Diocese of Winona v. Lloyd's London , 89 F.3d 1386 ( 1996 )

___________
Nos. 94-3216, 95-1419, 95-1422 and 95-1425
___________
Diocese of Winona, a Minnesota *
non-profit religious *
corporation, *
*
Plaintiff-Appellee/ *
Plaintiff/ *
Plaintiff/Appellant, *
*
v. *
*
Interstate Fire & Casualty *
Company; *
*
Defendant-Appellees, *
*
Those Certain Underwriters at *
Lloyd's, London, signatory to *
Policies Nos. SL 3402 and *
SLC 5421; *
*
Defendant-Appellant, *
*
Interstate Fire & Casualty * Appeal from the United States
Company; Those Certain Under- * District Court for the
writers at Lloyd's, London, * District of Minnesota.
signatory to Policies Nos. *
SL 3402 and SLC 5421; *
*
Defendants-Appellees, *
*
Centennial Insurance Company, *
*
Defendant, *
________________________________*
*
Archdiocese of St. Paul and *
Minneapolis; Church of the *
Immaculate Conception, in *
Columbia Heights, Minnesota; *
Church of the Risen Savior, in *
Apple Valley Minnesota, *
*
Plaintiffs-Appellees/ *
Plaintiffs-Appellants/*
Plaintiffs, *
v. *
*
Underwriters at Lloyd's, London;*
*
Defendants-Appellants/*
Defendants-Appellees, *
*
Underwriters at Lloyd's, London;*
Interstate Fire & Casualty *
Company; Aetna Casualty and *
Surety Company, *
*
Defendants-Appellees, *
*
Interstate Fire & Casualty *
Company; Aetna Casualty and *
Surety Company, *
*
Defendants-Appellees, *
*
Underwriters at Lloyd's, London;*
Interstate Fire & Casualty *
Company; *
*
Defendants-Appellees, *
*
Aetna Casualty and Surety *
Company, *
*
Defendant-Appellant. *
___________
Submitted: February 12, 1996
Filed: July 31, 1996
___________
Before McMILLIAN, LAY and HANSEN, Circuit Judges.
___________
LAY, Circuit Judge.
Underwriters at Lloyd's, London and Centennial Insurance Company
(Lloyd's) appeal from the district court's grant of a declaratory judgment
that the Diocese of Winona and the Archdiocese of St. Paul and Minneapolis
are entitled to insurance coverage for compensatory damages awarded by a
state court jury to Thomas Mrozka who had been sexually abused by a priest,
Father Tom Adamson.
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The primary basis of the present appeal by Lloyd's, joined by cross-
appellant Interstate Fire and Casualty (Interstate), is that the abuse was
"expected" by the insureds, thus, there was no coverage within the terms
of their insurance policies. The Diocese and the Archdiocese, as well as
Interstate and Aetna Casualty and Surety (Aetna), have filed cross-appeals
relating to the allocation of coverage among the three carriers and the
payment of attorneys' fees. The Diocese and the Archdiocese also appeal
the number of "self-insured retentions" they must pay. We hold that the
district court erred in finding coverage by Lloyd's and Interstate
throughout the period Mrozka was abused. We discuss the remaining claims
on appeal relevant only to that holding. We affirm in part, reverse in
part, and remand to the district court.
BACKGROUND
The circumstances surrounding the underlying dispute relate to a
pedophilic priest who subjected numerous children to prolonged periods of
sexual molestation. The detailed facts of this case are set forth in
detail in the district court's opinion, Diocese of Winona v. Interstate
Fire & Casualty Co., 858 F. Supp. 1407 (D. Minn. 1994), and the state
court's opinion in the underlying litigation, Mrozka v. Archdiocese of St.
Paul & Minneapolis, 482 N.W.2d 806 (Minn. Ct. App. 1992).
The Employment of Father Adamson
From 1958 until 1975, Father Adamson served as a priest in various
school and parish assignments in the Diocese of Winona. In 1975, the
Diocese transferred Adamson to the Archdiocese, where he served in
different positions until January 1985. Adamson's ministry was terminated
by the Archdiocese in 1985 because of publicity and litigation surrounding
a sexual abuse claim unrelated to Mrozka's suit. While Adamson remained
a priest, he did not serve at another parish in the Diocese or Archdiocese
after 1985.
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Mrozka sued the Diocese and Archdiocese, alleging that they
negligently and recklessly supervised Adamson, allowing Adamson to sexually
abuse Mrozka when he was a minor. Both the Diocese and the Archdiocese
conceded negligence but disputed their recklessness. Mrozka, 482 N.W.2d
at 810. The jury awarded Mrozka $821,250 in compensatory damages and,
finding recklessness, awarded $2,700,000 in punitive damages. The punitive
damages award was later reduced to $187,000, which was upheld on appeal.2
1
The parties involved paid the judgment pursuant to an interim funding
agreement which preserved their rights against each other. Diocese, 858
F. Supp. at 1413.3
The Insurance Policies
During the period Mrozka was abused, the Diocese and the Archdiocese
had standard Comprehensive General Liability (CGL)
1
The district court ruled that the punitive damages award was
not covered by the insurance policies, and neither the Diocese nor
the Archdiocese appeals this ruling.
