bodily injury"). In that case, we read the definition of "occurrence"
together with an exclusion precluding coverage for bodily injury "expected
or intended" by the insured. See id. at 213, 777 A.2d at 158. In doing
so, we found it clear and unambiguous that if coverage was sought because
of an accident that resulted in injury that was neither expected nor
intended, there was an "occurrence" and consequently, there could be
coverage. Id. Because defendants' policies contain a similar definition
of "occurrence" as that found in Perron, and because all similarly contain
an exclusion for bodily injury "expected or intended by the insured," we
approach the question presented in this appeal in the same manner. Thus,
we read the definition of "occurrence" together with the policies' specific
exclusion for intentional acts to determine if there is coverage. Id. at
210 n.4, 777 A.2d at 155 n.4.

19. This Court has held that an "accident" can occur despite the
intentional nature of an insured's conduct. State v. CNA Ins. Cos., 172
Vt. 318, 328, 779 A.2d 662, 670 (2001) (where "occurrence" defined as "an
accident, including continuous or repeated exposure to conditions, which
results in property damage neither expected nor intended [by] the insured,"
the unexpected nature of an "accident" describes harm that is caused,
rather than act involved). The central question in conducting this
analysis is whether the harm that resulted from the intentional act was
expected or intended by the insured. Id.; see also, Perron, 172 Vt. at
213-214, 777 A.2d at 158 (determination of whether insured's actions
constituted an occurrence involves an inquiry into whether he expected or
intended to harm the victims by his actions). "An insured expects an
injury if he or she is subjectively aware that injury is substantially
certain to result." Perron, 172 Vt. at 213-14, 777 A.2d at 158 (internal
quotation marks, citation, and brackets omitted). In other words, "if the
insured did not intend to inflict the injury on the victim by his
intentional act, and the act was not so inherently injurious that the
injury was certain to follow from it, the act as a contributing cause of
injury would be regarded as accidental and an 'occurrence.'" Id. at 214,
777 A.2d at 158.

20. Whether an insured should expect injury from an intentional
act generally presents a factual question, but we have recognized that
"[s]ome actions . . . are so likely to result in injury that, as a matter
of law, the court will find that the injury did not result from an accident
regardless of the actor's subjective intent or expectations." Id. Thus,
"[u]nder the so-called inferred-intent rule, courts conclusively presume
intent to harm as a matter of law based on the nature and character of the
insured's alleged acts, regardless of whether the insured asserts that he
or she had no subjective intent to injure." Id.; see also Espinet v.
Horvath, 157 Vt. 257, 259, 597 A.2d 307, 309 (1991) (recognizing that
although the question of whether an insured expected or intended an injury
to occur is a subjective inquiry, "an insured must be taken to have
intended an injury where the circumstances indicate that he knew his act
would damage the injured party"); Cooperative Fire Ins. Ass'n of Vermont v.
Bizon, 166 Vt. 326, 334, 693 A.2d 722, 727-28 (1997) (recognizing that
where circumstances are not equivocal that injury would result, subjective
intent of the insured to harm is irrelevant); State v. Glens Falls Ins.
Co., 137 Vt. 313, 317, 404 A.2d 101, 104 (1979) (same).

21. Prior decisions of this Court have applied the inferred-intent
rule to claims arising from an adult's sexual abuse of a minor. Mass. Mut.
Life Ins. Co. v. Ouellette, 159 Vt. 187, 192, 617 A.2d 132, 135 (1992);
Lajoie, 163 Vt. at 620, 661 A.2d at 86; Meyer, 168 Vt. at 149-50, 716 A.2d
at 32. In Lajoie, 163 Vt. at 620, 661 A.2d at 86, we extended the
application of the inferred-intent rule to claims of nonsexual verbal and
psychological abuse and destruction of familial relationships where the
nucleus of the underlying action was sexual abuse. We explained that it
was "inconceivable that sexual abuse of a minor by a family member [would]
not be accompanied by other abuse and [would] not destroy familial
relationships." Id.

