Plaintiffs Billy Bramblett, James Lacey, Dion Lumadue, and Nicholas Knaack sued Allied World Specialty Insurance Company after Allied refused to defend American Behavioral Health Systems (ABHS) against a state court complaint. The plaintiffs had reached a settlement with ABHS, which assigned its rights under the insurance policy to them. The underlying complaint included allegations of sexual harassment, gender discrimination, and sexual abuse. Allied denied coverage entirely, relying on a 'Sexual Abuse Exclusion' in the policy. The district court granted summary judgment to Allied, ruling that the exclusion barred coverage for the entire complaint. The plaintiffs appealed, arguing that the exclusion was ambiguous and that the policy should provide partial coverage for the non-excluded allegations.
The Ninth Circuit applied Washington law, which mandates that an insurer must defend an insured if the complaint could conceivably be covered. The court focused on the ambiguity of the 'Sexual Abuse Exclusion,' which barred coverage for claims 'relating to' sexual molestation or abuse. The court noted that the policy did not define these terms. Using ordinary dictionary definitions, the court found that 'molestation' and 'sexual abuse' typically require physical contact and force. Consequently, the plaintiffs' allegations of verbal harassment, excessive strip searches without touching, and unwanted hugging did not clearly fall within the exclusion. The court rejected Allied's argument that the allegations were too intertwined to separate. It held that a jury could conceivably find liability based only on covered allegations, such as gender discrimination based on verbal harassment. Because the policy could conceivably cover the complaint in part, Allied breached its duty to defend. Furthermore, the court found that Allied acted in bad faith by denying the defense based on an unreasonable interpretation of the policy that favored the insurer over the insured. This unreasonable denial also violated the Washington Insurance Fair Conduct Act (IFCA). The court affirmed the district court's dismissal of claims based on procedural violations, as the plaintiffs failed to prove injury from those specific violations.
The case is remanded to the district court with instructions to grant partial summary judgment in favor of the plaintiffs on the breach of contract claim regarding the duty to defend. The court also instructed the district court to grant summary judgment on the bad faith and IFCA claims. The trier of fact must now determine the appropriate damages. Additionally, the plaintiffs are entitled to the remedy of coverage by estoppel for the full amount of the underlying settlement. The insurer is allocated costs.
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