2
In this regard, the Minnesota Court of Appeals found
sufficient evidence "from which the jury could conclude that Church
officials repeatedly and knowingly placed Adamson in situations
where he could sexually abuse boys and then failed to properly
supervise him and disclose his sexual problem." 482 N.W.2d at 813(emphasis added). The court found that this evidence constituted
"clear and convincing evidence that the acts of the defendant[s]
show a willful indifference to the rights and safety of others"
sufficient to justify punitive damages. Id. at 812.
3
The jury in the underlying state court action was not asked
to apportion fault between the Diocese and Archdiocese; rather,
defendants stipulated between themselves that the Archdiocese is
liable for 45 percent and the Diocese for 55 percent of the
compensatory damages. Although none of the insurers is a part of
this stipulation, none challenge it. Diocese, 858 F. Supp. at
1413.
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policies, covering, among other things, personal injury. Each of the
4
policies is an "occurrence" based policy.
Aetna insured the Archdiocese from July 1, 1979 through August 30,
1980. Aetna's policy covers "ultimate net loss in excess of . . . $10,000
which the insured shall become legally obligated to pay as damages because
of . . . personal injury . . . caused by an occurrence." An occurrence is
defined as "an accident, including continuous or repeated exposure to
conditions, which results in personal injury . . . which is neither
expected nor intended from the standpoint of the insured[.]" Aetna's App.
at 106 (emphasis added). The policy applies only to personal injury "which
occurs during the policy period," and has a $3,000,000 limit of liability
for each occurrence.
On September 1, 1980, the Archdiocese replaced Aetna's program with
a Protected Self-Insurance Program. Under this program, the Archdiocese
served as a self-insurer up to $100,000 per occurrence. This feature is
known as a "self-insured retention," or "SIR." The Archdiocese purchased
two layers of insurance for losses in excess of the SIR. Lloyd's provided
the first layer, with a limit of $100,000 per occurrence, and Interstate
provided the second, with a limit of $4,800,000 per occurrence.
Accordingly, in the event of a covered loss for $5,000,000, the Archdiocese
would be liable for the first $100,000, Lloyd's would be liable for the
next $100,000, and Interstate would be liable for the next $4,800,000. Any
losses greater than $5,000,000 would be uninsured.
Lloyd's policies are similar to Aetna's in that they cover damages
"on account of personal injuries . . . arising out of any occurrence
happening during the period of insurance." In language
4
Occurrence-based policies, the traditional form of CGL
insurance, cover any occurrence that happens within the policy
period, regardless of when the insured submits the claims. See
Hartford Fire Ins. Co. v. California, 509 U.S. 764, 771 (1993).
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similar to that in Aetna's policy, the Lloyd's policies define an
occurrence as "an accident or a happening or event or a continuous or
repeated exposure to conditions which unexpectedly and unintentionally
results in personal injury . . . during the policy period." Aetna's App.
at 138 (emphasis added). Lloyd's policy periods were one year long and
began on September 1. Beginning on September 1, 1986, Lloyd's policies
specifically excluded coverage for personal injury caused by sexual abuse.
Interstate's policies generally incorporated the terms of Lloyd's
policies. For purposes of this litigation, the only difference between
Interstate's and Lloyd's policies is that Interstate's included a sexual
abuse exclusion beginning on September 1, 1985, a year earlier than
Lloyd's.
The insurance purchased by the Diocese throughout the relevant period
was essentially identical to the Archdiocese's Protected Self-Insurance
Program. The insurers were Lloyd's and Interstate. The primary
differences are that the Diocese's policy periods began on July 1 of each
year; its SIR per occurrence was $75,000 before July 1, 1983; and its SIR
per occurrence was $100,000 after that date. Lloyd's covered the next
$125,000 per occurrence up to July 1, 1983, after which it covered the next
$100,000. In all of the relevant policy periods Interstate covered the
next $4,800,000 per occurrence. Aetna did not insure the Diocese at any
time relevant to this appeal.
OCCURRENCES
The district court found the damage resulting from abuse was not
"expected", thus, there was an "occurrence" within the time period of each
policy. Based on Northern States Power Co. v. Fidelity & Casualty Co., 523
N.W.2d 657 (Minn. 1994) ("NSP"), the district court concluded that
Adamson's abuse constituted a number of occurrences which merged into "one
continuing occurrence." As
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such, the court found coverage was afforded by each policy of the various
insurers, except for the policy periods that contained a sexual abuse
exclusion.5
5
Lloyd's urges that since there was only "one continuous
occurrence," it should be responsible for at most one insurance
policy limit. This misreads the district court's opinion as well
as NSP.
The district court found the reasoning of NSP, involving
environmental contamination producing one continuous occurrence,
was analogous to the repetitive sexual abuse by Adamson. In
understanding this analysis, it is important to separate the
occurrence from the injury in fact. The occurrence results in the
injury, but the events constituting the occurrence are distinct
from the resulting injury. In the context of the present case, the
occurrence is the continuous and repeated exposure of Mrozka to the
negligent supervision of Father Adamson by both the Diocese and the
Archdiocese. The abuse is the actual injury, not the occurrence.
Under Minnesota law, it is the time of the actual injury within the
effective dates of the policy which triggers the policy. See NSP,
523 N.W.2d at 662. As Judge Weinstein explained in his thorough
discussion of the number of occurrences in the Agent Orange case,
"the fact that an occurrence takes place at the same time as one or
more policy periods is irrelevant to coverage, since it is the time
of injury that triggers coverage." See Uniroyal, Inc. v. Home Ins.