22. We reached a similar conclusion in Meyer, 168 Vt. at 152-53,
716 A.2d at 34. The homeowner's policy at issue in that case excluded
coverage for bodily injury expected or intended by the insured. Id. at
150-51, 716 A.2d at 32-33. We held that the insurer was not required to
defend or indemnify its insured on claims against the insured for
intentional nonphysical sexual exploitation of a minor because the
insured's conduct was so certain to result in injury that his intent to
injure could be inferred as a matter of law. Id. at 152-53, 716 A.2d at
34. We acknowledged that the application of the inferred-intent rule would
deny the victim a potential source of income for her injuries, but we found
this concern outweighed by the need to fix both moral and economic
responsibility on the insured. Id. at 154, 716 A.2d at 35.

23. We declined to apply the rule of inferred-intent to claims
stemming from a minor's sexual molestation of another minor, finding that
the question of intent to injure should be determined on a case-by-case
basis. Perron, 172 Vt. at 215-16, 777 A.2d at 159-60. We explained that
inferring an intent to harm as a matter of law in cases involving minors
who are abusers would be inconsistent with provisions in Vermont criminal
law. See id. at 216, 777 A.2d at 160 ("[I]f minors cannot appreciate the
nature and consequences of, and therefore lack the ability to consent to,
sexual activity for purposes of Vermont criminal law, it would be
inconsistent to hold that, for purposes of Vermont civil law, when minors
engage in sexual acts, as a matter of law, they intend the consequences of
their acts.") (emphasis in original).

24. While application of the inferred-intent rule has thus far
been limited to claims related to an adult's sexual abuse of a minor, we
find it equally applicable in cases involving sexual harassment. Like
other forms of sexual abuse, we conclude that sexual harassment is so
likely to result in injury that, as a matter of law, the injury cannot be
said to be the result of an "accident," regardless of the actor's
subjective intent or expectation. Cf. J.C. Penney Cas. Ins. Co. v. M.K.,
804 P.2d 689, 700 n.17 (Cal. 1991) (en banc) (rejecting notion of
"accidental" child molestation as implausible). To say that Harlow did not
intend to inflict injury through his intentional acts of sexual harassment
"flies in the face of all reason, common sense and experience." CNA Ins.
Co. v. McGinnis, 666 S.W.2d 689, 691 (Ark. 1984) (finding it untenable for
stepfather to claim that he did not intend to injure six-year old
stepdaughter through repeated and continuous sexual abuse). Sexual
harassment is not the type of act that only occasionally results in harm -
it is inherently harmful. See J.C. Penney Cas. Ins. Co., 804 P.2d at 698
(expressing similar sentiment with respect to acts of child molestation).
In other words, the intent to act is the equivalent of the intent to harm.
See id. ("Some acts are so inherently harmful that the intent to commit
the act and the intent to harm are one and the same."). We therefore hold
that the rule of inferred-intent applies to claims arising from acts of
sexual harassment. Our conclusion is consistent with policy concerns
underlying the rule; requiring defendants to indemnify plaintiffs in this
case would in effect require defendants to subsidize Harlow's sexual
misconduct and force defendants' other policyholders to bear the expense of
any passed-along costs. See Meyer, 168 Vt. at 154, 716 A.2d at 35 (voicing
same concern in context of insured's nonphysical sexual abuse of minor);
Ouellette, 159 Vt. at 192, 617 A.2d 135 (stating that it would be
inappropriate to transfer the financial costs incurred incidental to an
insured's sexual abuse of minor to other policyholders).

