Seventh Circuit Requires Insurance to Fund Settlement with Larry Nassar Sexual Abuse Victims – Laws and Insurance Products


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Key points:

  • Liberty Insurance insurers must pay funds to settlement trust formed by USA Gymnastics bankruptcy settlement with Nassar sex abuse victims

  • Court rules Nassar’s guilty plea to 10 counts of sexual assault not ‘final decision’ on hundreds of other pending complaints

  • Good News for Other Institutions Facing Multiple Sexual Abuse Complaints

Introduction

Survivors of USA Gymnastics and Michigan State Physician Larry Nassar’s insidious sexual abuse have received a ruling that will help them secure funding for their $380 million settlement with now-bankrupt USA Gymnastics. In USA Gymnastics vs. Liberty Insurance Underwriters, Inc.27 F.4th 499 (7th Cir. 2022), the Court found that the directors and officers (“D&O”) liability insurance policy sold by Liberty Insurance to USA Gymnastics covered the majority of claims made by survivors of the sexual abuse of Nassar.

Insureds, particularly those seeking coverage for sexual abuse claims, should take note of this important decision and the distinction made by the Court between alleged conduct and adjudged conduct. For the American gymnastics Court, the critical distinction was between conduct that was the subject of plea bargains versus conduct that was the subject of dismissed lawsuits or non-prosecution agreements. The conduct related to the plea agreement was deemed to have been finally judged – and therefore excluded from coverage. In contrast, conduct that was the subject of dismissed lawsuits or non-prosecution agreements was not judged and therefore was not excluded.

In the American gymnastics case, the insurance policy provision at issue excluded claims that were “based on, arising out of, or in any way related to … any willfully dishonest, malicious, or fraudulent act or omission or any willful violation of the law by any Insured … provided, however, that this exclusion shall only apply if such conduct is ultimately found to have actually occurred.” The question was whether it was “finally judged” that the conduct at issue in the regulations had taken place. If yes, then claims and settlements have been excluded from coverage; if not, then claims and settlements were covered.

The bankruptcy court ruled that Nassar’s conduct was ultimately judged only for the ten crimes for which a guilty verdict was entered, and not for those relating to the numerous other claims. Liberty Insurance appealed – and lost.

After analyzing the plea agreements between Michigan and Nassar prosecutors, the Seventh Circuit agreed with the lower court and concluded that only conduct that encompassed the ten counts to which he pleaded guilty was ” finally judged” and excluded. But the behavior that was the subject of claims dismissed without prejudice or the subject of a non-prosecution agreement was not “finally judged” and therefore not excluded.

Another important point in this case is the Court’s treatment of Nassar-related claims as different from the financial claims of defrauded shareholders. The Court held that claims like those of the Nassar victims could not be logically grouped together or be considered “related in any way to the ‘same wrongful act because'[t]there is no common unit of measurement (like dollars) that would allow someone to assess cumulative harm as we would with, say, claims from different shareholders for accounting fraud or a merger of corrupt self-dealing.” Thus, the Court emphasized that sexual assault is distinct from economic wrongdoing and should be treated differently, even in the context of A&D liability insurance.” which is “an important and often negotiated D&O policies.” Accordingly, the Court agreed with USA Gymnastics and found that “the policy’s board language becomes ambiguous when applied to these unique facts.”

This victory for survivors of Nassar and USA Gymnastics abuse was cemented when, on March 28, 2022, the Seventh Circuit denied Liberty Insurance’s motion for a rehearing and for a bench rehearing.

Originally published on April 7, 2022

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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