Co., 707 F. Supp. 1368, 1392 (E.D.N.Y. 1988). The "occurrence" and
the "injury" it produces need not have any relationship to each
other in time or place. See id. at 1387. In other words, the time
of the occurrence producing the injury is irrelevant to the
triggering of the policy.
This analysis by the district court is relevant to determining
the number of SIRs to be applied in each policy period. NSP and
Uniroyal, in effect, create a legal fiction that a single,
continuous occurrence spanning multiple policy periods constitutes
a single occurrence in each policy period. See Uniroyal, 707 F.
Supp. at 1393; NSP, 523 N.W.2d at 664. In Uniroyal, the insurance
carrier urged that each injury constituted a separate occurrence.
Judge Weinstein rejected that view. He made clear that an ongoing
exposure to a hazardous condition must be treated as a single,
continuous occurrence to avoid the absurd situation where a
condition causing hundreds of thousands of injuries would
constitute hundreds of thousands of occurrences, forcing the
insured to pay for hundreds of thousands of SIRs. 707 F. Supp. at
1383. In both NSP and Uniroyal, the insured paid one SIR per
policy period.
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Lloyd's and Interstate, however, assert that the damages arising from
Adamson's abuse was not covered because (1) the jury's finding of
recklessness in the state action collaterally estops the Diocese and the
Archdiocese from arguing they did not expect the abuse, and alternatively,
(2) the Diocese and the Archdiocese expected the abuse within the meaning
of the insurance policies, thus, there was no occurrence and no coverage.
We agree with the district court's analysis finding that collateral
estoppel does not apply,6 thus, we pass directly to the second issue as to
whether the Diocese and the Archdiocese expected, within the terms of the
policies, the sexual abuse.
Each of the insurance policies defines "occurrence" in a similar
fashion. An "occurrence" requires an injury or event or happening
resulting in injury that is neither expected nor intended by the insured.
Although Lloyd's and Interstate do not assert the Diocese and the
Archdiocese intended that Adamson abuse Mrozka, they do argue those damages
were "expected" under the terms of the policies. Interpreting Minnesota
case law, this court has stated:
"For the purposes of an exclusionary clause in an insurance
policy the word 'expected' denotes that the actor knew or
should have known that there was a substantial probability that
certain consequences will result from his actions . . . The
results cease to be expected and coverage is present as the
probability that the consequences will follow decreases and
becomes less than a substantial probability."
6
The district court correctly reasoned that the finding of the
state court jury of "recklessness" by the Diocese and the
Archdiocese, for purpose of awarding punitive damages, is a
separate and distinct issue from insurance coverage. See Diocese,
858 F. Supp. at 1417-19 (recklessness reflects degree of
culpability--such as an unreasonable but slight risk of extreme
harm--rather than likelihood of occurrence); but cf. Ohio Casualty
Ins. Co. v. Terrace Enters., Inc., 260 N.W.2d 450, 452-53 (Minn.
1977) (suggesting in dicta that a reckless act may not constitute
an occurrence).
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Auto-Owners Ins. Co. v. Jensen, 667 F.2d 714, 720 (8th Cir. 1981) (quoting
City of Carter Lake v. Aetna Casualty & Sur. Co., 604 F.2d 1052, 1058-59
(8th Cir. 1979)); accord Bituminous Casualty Corp. v. Tonka Corp., 9 F.3d
51, 53 (8th Cir. 1993), cert. denied, 114 S. Ct. 1834 (1994); see also
Continental W. Ins. Co. v. Toal, 244 N.W.2d 121, 125 n.3 (Minn. 1976).
This standard involves a higher degree of certainty than reasonable
foreseeability. Tonka, 9 F.3d at 53.
The issue then is whether a reasonably prudent person in the position
of the Diocese and the Archdiocese knew or should have known that Adamson's
abuse of Mrozka was substantially probable as a result of the continuing
exposure caused by their willful indifference. See Sylvester Bros. Dev.
Co. v. Great Cent. Ins. Co., 480 N.W.2d 368, 372 (Minn. Ct. App. 1992).
In defining substantial probability, this court has stated, "[t]he
indications must be strong enough to alert a reasonably prudent man not
only to the possibility of the results occurring but the indications also
must be sufficient to forewarn him that the results are highly likely to
occur." Carter Lake, 604 F.2d at 1059 n.4.
The district court determined that at some point before Mrozka's
abuse in 1979 Adamson was "more likely than not" to continue to abuse boys,
however, the court was unable to conclude that a reasonable person would
have determined before January 1985 that further pedophilia on Adamson's
part was "substantially probable or highly likely to occur." Diocese, 858
F. Supp. at 1419. We disagree.
The Diocese and the Archdiocese argue that this court may not reverse
the district court finding that the abuse was not substantially probable
unless such finding can be said to be clearly erroneous. See, e.g.,
Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir. 1981).
However, this argument overlooks that the district court's conclusion--that
Adamson's
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abuse of Mrozka was not substantially probable--is a mixed question of fact
and law. Here the facts are undisputed. Where the facts upon which
liability is claimed or denied under an insurance policy are undisputed and
the existence or amount of liability depends solely upon a construction of
the policy, the question presented is one of law and this court reviews the
finding de novo. See Tonka, 9 F.3d at 52; Auto-Owners, 667 F.2d at 721.