25. Other courts interpreting similar policy language have
reached a similar result. See, e.g., Commercial Union Ins. Cos. v. Sky,
Inc., 810 F. Supp. 249, 252-55 (W.D. Ark. 1992) (mem.) (alleged sexual
harassment did not result from "occurrence" within meaning of general
liability policy excluding coverage for bodily injury expected or intended
from standpoint of insured; there was no contention that insured's actions
were anything other than volitional, or that insured was incapable of
forming intent); Sena v. Travelers Ins. Co., 801 F. Supp. 471, 476 (D. N.M.
1992) (mem.) (applying New Mexico law) (inferring insured's intent to harm
as a matter of law in cases involving sexual misconduct); Old Republic Ins.
Co. v. Comprehensive Health Care Assocs., Inc., 786 F. Supp. 629, 632-33
(N.D. Tex. 1992) (applying Texas law) (holding that insurer had no duty to
defend a complaint alleging various causes of action arising out of alleged
sexual harassment because intentional acts are not "occurrences" as term is
commonly defined in insurance policies), aff'd on other grounds, 2 F.3d 105
(5th Cir. 1993); Contentinal Ins. Co. v. McDaniel, 772 P.2d 6, 8 (Ariz. Ct.
App. 1988) (insured's acts of sexual harassment so certain to cause injury
to victim that intent to harm inferred as a matter of law, despite
insured's statements that he did not intend harm); Greenman v. Michigan
Mut. Ins. Co., 433 N.W.2d 346, 349 (Mich. Ct. App. 1989) (per curiam)
(insured's sexual harassment of co-worker not covered under terms of
homeowner's policy because, among other reasons, insured's intentional acts
could not be deemed an accidental occurrence); Russ v. Great Am. Ins. Cos.,
464 S.E.2d 723, 725-26 (N.C. Ct. App. 1995) (injuries suffered as a result
of acts of sexual harassment not "accidents," and thus, are not bodily
injuries caused by "occurrences," because sexual harassment is
substantially certain to cause injury to person harassed); State Farm Fire
& Cas. Co. v. Barrett, 530 S.E.2d 132, 136 (S.C. Ct. App. 2000) (per
curiam) (inferring an intent to harm as a matter of law when a person
sexually assaults, harasses, or otherwise engages in sexual misconduct
towards an adult); Smith v. Animal Urgent Care, Inc. 542 S.E.2d 827, 832
(W. Va. 2000) (claim based on sexual harassment does not come within
definition of "occurrence," defined as an "accident," in insurance
liability policy).

26. Because we conclude that Harlow's intent to harm can be
inferred as a matter of law from the nature of his acts, the harm that
resulted from his acts does not constitute an "accident" within the meaning
of defendants' policies. Thus, there is no "occurrence" and consequently,
there is no coverage. Based on our conclusion, we reject plaintiffs'
assertion that coverage should apply under National Grange and Utica's
business liability policies because the policies do not contain a specific
exclusion for sexual harassment.

27. We find plaintiffs' remaining arguments on appeal equally
without merit. First, based on our conclusion that defendants were not
obligated to indemnify the underlying defendants, we reject plaintiffs'
assertion that the court erred in dismissing their claim of bad faith as a
matter of law. To establish bad faith, plaintiffs needed to show that the
insurance company had no reasonable basis to deny benefits of the policy,
and the company knew or recklessly disregarded the fact that no reasonable
basis existed for denying the claim. Bushey v. Allstate Ins. Co., 164 Vt.
399, 402, 670 A.2d 807, 809 (1995). We concluded above that defendants'
policies do not cover the acts alleged in plaintiffs' underlying complaint.
Thus, as a matter of law, defendants did not act in bad faith in denying
coverage. See Myers v. Ambassador Ins. Co., 146 Vt. 552, 557, 508 A.2d
689, 692 (1986) (determination of whether insurer acted in bad faith
presents a question of law where, based on uncontroverted evidence, "a
reasonable man following the law can draw but one conclusion on the
issue").

28. For a similar reason, we also reject plaintiffs' assertion
that the court erred in granting summary judgment before discovery was
complete. Plaintiffs maintain that if the court had ruled on their motion
to compel answers to interrogatories before determining the coverage issue,
they might have been able to show that defendants acted in bad faith by
denying coverage without conducting a proper investigation. As discussed
above, the undisputed evidence shows that defendants did not act in bad
faith, but rather justifiably denied coverage because their policies do not
cover intentional acts of sexual harassment. The record shows that
plaintiffs had "an adequate time for discovery," see Bushey, 164 Vt. at
405, 670 A.2d at 811, and we find no error in the timing of the court's
summary judgment decision.

29. Based on our conclusion that there was no "occurrence" within
the meaning of defendants' policies, we do not address plaintiffs'
arguments concerning the applicability of the "business pursuits" exclusion
found in Utica's and National Grange's policies.