The New Brunswick Court of Appeal has upheld a ruling that an insurance company is not required to defend a wrongful dismissal and defamation lawsuit because the claims involved sexual misconduct, even though the university itself was not accused of sexual misconduct.
In Crandall University v. AIG Insurance Company of Canada, the court dismissed Crandall’s appeal of a King’s Bench decision, ruling that a “Sexual Misconduct and Child Abuse Exclusion” in the university’s “Not-For-Profit Risk Protector” insurance policy clearly excluded coverage for claims that “in any way involve, directly or indirectly” sexual misconduct.
Background
The case arose after Crandall University terminated the employment of Dr. S., a professor, following an investigation that concluded he had “engaged in behavior that constitutes sexual harassment of a female member of Crandall.” The university posted a news release on its website announcing the termination and included a summary of the investigation findings.
Dr. S. and his wife then commenced an action against the university claiming damages for wrongful dismissal and defamation. His wife later joined the action, and the claim was amended to include additional privacy-related torts.
Crandall sought coverage under its AIG insurance policy, which generally provides protection for wrongful dismissal and defamation claims. However, AIG denied the request, citing a policy endorsement that excluded coverage for claims “alleging, arising out of, based upon or attributable to, or in any way involving, directly or indirectly, any Sexual Misconduct.”
The exclusion debate
Crandall argued that the exclusion should only apply to claims that accuse the university or its insured agents of sexual misconduct. The university contended that the exclusion was ambiguous and should be interpreted in a commercially reasonable way that preserved coverage for wrongful dismissal and defamation claims.
The court disagreed, finding that the exclusion’s language was clear and unambiguous.
“On a plain language reading of the Sexual Misconduct Exclusion… the Court is left with the following relevant language: ‘…the Insurer shall not be liable to make any payment for Loss in connection with any Claim(s)… made against any Insured(s)…, arising out of, based upon or attributable to, or in any way involving, directly or indirectly any Sexual Misconduct,'” the court wrote.
The court found that a plain language reading of the exclusion “provides that coverage is not available where the Claim is indirectly related to Sexual Misconduct, even if coverage was provided for in another section of the Insurance Policy.”
Core issue: ‘Involving indirectly’
At the heart of the case was the interpretation of the phrase “in any way involving, directly or indirectly” sexual misconduct.
The court determined that this wording was intentionally broader than other exclusions in the policy that used phrases such as “arising out of” or “based upon or attributable to.” These different phrases, the court found, reflected “an intention to exclude claims where the connection to sexual misconduct is less or weaker than claims ‘alleging,’ ‘arising out of,’ or ‘based upon or attributable to’ sexual misconduct.”
The court rejected Crandall’s argument that such an interpretation would lead to absurd results in hypothetical situations, such as denying coverage for wrongful dismissal claims where an employee was terminated due to absences resulting from a sexual assault outside the workplace.
Instead, the court focused on the specific facts of the case, noting that it was “difficult to imagine a claim, which is not based on or alleges sexual misconduct, that ‘involves’ sexual misconduct more readily than the present case.”
Implications for coverage
The court emphasized that reading an exclusion in light of a policy’s coverages “does not mean that an exclusion cannot negate coverage that would otherwise exist under the coverage sections. After all, the object of an exclusion is generally to do just that.”
The court also addressed Crandall’s argument about the exclusion’s failure to specifically use the term “sexual harassment,” even though that term appears elsewhere in the policy. The court found that the definition of “Sexual Misconduct” in the exclusion (“any licentious, immoral or sexual behavior, sexual abuse, sexual assault, or molestation”) was “sufficiently broad to include sexual harassment.”
“The plain and ordinary meaning of sexual harassment is a form of sexual violence, a form of sexual behaviour,” the court stated. “The definition of Sexual Misconduct in the Sexual Misconduct Exclusion includes ‘immoral and sexual behaviour’ and therefore includes sexual harassment.”
The court concluded that the King’s Bench judge correctly interpreted the exclusion as applying to the claims made by Dr. S. and his wife, even though there was no allegation of sexual misconduct against the university itself.
For more information, see Crandall University v. AIG Insurance Company of Canada, 2025 NBCA 57 (CanLII).