Substantial Probability
A review of Minnesota and Eighth Circuit decisions recognizes the
fundamental premise that an insurance policy protects an insured from
fortuitous loss.7 For example, if a building contractor suffers a loss
because of unknowing mistakes or carelessness, the resulting damage is
intended to be covered. If, however, the loss is incurred due to
intentional acts, no coverage is intended. See Bartlett, 240 N.W.2d at 313
(holding that contractor who knowingly violated contract specifications
consciously controlled risk of loss, precluding an "occurrence"). While
an insured has a reasonable expectation in securing a CGL policy that the
policy will cover some negligent acts, it does not necessarily follow that
all negligent acts are covered. This court has held under Minnesota law
that there may be instances when, although an insured was negligent, she
knew or should have known that resulting damage was expected. See Auto-
Owners, 667 F.2d at 719. The difference between damages that are
reasonably foreseeable and damages that are substantially probable is one
of degree of expectability. Id. at 720.
7
Insurers distribute losses among large numbers of
policyholders. They are able to properly set premiums and supply
coverage only if those losses are uncertain from the standpoint of
any single policyholder. If a single insured is allowed to
consciously control the risks covered by the policy, a central
concept of insurance is violated. Bituminous Casualty Corp. v.
Bartlett, 240 N.W.2d 310, 313 (Minn. 1976), overruled on other
grounds, Prahm v. Rupp Const. Co., 277 N.W.2d 389 (Minn. 1979).
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Thus, for example, this court held under the substantially probable
test that if an insured is alerted to a problem, its cause, and knows or
should have known of the likelihood of the problem's reoccurrence, it
cannot ignore such problem and then look to its insurer to reimburse it for
the liability incurred by reason of such inaction. Carter Lake, 604 F.2d
at 1059 (no occurrence where city failed to repair sewer equipment after
repeated equipment failures and took calculated risk that loss would not
occur). Relatedly, if an insured undertakes a course of action, knows of
the substantial risks involved, proceeds in light of this knowledge, and
disregards the known hazard, the Minnesota Court of Appeals has held that
no "occurrence" will lie. Farmers Union Oil Co. v. Mutual Serv. Ins. Co.,
422 N.W.2d 530, 533 (Minn. Ct. App. 1988) (no occurrence for damage to crop
where farming cooperative sprayed non-approved herbicide with knowledge
that use of the mixture was illegal and that there was a chance the mixture
would kill the crop).8
This court recently applied these concepts to determine whether
damage was "expected" in Tonka. In Tonka, a manufacturer knowingly dumped
manufacturing solvents in its parking lot and on
8
The Minnesota Court of Appeals cited with approval the
district court's conclusion that notwithstanding the fact that "no
damage of any sort was intended," the cooperative was reckless and
there was no occurrence:
In the current case, the insured had full access to
product use instruction and knew for a fact that the
requested use [was not federally approved]. [The co-
op's] employees knew the requested herbicide was often
used to kill the crop now being claimed as a loss. The
resultant damage should have been highly expected and a
contrary belief is absurd in light of the admitted
knowledge of the insured. . . . The knowledge of the
insured implies a high expectation of crop damage that is
not an occurrence under the insurance policy now at
issue.
Farmers Union, 422 N.W.2d at 532 (quoting district court).
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adjacent land notwithstanding its knowledge that dumping the solvents on-
site was dangerous to humans and environmentally harmful. We stated:
In these circumstances, we agree with the district court
that Tonka knew or should have known that there was a
substantial probability that its on-site dumping of liquid
wastes containing TCE and other solvents would cause property
damage. Therefore, the damage that did result was "expected"
as a matter of Minnesota law, and there was no covered
"occurrence" under the Insurers' policies.
Id. at 54 (emphasis added). With these concepts in mind, we now turn to
the basically undisputed facts.
The Diocese
The record shows that prior to Adamson's abuse of Mrozka in 1979,
there were eight separate cases of sexual abuse or attempted abuse reported
to the Diocese and admitted to by Adamson. The admitted abuse began in
1961. In 1964, the Diocese first learned that Adamson, in that same year,
had attempted to sexually molest a boy on five or six occasions. Adamson
admitted to the Vicar General of the Diocese that he had touched the youth.
Tr. at 762-76. In 1966, the Diocese learned of an incident in which
Adamson asked two boys to disrobe. The boys reported the incident to a
priest in the Diocese; Adamson again admitted the solicitation. In 1973,
Adamson tried to grab a boy's genitals while they were in a swimming pool.
The boy told a priest about the attempted abuse, who in turn told the
Bishop of the Diocese. At the time same, the Bishop received an anonymous
phone call about Adamson's association with boys. Once again, Adamson
admitted the attempted abuse. In 1974, while sitting in a sauna or
swimming pool, Adamson touched another boy's genitals. This boy told
others. The Bishop again met with Adamson who admitted the abuse. In
addition, in 1974, the Diocese received additional reports that Adamson had
sexually
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abused and victimized over twenty children since 1964. In 1974, the Bishop
also learned that Adamson had been sexually abusing a boy for over ten
years. In response to this report by the victim's brother, Adamson
admitted to sexually abusing the youth, and also admitted there had been
another "problem" with a "younger person" in the early 1960's. Tr. at
1211.
Thus, within the fifteen years prior to Adamson's abuse of Mrozka,
the Diocese was alerted to Adamson's sexual abuse of boys which occurred
as a direct result of the Diocese's inadequate supervision. In response
to these incidents, the Diocese failed to take adequate remedial measures.
The typical response was to transfer Adamson to another school or parish,
where he continued to have access to and sexually molest children.
