IMT Insurance Co. v. Crestmoor Golf Club

WIGGINS, Justice.

This appeal involves a petition for declaratory judgment filed by an insurance company requesting judgment that it did not have a duty to defend or indemnify under its policy of insurance. The district court found coverage to exist for the claims of negligent supervision and retention. Thus, the insurance company was required to defend or indemnify regarding those claims. The insurance company appeals contending various exclusions in the policy exclude coverage. We reverse the decision of the district court and remand the case to enter judgment in favor of the insurance company because the policy provides “[t]his insurance does not apply under any of the coverages to damages arising out of ... the liability of the insured for the misconduct of ... any other person,” thereby excluding coverage for the claims of negligent supervision and retention.

I. Background Facts and Proceedings.

Tabitha Lynnae Cottrell, a former female employee of Crestmoor Golf Club d/b/a Crestmoor Country Club (Crestm-oor) claims her supervisor, Galen Krieger, made inappropriate sexual comments to her, touched her inappropriately, and sexually assaulted her. She later complained to Crestmoor personnel. She alleges when she returned to work at Crestmoor, “other managers ridiculed her complaint and engaged in other improper conduct toward her.” She further claims Crestm-oor constructively discharged her. As a result of the actions of her supervisor and Crestmoor, she claims she suffered humiliation, alienation, severe emotional distress, and economic harm.

She filed a complaint in the United States District Court against Crestmoor *495and Krieger. She also filed a petition against the same defendants in state court, making the same allegations as she made in federal court. She alleged federal and state claims of sexual harassment and retaliation against Crestmoor. She additionally alleged claims of negligent supervision, negligent retention, tortious infliction of severe emotional distress, and a claim of respondeat superior against Crestmoor.

Relevant to this appeal, she alleged “Crestmoor knew, or should have known, that Krieger harassed and acted inappropriately toward other employees prior to Krieger’s harassment and assault on [her].” Her allegation of negligent supervision claimed: “Crestmoor, its agents, board members, servants, and employees were negligent in failing to properly supervise and control the activities of Krieger.” Her allegation of negligent retention claimed: “Crestmoor, its agents, board members, servants, and employees were negligent in retaining and failing to terminate Krieger.” As a proximate cause of Crestmoor’s negligent supervision and retention of Krieger, Cottrell asked for damages.

Crestmoor purchased a contract of insurance through IMT Insurance Company (IMT). This policy was in force at the time of the alleged incident. Although Crestmoor and Krieger timely requested IMT defend them from the claim, IMT denied the request asserting there was no coverage under the terms and provisions of the insurance contract existing between IMT and Crestmoor. IMT filed a petition for declaratory judgment requesting judgment that it did not have a duty to defend or indemnify Crestmoor or Krieger under its policy of insurance. IMT also named Cottrell as a defendant.

The parties submitted the coverage case to the court as a bench trial on stipulated facts. The parties stipulated the IMT insurance policy did not provide coverage for the claims against Krieger, individually, or for the claims against Crestmoor based on theories other than negligent supervision and retention. Therefore, the issue before the district court was whether the IMT policy provided coverage for the negligent supervision and retention claims brought against Crestmoor. The district court determined insurance coverage existed for the negligent supervision and retention claims requiring IMT to defend and indemnify Crestmoor on those claims. IMT appeals.

II. Issue.

Although IMT raises numerous issues on appeal, one is dispositive: whether the amendatory endorsement exclusion, which provides “[t]his insurance does not apply under any of the coverages to damages arising out of ... the liability of the insured for the misconduct of ... any other person,” is applicable to this case.

III. Scope of Review.

“A declaratory judgment action tried at law limits our review to correction of errors at law. We are bound by well-supported findings of fact, but are not bound by the legal conclusions of the district court.” Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571, 575 (Iowa 2004) (citing United Fire & Cas. Co. v. Shelly Funeral Home, Inc., 642 N.W.2d 648, 651 (Iowa 2002)).

