Material Misrepresentations on Application and Prior Knowledge Preclude Professional Liability Coverage for Behavioral Health Center

The United States District Court for the Central District of California, applying California law, has held that an insured behavioral health center’s material misrepresentations on an application and its prior knowledge precluded professional liability coverage for a claim alleging negligence in connection with sexual abuse of a minor patient by one of its former employees. Evanston Ins. Co. v. Footprints Behav. Interventions, Inc., 2023 WL 4317198 (C.D. Cal. May 24, 2023). The court held that, prior to providing the relevant application, the insured was aware of circumstances that made a claim “very possible, if not likely.”

An insured behavioral health center had a series of medical professional liability policies that were renewed annually between 2005 and 2020. In July 2019, the insured submitted an application for the 19-20 Policy and answered “No” to a question asking whether the applicant was “aware of any circumstances which may result in a malpractice claim or suit being made or brought against you or any of your employees?” The 19-20 Policy stated that “the Insureds agree . . . [t]hat the information and statements contained in the application(s) are their representations, . . . and that this policy is issued in reliance upon the truth of such representations.” It also provided that coverage was available so long as “[p]rior to the effective date of this policy the Insured had no knowledge of such act, error or omission or any fact, circumstance, situation or incident which may lead a reasonable person in the Insured’s position to conclude that a Claim was likely.”

In November 2017, the insured received a report of potential inappropriate sexual contact between one of its behavioral technicians and a minor patient. The employee was terminated shortly thereafter, and the matter was reported to law enforcement and regulatory agencies. The former employee was convicted of sexual battery after a February 2019 trial where other employees of the insured provided testimony. A civil lawsuit against the insured alleging negligence in connection with this incident followed in November 2019 and was tendered for coverage. The insurer denied coverage and sought a declaratory judgment that the 19-20 Policy did not afford coverage for the civil lawsuit because of material misrepresentations in the application and prior knowledge.

On summary judgment, the court granted the insurer’s motion in relevant part. The court noted that, prior to submitting the application for the 19-20 Policy, the insured was aware of possible sexual contact between its employee and a minor patient and that law enforcement and regulatory agencies were investigating the report. The court also emphasized the fact that other employees of the insured testified at the trial prior to the insured submitting the application, which suggested that the insured likely would have known of the trial and the resulting verdict. Under these circumstances, the court concluded that it was a “reasonable inference” that a malpractice claim like the civil lawsuit was “very possible, if not likely.” The court thus found that there was a material misstatement on the application so as to preclude coverage. The court applied this same reasoning to find that the insured had prior knowledge of circumstances which would lead a reasonable person to conclude that a claim was likely such that there was also no coverage for this additional reason.