Furthermore, although the Diocese required that Adamson receive treatment
for his pedophilia as early as 1966, the Diocese was fully aware this
treatment was not effective because Adamson continued to abuse children.
On two separate occasions in 1974, the Personnel Board of the Diocese noted
that Adamson was "having a recurring problem" and needed in-patient
treatment. Pl. Tr. Exh. No. 3. Even after Adamson underwent in-patient
treatment, the Diocese knew it was ineffective. Upon conclusion of
Adamson's in-patient treatment, one of his doctors said that Adamson was
only "slightly improved." Tr. at 1731. Indeed, the Diocese itself was
more than merely skeptical that Adamson was rehabilitated. The Bishop
testified that he "didn't have any confidence" in the treatment program
that Adamson attended. Tr. at 1218. Furthermore, in spite of the
importance Adamson's doctors placed on continuing out-patient therapy, the
Diocese knew that Adamson was not continuing his therapy. In response to
questioning by a nun about Adamson's sexual molestation of a youth, the
Bishop stated that although Adamson had received the finest treatment
available, Adamson himself admitted that he was unable to control himself.
Moreover, in 1975, the Bishop concluded that there were questions about
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Adamson's relationships with boys in each of the communities in which he
had served.
In 1975, the Bishop pressured Adamson into taking a leave of absence
to undergo counseling in St. Paul, transferring him to the Archdiocese.
The Bishop refused to reappoint Adamson in the Diocese until Adamson's
counselor made the recommendation that the treatment program had been
effective, and that Adamson could be responsibly entrusted with pastoral
care. The Bishop testified that in formulating this decision he felt the
needs of Adamson needed to be balanced against the needs of all people in
the diocese, including the needs of the parishioners "of whatever age" to
be free of Adamson's "sexuality problem." Tr. at 1297. Notwithstanding
the Bishop's refusal to appoint Adamson to another parish in the Diocese
until he could be entrusted with pastoral care, the Archbishop, with the
Bishop's approval, appointed Adamson associate pastor of St. Thomas Aquinas
Church in 1976, and head pastor at Immaculate Conception Church in 1979.
Adamson, while he was a priest at Immaculate, began abusing Mrozka in
October 1979. The abuse of Mrozka continued on a frequent basis until the
spring of 1984, and thereafter on a sporadic basis until 1987.
In light of these undisputed facts, we hold as a matter of Minnesota
law that Adamson's abuse of Mrozka was expected by the Diocese for purpose
of determining whether there was an occurrence under the policies in
question. A reasonably prudent person in the position of the Diocese
should have known there was a substantial probability that Adamson would
continue to sexually abuse children. The Diocese knew of Adamson's sexual
abuse of boys over fifteen years. The Diocese knew it was recurring. The
Diocese knew treatment was ineffective. The Diocese knew Adamson could not
control himself. The Diocese knew that he had molested boys in each and
every parish in which he served, yet allowed Adamson to be placed in the
Archdiocese in situations where he could continue to abuse. The fact that
the Diocese transferred Adamson to the
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Archdiocese in light of the needs of youthful parishioners to be free from
Adamson's "sexuality problem" severely undermines the Diocese's assertion
that further abuse was not substantially probable. A review of the record
as a whole contain overwhelming evidence that the Diocese knew or should
have known that Adamson's continued sexual abuse was highly likely to
reoccur. Under the circumstances, we hold as a matter of law there was no
occurrence within the meaning of the Diocese's insurance policies, and
consequently, no insurance coverage is available to the Diocese for damages
arising from Adamson's abuse of Mrozka.
The Archdiocese
After being transferred to the Archdiocese from the Diocese, Father
Adamson came to Minneapolis in 1975 to continue sexual counseling and to
complete his degree work. The district court found, on conflicting
evidence, that the Archbishop "apparently did not learn of [Adamson's
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pedophilia] until late 1980." Diocese, 858 F. Supp. at 1410.9 However,
the Bishop also testified that he
9
Other evidence suggested the Archbishop was informed of
Adamson's pedophilia as early as January 1975. Specifically, in an
October 1984 letter to the Archbishop, the Bishop wrote:
I am very sorry that Father Adamson's many talents
continue to be compromised because of his involvement
with juvenile males; and all the more so now that his
irresponsible conduct has now become a matter of public
record. . . . As you will recall, when I asked you to
consider helping Father Adamson in January of 1975 I
indicated that I could no longer ask him to accept
pastoral responsibilities in the Winona Diocese because
of this same type of problem.
Tr. at 1258-59. At trial, the Bishop was asked,
[W]hen you say, "because of this same type of problem,"
you are referring here to, are you not, Father Adamson's
involvement with juvenile males?
A. Yes. I would include [a previously abused juvenile
male] in that statement.
Q. Right. And you are saying here that when you
asked Archbishop Roach to consider helping
Father Adamson in January '75, you indicated to
him that you could no longer ask him to accept
responsibility for that reason?
A. Well again, I guess that's the indirection of my
first letter to Archbishop Roach that I did not
spell -- simply said he was coming to the Cities
to be involved in this consultation services
program. And in -- that is as specific as I
became with Archbishop Roach.
Id. at 1259.
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wrote the Archbishop a letter emphasizing Adamson's continued need for
therapy. Tr. at 1263. Further, the Bishop testified that while he never
told the Archbishop that Adamson "needed help," it was his perception that
"the implication would be that if he's in therapy there must be a problem."
