Abuse Exclusion Applied To Bar Coverage For Entire EEOC Proceeding

The United States District Court for the Southern District of New York, applying New York law, held that a Sexual and Physical Abuse exclusion barred coverage for a discrimination complaint filed with the Equal Employment Opportunity Commission ("EEOC") in its entirety because the Policy's definition of "Claim" included the EEOC complaint as a whole, and the complaint clearly alleged conduct triggering the exclusion. Joy Constr. Corp. v. Starstone Specialty Ins. Co., 2025 WL 1677805 (S.D.N.Y. June 13, 2025).

The claimant, an employee of the insured construction company, lodged an EEOC complaint against the company alleging that she was discriminated against on the basis of her sex and gender and that she was subjected to sexual harassment and a hostile work environment. In the complaint, the employee detailed the repeated sexual advances that her supervisor made toward her, including by making sexually charged remarks about her body and groping her breasts. The insured company sought coverage under a Management Liability Policy that contained a Sexual and Physical Abuse exclusion, which precluded coverage for "any Claim . . . based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged . . . sexual abuse . . . [or] licentious, immoral or sexual behavior intended to lead to or culminate in any sexual act." The insurer denied coverage on the basis of the exclusion, which, in the ensuing coverage litigation, the district court held barred coverage for the EEOC complaint in its entirety.

As an initial matter, the court concluded that the Policy's definition of "Claim," which included a legal "proceeding" (rather than an individual cause of action or allegation within a proceeding), unambiguously referred to the employee's discrimination complaint as a whole. Accordingly, the court held that the insurer did not need to show that each individual allegation fell within the scope of the exclusion for it to bar coverage for the entire proceeding.

The court also reasoned that the exclusion applied to the full complaint on the additional basis that its lead-in language was "unmistakably broad." According to the court, while the phrase "arising out of" requires a "but-for" test, the prefatory language "directly or indirectly resulting from" is much broader and encompasses almost any causal relationship to the triggering conduct. The employee alleged that she was sexually harassed by her supervisor, including that he made sexual advances toward her and groped her, which the court determined unambiguously qualify as allegations of "sexual behavior intended to lead to or culminate in any sexual act" and/or "sexual abuse." The court also observed that these allegations of misconduct are "at the center" of the employee's EEOC complaint. According to the court, the instances of sexual abuse and harassment are the key allegations made in the complaint and, at a minimum, "contributed to" or have "some kind of connection or relationship" to the employee's EEOC complaint as a whole.

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