No coverage for wrongful termination claim indirectly involving sexual misconduct

Employer’s claim for defence and indemnity for claim against it for wrongful termination upheld as excluded from coverage because the claims indirectly involved sexual misconduct.

Insurance law — Liability insurance — Exclusions — Sexual harassment — Wrongful acts — Interpretation of policy; Insurers — Duties; Practice – Appeal.

Crandall University v. AIG Insurance Co. of Canada, [2025] N.B.J. No. 142, New Brunswick Court of Appeal, May 1, 2025, J.C.M. Richard C.J.N.B., K. Quigg and R.T. French JJ.A.

A university terminated a professor for sexually harassing a student. That professor then filed a lawsuit against the university for wrongful termination, defamation, false light in public eye, intrusion upon seclusion, public disclosure, and breach of confidence. The university’s insurer declined to provide indemnification and a defence to the university in respect of the lawsuit on the basis that coverage was excluded by the Sexual Misconduct and Child Abuse Exclusion in the policy. The exclusion excluded coverage for claims (which otherwise would have been covered under the D&O and EPL sections of the policy) for claims “alleging, arising out of, based upon or attributable to, or in any way involving, directly or indirectly, any Sexual Misconduct”.

The university applied for a declaration of coverage which was denied by the lower court on the basis that the lawsuit arose from sexual harassment of a student, and as such fell within the ambit of the exclusion. On appeal, the university submitted that the lower court failed to review the policy as a whole, recognize that the exclusion was ambiguous, and give the exclusion an interpretation that was commercially reasonable.

The Court of Appeal rejected the university’s arguments and held, among other reasons, that the lower court did not err in interpreting the endorsement as excluding claims that “involve indirectly” sexual misconduct, even where the claims were in wrongful dismissal and there was no allegation of sexual misconduct against the university. In doing so, the Court of Appeal noted that the “in any way involving, directly or indirectly” wording in the exclusion required a less direct connection between the claim and the basis for the exclusion than other phrases such as “based upon or arising from”, “based upon, arising out of, or relating to”, or “arising out of or in connection with”.

This case was digested by Michael J. Robinson and edited by Steven W. Abramson of Harper Grey LLP.  If you would like to discuss this case further, please feel free to contact them directly at [email protected] or [email protected].