Tr. at 1264.
In November 1980, it is undisputed the Archdiocese learned of
Adamson's pedophilia. Two boys notified a priest that Adamson had fondled
a young boy in a whirlpool. Within the next week, the father of the boy
met with the priest, and indicated he was concerned that several other
youths, all the same age as the fondling victim, may have been assaulted
by Adamson and gave the priest their names. The priest reported this
incident, among others, to the Chancellor of the Archdiocese. In the
Chancellor's meeting memorandum, prepared in November 1980, it is reported
that "Father Adamson has a number of young people stop to see him. They
usually use the private entrance of the pastor and their presence is never
mentioned." Tr. at 1776. Additionally, it is reported that Adamson had
two 13 or 14 year old boys spend the night in September or October of 1979,
and that this was known at the time to both the priest and the housekeeper
at Immaculate Conception.10
10
Father Wajda, a priest at Immaculate Conception, testified
as follows:
Well, I woke up in the morning and I was going out of my
room and across the hall are two guest rooms. At that
particular time I heard noise in one of the guest rooms
and I was not aware that there had been any house guests
to come to stay the night before. And a little bit later
on, the two boys had come out of that room.
Tr. at 1777.
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Furthermore, there was a report of Adamson taking showers with a number of
young boys on an afternoon when there was no school, which was reported to
the Chancellor at the time it occurred. Tr. at 1779. The report also
stated that "[Father Adamson] frequently takes young boys to the YMCA and
. . . fewer and fewer want to go, and find more and more excuses not to."
Tr. at 1781. Finally, the report stated that Father Wajda reported to the
Chancellor that "[t]here are a number of other things -- taking a young boy
by the name of Tom Maruska [sic] for overnights in Rochester. A kind of
world that centers on young boys and some late night going out and having
visitors in." Id.
After Adamson fondled the boy in the whirlpool in November 1980, the
Archbishop wrote to the Bishop of Winona in December 1980, stating that
Adamson had sexually molested a youth at Immaculate Conception, and that
Adamson would have to resign. The Bishop responded that he understood that
there was no alternative and that he "insisted on the same procedure in
January of 1975 after it became evident that the Hartford [treatment]
program had been rather pro forma." Tr. at 1323-24 (emphasis added). The
Bishop further wrote, "Naturally, I'm very sorry that the problem
reoccurred . . . ." Tr. at 1326 (emphasis added). In response to the
Archbishop's indication that Adamson would again be entering a treatment
program, the Bishop responded to the Archbishop "[p]lease God, [let] this
present program . . . help him resolve this long standing problem." Id.
(emphasis added). Adamson entered an in-patient treatment program, and was
assigned by the Archbishop to another parish within six weeks.
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We hold that Adamson's abuse of Mrozka was expected within the
meaning of the Archdiocese's insurance policies as of December 1980. The
Archdiocese had received numerous reports of abuse by Adamson. The
Archdiocese knew he fondled a boy in the whirlpool. The Archdiocese knew
Adamson had young boys spend the night and that Adamson engaged in a "kind
of world that centers on young boys and some late night going out and
having visitors in." Mrozka was identified as one of the boys.
Furthermore, as of December 1980, the Archbishop knew from the Bishop of
the Diocese that Adamson had previously been in treatment for a
"longstanding" and "reoccurring" problem, and knew, based on the more
recent incidents, that previous treatments under the direction of the
Diocese had not been effective. Nonetheless, the Archdiocese disregarded
these known risks by placing Adamson in another parish and continuing to
provide inadequate supervision, such that Adamson was able to continue
abusing Mrozka. The actions of the Archdiocese were repeated and knowing.
See Mrozka, 482 N.W.2d at 813. A review of the record as a whole contains
overwhelming evidence that the Archdiocese knew or should have known that
personal injury from child sexual abuse by continuing to allow Father
Adamson's access to children was highly likely to occur. Under the
circumstances, we hold there was no insurance coverage available to the
Archdiocese after December 1980 for damages arising from Adamson's abuse
of Mrozka.
Having decided that the repeated exposure of Mrozka to Adamson
resulting in abuse of Mrozka was expected by the Diocese at all relevant
times, we find no insurance coverage was afforded to the Diocese. We also
find the injury from the same exposure to conditions was not unexpected by
the Archdiocese after December 1980. Under these circumstances, we must
determine the extent to which the Archdiocese's insurance policies cover
the damages incurred.
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Allocation
The parties agree that Mrozka's abuse began in October 1979 and
continued until February 1987. Thus, it is undisputed that Mrozka suffered
"actual injury" in all policy periods, triggering the coverage of all such
policy periods. See NSP, 523 N.W.2d at 663.11 We have determined,
however, that there was no covered "occurrence" for purposes of insurance
coverage for the Archdiocese after December 1980, thus, the only insurance
coverage triggered are those in effect from October 1979 through December
1980: Aetna's through August 30, 1980, and Lloyd's and Interstate's
commencing September 1, 1980.
