The exclusion of willful misconduct: are liability insurers aware of what they still cover?

The exclusion of willful misconduct: are liability insurers aware of what they still cover?

Martina Smit
24 January 2012

One of the best known exclusions of cover of a liability-insurance is damage resulting from willful misconduct. It is no surprise that damages made on purpose by the insured are not covered. Not only because this would conflict with the values of society but it also would intervene with what insurance stands for: cover for uncertain damages on uncertain times.

The Dutch literature recognizes several degrees of willful misconduct. It distinguishes the act which ‘could probably’ or ‘could possibly’ lead to a certain result as well as the act which for sure will lead to a certain result. There is not just one formula to describe the exclusion of willful misconduct. Every insurer uses its own description but in general one could say that every liability insurance does exclude cover for damages which the insured intended, or damages which would certainly occur from certain actions.

Despite the effort insurers put in describing the extent of cover in a (liability) insurance policy, there could always be an insured who does not interpret the policy wording in the same way the insurer does. This could raise discussions regarding the extent of cover between the insured and the insurer. In these cases it is custom under Dutch (insurance) law to try to explain the cover based on what both parties could have intended and must have understand based on the mutual actions at the time the insurance contract was concluded.

With regard to exclusion of willful misconduct in liability insurance, Dutch case law shows some prominent cases. The most appalling cases are the ones in which insureds try to claim cover once they are held liable by their victim of sexual abuse. It seems logical that liability insurance is not mend to cover the consequences of this kind of actions. Insurers always deny cover for this type of claims based on the exclusion of willful misconduct. This point of view seems basically fair and judicially right.

Therefore it was quite a surprise that the Court of Appeal of ‘s-Hertogenbosch on 6 September 2011 decided that the liability insurance in question must provide cover for liability claims regarding sexual abuse. The Court of Appeal of ‘s- Hertogenbosch based it’s ruling on an earlier judgment of the Supreme Court of 6 November 1996. In that case the Supreme Court ruled that the exclusion of willful misconduct only allows to exclude cover for liability regarding actions of which the intent also relates to the damages occurred, or an intention as to the consequences of such actions for which it was certain that the damages would result.

The Court of Appeal in its recent decision ruled that although the acts of the insured were immoral and despicable, it could not be stated that it was certain that his actions would certainly lead to the damages suffered by his victim for which the insured was held liable now. The Court of Appeal stated that it is not certain that every victim of sexual abuse would eventually suffer from (emotional) damages and for which the abuser can be held liable. Because the lack of certainty of the eventual damages, the insurance company was held to provide cover for the liability to compensate damages of its insured regarding the sexual abuse.

In our opinion the Court of Appeal did rule in accordance with legal principles set for by the Supreme Court regarding the exclusion of willful misconduct. However, the Court of Appeal should have also looked at the moral and social consequences of its ruling. Art. 3:40 DCC states that every legal act which conflicts with the the public policy or good morals is null and void. Providing insurance cover against liability damages regarding sexual abuse is to our opinion against public morality. Even if insurance companies would intend to render cover for these damages (which we do not believe was originally intended), the law should prohibit such cover. The only real argument to defend this ruling could be the financial position of the insured and the possibility that the insured was not able to pay the damages himself. It might be that the Court of Appeal also considered the position of the victim and tried to compensate the victim financially by ruling that the insurance company (with deep pockets) eventually would pay damages to the victim. However, the financial position of parties involved may not – in general - influence a judgment on insurance cover. Allowing a direct action for the victim to claim against the underwriters, provides for a proper alternative in such case.

It is not known whether the insurance company took this case to the Supreme Court. In case the insurance company did not we can only hope that this ruling does not become too much of a precedent for other cases. Not only does the ruling affect public morals, but it will force insurance companies to amend the exclusion of cover of willful misconduct. Insurance companies must realize what actions they cover.