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(Article from Insurance Law Alert, July/August 2015)

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Reversing a Virginia district court decision, the Fourth Circuit ruled that an insurer had  no duty to defend a suit alleging that a university was vicariously liable for the intentional acts of its agents.  The Fourth Circuit held that a separation of insureds provision does not require an insurer to provide coverage for claims alleging the insured’s vicarious liability for the intentional acts of its agents.  Liberty Univ., Inc. v. Citizens Ins. Co. of Am., 2015 WL 4153840 (4^th Cir. July 10, 2015).

The coverage dispute arose from an alleged kidnapping.  The underlying plaintiff claimed that Liberty University and its agents helped a parent abscond with a child to Nicaragua.  The complaint alleged that Liberty University was directly liable for its involvement in the kidnapping scheme and vicariously liable for the intentional acts of its agents.  A Virginia district court ruled that Citizens Insurance Company was required to defend Liberty University.  The district court explained that a Separation of Insureds provision requires each insured to be treated as if it had separate coverage, so that excluded conduct by one insured does not preclude coverage for other insureds.  The court reasoned that although the complaint alleged intentional conduct against the individual agents of Liberty University, a Separation of Insureds provision prohibited the court from imputing that intent to Liberty University.  The Fourth Circuit reversed.

The Fourth Circuit ruled that the underlying complaint did not plead an “occurrence” notwithstanding the Separation of Insureds provision.  The court explained that the intentions of the individual defendants were imputed to Liberty University because, under Virginia law, the expectations and intent of agents are imputed to their principal.  The court further held that the Separation of Insureds provision does not alter this rule of law, stating that, “[a]lthough the Separation of Insureds provision requires the coverage claims of each named insured to be evaluated separately . . ., it does not displace Virginia’s rule that an agent’s intentionally tortious act cannot be ‘unexpected’ by the principal who is vicariously liable for the act.” 

Significantly, the court distinguished cases in which an underlying complaint alleges liability for intentional acts based on a principal’s negligent supervision.  In such cases, a separation of insureds provision may give rise to coverage if the principal’s liability sounds in negligence, rather than vicarious liability for the agent’s intentional acts.