Under NSP, where insurers are held consecutively liable, and there
is no evidence allocating the timing of actual damages, the proper method
is to allocate damages pro rata by each insurer's "time on the risk." 523
N.W.2d at 662 (citing Insurance Co. of N. Am. v. Forty-Eight Insulations,
Inc., 633 F.2d 1212 (6th Cir. 1980), amended, 657 F.2d 814 (6th Cir. 1981),
cert. denied, 454 U.S. 1109 (1981)). Each triggered policy, therefore,
bears a share of the total damages proportionate to the time period it was
on the risk relative to the time period coverage was triggered. Forty-
Eight Insulations, 633 F.2d at 1224. The Archdiocese must bear its share
of the liability risk for the period in which it had no insurance coverage-
-that is, after December 1980. Id.Adamson's abuse of Mrozka lasted 89 months, from October 1979 through
February 1987. Aetna insured the Archdiocese from
11
Furthermore, as we discussed in footnote 5, supra, the court
in NSP also held that in situations in which multiple policies
involved where there was one continuous occurrence, the courts
should apply one full SIR or limit to each separate policy period.
523 N.W.2d at 664. Thus, under the rationale set forth in NSP, the
Archdiocese must assume the retained limit with respect to each of
the triggered policies.
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September 1979, through August 1980; thus, it is "on the risk" for eleven
of 89 months. Lloyd's and Interstate insured the Archdiocese from
September 1980 through December 1980, which is the time when Adamson's
abuse of Mrozka was no longer an occurrence for the purposes of coverage.
Thus, Lloyd's and Interstate are "on the risk" for four of 89 months.
The Judgment Against Aetna
A judgment was rendered against Aetna for $41,422. This is not
contested on appeal. The math used to reach the verdict was based on the
Archdiocese being responsible for 45 percent of the state court verdict of
$924,57012 resulting in the sum of $416,056.50. When this sum is
proportioned over 89 months, the allocation per month is $4,674. When
multiplied by the eleven months Aetna was on the risk the overall liability
is $51,422. Subtracting the Archdiocese's $10,000 SIR, the amount owed by
Aetna is $41,422. Aetna contributed $127,258 as a tentative share to pay
Mrozka. Therefore, it asserts that the sum owed Aetna by the Archdiocese
is $127,258 less $41,422. This comes to $85,836. The district court
divided this sum between the Diocese and the Archdiocese on the basis of
the stipulation made by them. We find this to be error. Aetna had no
contract or privity with the Diocese. Aetna was not sued by the Diocese.
Aetna should receive reimbursement of the full $85,836 from its insured,
the Archdiocese.
Judgment Against Lloyd's and Interstate
Liability is pro-rated to the Archdiocese for the periods there was
no insurance coverage, thus, it is liable for 75 of 89
12
Excluding punitive damages, the judgment was for $821,250.
With interest, the compensatory award totaled $924,570. Diocese,
858 F. Supp. at 1413.
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months. However, based upon the allocation of the four months where we
find Lloyd's and Interstate covered the Archdiocese, thus the allocation
of damages amounts to $4,674.79 a month, or a total of $18,699.16. Because
the SIR is triggered by the occurrence beginning in October 1980, the
Archdiocese must pay the first $100,000 of the actual damage incurred
during this time. Thus, the result is that Lloyd's and Interstate incur
no liability to the Archdiocese.
ATTORNEYS' FEES
The district court found the Archdiocese was not entitled to attorney
fees expended in defending the underlying state action because the request
for fees should have been submitted to the court during the trial seeking
indemnity as part of the "ultimate net loss" to the Archdiocese.13 The
district court concluded that such litigation expenses were not
appropriately addressed in post trial motions. The Archdiocese asserts
error with the district court's denial of these expenses. Conversely, the
insurance carriers assert error in the district court's grant of expenses
to the Archdiocese incurred in the declaratory judgment action seeking
indemnification.
The Underlying Litigation
Aetna fulfilled its duty to defend the Archdiocese in the state
proceeding brought by Mrozka. The Archdiocese seeks no fees
13
The Diocese also raises this claim in its cross-appeal.
However, as the Diocese is not entitled to any coverage because
there was no occurrence under its policies, the Diocese is also not
entitled to its litigation expenses in either the underlying
litigation or the declaratory judgment action. Since there was no
duty to indemnify, the Diocese's insurer carriers were not liable
to pay fees or expenses in the state court suit or in the
declaratory judgment action. See State Farm Fire & Casualty Co. v.
Williams, 355 N.W.2d 421, 425 (Minn. 1984).
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from Aetna. The Archdiocese brought a post-trial motion against Lloyd's
and Interstate for attorneys' fees expended in the underlying state court
action in the form of a request for amended findings of fact and
14
conclusions of law under Fed. R. Civ. Prob. 52(b). The Archdiocese
contends error, arguing the district court's refusal to enter a judgment
for defense costs is contrary to the policy language. It is undisputed
that legal fees expended by an insured may be considered part of the
insured's "ultimate net loss" under the applicable insurance policies. The
issue here is whether a post trial motion was the proper vehicle to request
fees. Motions to amend a judgment cannot be used to raise arguments which
could have been raised prior to the issuance of judgment. Concordia
College Corp. v. W.R. Grace & Co., 999 F.2d 326, 330 (8th Cir. 1993), cert.
denied, 114 S. Ct. 926 (1994). The Archdiocese had ample time to produce
evidence and argument regarding their legal expenses in the underlying
litigation during trial, but no such evidence or argument was presented.
We, therefore, affirm the ruling of the district court.15
14
We are perplexed by the Archdiocese's claim for attorney fees
in the underlying state court action in view of the fact that Aetna
provided the Archdiocese with a defense. Although the issue is not
briefed, the claim evidently is made seeking reimbursement for the
Archdiocese's personal lawyer who assisted Aetna in the defense.
Such a claim is highly questionable on its merits.