IV. Analysis.

General Principles of Insurance Contract Construction and Interpretation. We have long adhered to the following principles regarding interpretation and construction of insurance contracts:

“The cardinal principle in the construction and interpretation of insurance policies is that the intent of the parties at *496the time the policy was sold must control. Except in cases of ambiguity, the intent of the parties is determined by the language of the policy. ‘An ambiguity exists if, after the application of pertinent rules of interpretation to the policy, a genuine uncertainty results as to which one of two or more meanings is the proper one.’ ”

Am. Family Mut. Ins. Co. v. Corrigan, 697 N.W.2d 108, 111 (Iowa 2005) (quoting LeMars Mut. Ins. Co. v. Joffer, 574 N.W.2d 303, 307 (Iowa 1998)). “Where neither party offers any extrinsic evidence concerning the meaning of the policy language, the process of construing or interpreting the meaning of the words used is a matter of law for the court to decide.” Nationwide Mut. Ins. Co. v. Kelly, 687 N.W.2d 272, 274 (Iowa 2004).

Because insurance policies are adhesion contracts, we construe ambiguous terms in the insured’s favor. Cairns v. Grinnell Mut. Reins. Co., 398 N.W.2d 821, 824 (Iowa 1987); see also Joffer, 574 N.W.2d at 307 (stating, “[exclusions from coverage are construed strictly against the insurer”). “It is therefore incumbent upon an insurer to define clearly and explicitly any limitations or exclusions to coverage expressed by broad promises.” Cairns, 398 N.W.2d at 824. Even in cases of doubt as to whether a claim is covered by the policy, the doubt must be resolved in the insured’s favor. N. Star Mut. Ins. Co. v. Holty, 402 N.W.2d 452, 454 (Iowa 1987).

The Amendatory Endorsement Exclusion. The policy of insurance issued to Crestmoor contains an amendatory endorsement that states:

This insurance does not apply under any of the coverages to damages arising out of:
a. misconduct by an insured, or
b. the liability of the insured for the misconduct of another insured or any other person.

(Emphasis omitted.) The policy endorsement includes a definition of “misconduct”:

Misconduct as used in this endorsement means sexual misconduct, sexual molestation, sexual abuse, non-consensual sexual activity, or the physical or mental abuse of any person.

(Emphasis omitted.)

Cottrell claims she is entitled to damages because Krieger made inappropriate sexual comments to her, touched her inappropriately, and sexually assaulted her. These claims clearly constitute misconduct under the policy endorsement’s definition. Paragraph “a” of the amendatory endorsement exclusion does not exclude coverage, however, because Cottrell is not alleging misconduct by Crestmoor. Her claims against Crestmoor are for negligent supervision and retention of Krieger, whose misconduct allegedly caused her damages.

We hold under paragraph “b” of the amendatory endorsement exclusion, coverage for Crestmoor’s negligent supervision and retention of Krieger is excluded. Crestmoor is liable for Cottrell’s damages only if Krieger committed the underlying acts alleged by her. A necessary element of a claim for negligent supervision or retention is an underlying tort or wrongful act committed by the employee. Kiesau v. Bantz, 686 N.W.2d 164, 172 (Iowa 2004). In a claim of negligent retention and supervision, the cause of action arises from the employer’s own tortious conduct. Id. at 173. “[T]he underlying tort or wrongful conduct is simply a link in the causal chain leading to compensable damages.” Id.

