A Kentucky federal judge ruled that Shelter Mutual Insurance Company doesn’t have to pay a $4 million judgment against a daycare center director in a child abuse case, finding that coverage is barred by an exclusion in the director’s homeowners policy for business-related claims.
In May 2017, a Kentucky jury found the insured, the director of Louisville-based daycare center Kidz University Inc., had negligently failed to supervise staff and comply with child abuse prevention laws, resulting in injuries to two minors attending the program. The minors were awarded a total of $4 million, but Shelter refused to cover the judgment under the director/insured’s homeowners policy, citing no fewer than five exclusions.
The insured then filed suit against the insurer alleging breach of contract, contractual breach of implied covenant of good faith and fair dealing, tortious breach of the implied covenant of good faith and fair dealing, bad faith, unfair trade practices, intentional infliction of emotional distress and negligent infliction of emotional distress. The insurer moved for partial summary judgment on the issue of whether the policy provided coverage for the judgment.
The court ruled in the insurer’s favor solely based on a “business activity” exclusion. Ensey v. Shelter Gen. Ins. Co., et al., 17-cv-642 (W.D. Ky Feb. 18, 2020). That exclusion precluded coverage for damages arising out of “business activity” if that activity caused, or contributed to cause, the damages. The policy defined business” as “any activity for which the person engaged in that activity receives compensation of any kind, or reasonably expects to receive compensation of any kind.” The court found that the insured’s liability in the abuse case was “directly related to her employment” at Kidz University. The judge pointed to the jury’s finding that the insured’s negligence was a “substantial factor” in causing the minors’ injuries. As a result, the court noted the children’s injuries arose out of the insured’s business activity, thus triggering the exclusion.