15
The Archdiocese urges it is entitled to fees under Minnesota
law, citing Kline v. Hanover Ins. Co., 368 N.W.2d 381 (Minn. Ct.
App. 1985) and SCSC Corp. v. Allied Mut. Ins. Co., 515 N.W.2d 588(Minn. Ct. App. 1994), aff'd in part, rev'd in part by SCSC Corp.
v. Allied Mut. Ins. Co., 536 N.W.2d 305 (Minn. 1995). The
Archdiocese's reliance on the cited cases as authority on the issue
of federal procedure is misplaced. In SCSC, the timing of the
request for attorney fees was not raised, discussed, or condoned in
either the state appellate court or the supreme court opinion.
Absent any discussion of the issue, there is no import to the bare
fact that plaintiff's request for costs was raised in post-judgment
proceedings. In Kline, the plaintiff sought attorney fees incurred
in a declaratory judgment action, not an underlying personal injury
case, thus, Kline is inapposite.
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Declaratory Judgment Action
The district court granted the Archdiocese its attorneys' fees
incurred in the declaratory judgment action. The court held that expenses
incurred in a declaratory judgment action against an insurer who denies
coverage are properly treated as consequential expense arising out of a
covered occurrence for the purposes of defining the ultimate net loss.
Noting the Minnesota Supreme Court has repeatedly stated that the preferred
method in Minnesota for resolving a dispute over coverage is an action for
declaratory judgment, the district court stated "[a]n insurer that denies
coverage and/or defense must reasonably expect that a declaratory judgment
action is a likely result. It is thus a reasonably foreseeable consequence
of the occurrence itself." Diocese of Winona v. Interstate Fire & Casualty
Co., 916 F. Supp. 923, 934 (D. Minn. 1995).
Lloyd's and Interstate argue the district court erred in interpreting
the contractual language in the insurance policies to allow for the
recovery of the Archdiocese's litigation expenses in a declaratory judgment
action against its insurers. We must agree. The ultimate net loss covered
by Lloyd's insuring agreements means the "total sum which the [Archdiocese]
becomes obligated to pay by reason of personal injury . . . through
adjudication" and includes "all sums paid as salaries, wages, compensation,
fees, charges and law costs" and "expenses for . . . lawyers . . . , and
for litigation, settlement, adjustment and investigation of claims and
suits which are paid as a consequence of any occurrence covered hereunder
. . . ." Aetna's App. at 138. The fees in the declaratory judgment action
are not recoverable, however, because the Archdiocese is attempting to
assert a right to indemnification and this is not a consequence of the
occurrence against which the Archdiocese insured. Although the policy
clearly intends coverage for attorneys' fees arising out of the underlying
state court litigation, there is no corresponding intention expressed
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concerning fees arising out of a subsequent suit seeking indemnification.
Absent a "specific provision in the insurance contract itself," the insured
may not recover attorneys' fees incurred in an action against the insurer
to establish coverage under an insurance policy providing indemnification
for losses. Rent-A-Scooter, Inc. v. Universal Underwriters Ins. Co., 173
N.W.2d 9, 12 (Minn. 1969). The Minnesota Supreme Court's encouragement of
declaratory judgment actions extends only to those circumstances where
there is a claim of a duty to defend. See, e.g., Spicer, Watson & Carp v.
Minnesota Lawyers Mut. Ins. Co., 502 N.W.2d 400, 403 (Minn. Ct. App. 1993).
In the present case, the claim asserted relates to the Archdiocese's right
to be indemnified, not to a duty to defend.16
Where a contract is breached and a suit is brought to enforce the
contract, it could in some sense be said that the fees incurred are
causally related to the breach. That causal relationship, however, does
not entitle the prevailing party in such a contract action on an
indemnification agreement to recover fees. See Frost v. Jordon, 36 N.W.
713, 714 (Minn. 1887) ("[I]t is against the analogies of the law to allow
expenses of litigation beyond the costs allowed by statute, which, as said
before, however inadequate, are the measure of indemnity which the law
provides."). Absent clear contractual language to the contrary, we hold
the Archdiocese may not recover attorneys' fees expended in prosecuting
16
The Minnesota Supreme Court has also stated that policy
considerations dictate the award of attorneys' fees when an insured
must commence a declaratory judgment action to compel coverage.
The policy considerations supporting the recovery of attorneys'
fees in declaratory judgment action, however, extend only to those
cases where there is a duty to defend. See Security Mut. Casualty
Co. v. Luthi, 226 N.W.2d 878, 885 (Minn. 1975) ("To deny an insured
the legal fees incurred in establishing coverage [when there is a
duty to defend] would work a substantial hardship in many
instances. The insured would be compelled to bear litigation costs
in situations where he contracted in order to avoid just such an
expense.").
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or defending the declaratory judgment action based on its indemnification
agreement with Lloyd's and Interstate. Such clear contractual language
does not exist. Having determined that attorneys' fees are not
recoverable, we need not address the issue of allocation of such fees.
Thus, we hold that the judgment against Aetna for $41,422 was proper;
that Aetna is entitled to reimbursement from the Archdiocese only, not the
Diocese; that neither the Diocese or the Archdiocese are entitled to
indemnification from Lloyd's or Interstate; and that the Diocese and
Archdiocese are not entitled to attorney fees or other expenses from
Lloyd's or Interstate. The case is remanded to the district court to enter
judgment in accord with this opinion.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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