Paragraph “b” of the amenda-tory endorsement exclusion applies “to damages arising out of ... the liability of the insured for the misconduct of ... any *497other person.” We narrowly construe the phrase “damages arising out of’ to mean only those injuries proximately caused by the liability of the insured. Kalell v. Mut. Fire & Auto. Ins. Co., 471 N.W.2d 865, 868 (Iowa 1991); accord Corrigan, 697 N.W.2d at 112-13 (holding because the claim of negligent supervision alleged against one insured was not independent of the other insured’s excluded wrongful acts, all theories of liability arose out of the wrongful conduct of the other insured and coverage was therefore excluded). The phrase “the liability of the insured” refers to the theories of recovery alleged in the claim of the injured party. In the present case, the theories of recovery are negligent supervision and retention. The phrase “for the misconduct of ... any other person” means misconduct, as defined by the exclusion, caused by any person. In the present case, the misconduct is the inappropriate sexual comments, inappropriate touching, and sexual assault allegedly committed by Krieger, who qualifies as “any other person.”

The claims of negligent supervision and retention, the basis of Crestmoor’s liability, are dependent on the wrongful conduct of Krieger; consequently, the damages allegedly incurred by Cottrell arose out of the liability of Crestmoor and the wrongful conduct of Krieger. The alleged wrongful conduct of Krieger, the inappropriate sexual comments, inappropriate touching, and sexual assault, is misconduct under the amendatory exclusion. Therefore, the amendatory exclusion excludes coverage for Crestmoor, because Krieger qualifies as “any other person” under the exclusion.

Cottrell also argues that the sev-erability-of-interests clause of the policy precludes us from holding paragraph “b” of the amendatory endorsement exclusion applies to her claim. She relies on our decision in Shelly Funeral Home, where we held the severability-of-interests clause required us to apply the policy from the perspective of the insured seeking coverage. 642 N.W.2d at 654. The severability-of-interests clause in the IMT policy provides:

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part or the first Named Insured, this insurance applies:
(a) As if each Named Insured were the only Named Insured; and
(b) Separately to each insured against whom claim is made or “suit” is brought.

We recently rejected a similar argument. Corrigan, 697 N.W.2d at 117.

In Corrigan, Mark Francke seriously injured an eight-month-old child left in his care, while he operated a daycare business in the home of his father, Harold Francke. Id. at 110. Mark ultimately pled guilty to child endangerment. Id. The child’s parents filed suit against Mark and Harold seeking damages for the injuries to their son. Id. They based their claims against Harold on his failure to warn them of the danger that Mark presented, Harold’s failure to supervise, monitor, or otherwise take action to discover Mark was a danger, and for knowingly allowing dangers to exist at the daycare that created a substantial risk of harm to children on the premises. Id.

Harold’s insurance policy contained a criminal acts exclusion. It provided, “We will not cover bodily injury or property damages arising out of ... violation of any criminal law for which any insured is convicted.” Id. at 112. The policy also contained a severability-of-interests clause similar to the clause contained in Crestm-oor’s policy. Id. at 115. After considering the argument that the severability-of-in-*498terests clause required the company to provide coverage, we concluded:

that even though the severability-of-in-terests clause requires that we apply the criminal acts exclusion from the viewpoint of Harold, the plain language of the exclusion mandates that we consider whether the claims made against Harold include as an element conduct by any insured that is a violation of the criminal law.

Id. at 117.

The same result is required in the present case. Even though we are required to apply the amendatory endorsement exclusion solely from the viewpoint of Crestm-oor, the plain language of the exclusion requires that we consider whether the claims made against Crestmoor include as an element misconduct, as defined by the exclusion, by any other person. Therefore, the damages that Cottrell seeks to recover from Crestmoor arise out of Krieger’s misconduct, as defined by the amendatory endorsement exclusion; thus, the policy does not provide coverage.

V. Disposition.

We reverse the decision of the district court requiring IMT to defend and indemnify Crestmoor because the amendatory endorsement exclusion precludes coverage for Cottrell’s claims for negligent supervision and retention against Crestmoor based on the inappropriate sexual comments, inappropriate touching, and sexual assault committed by Krieger. Accordingly, we remand the case to the district court to enter judgment in favor of IMT.

REVERSED AND CASE REMANDED WITH INSTRUCTIONS.

All justices concur except CADY, J., who dissents.