U.S. Gymnastics v. Liberty Ins. Underwriters
| Decision Date | 25 February 2022 |
| Docket Number | 20-1245 |
| Parties | USA Gymnastics, Plaintiff-Appellee, v. Liberty Insurance Underwriters, Inc., Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Argued November 9, 2020
Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No 1:18-cv-01306-RLY-MPB - Richard L. Young, Judge.
Before Sykes, Chief Judge, and Hamilton and Brennan, Circuit Judges.
Larry Nassar sexually assaulted hundreds of girls and young women over decades during his involvement with USA Gymnastics, Inc. (USAG), the non-profit organization which governs the sport in the United States. As a result of Nassar's abuse, USAG has been sued numerous times and investigated by Congress and federal and state authorities. USAG sought financial help with its defense from various insurers, including Liberty Insurance Underwriters, Inc. (Liberty), with which USAG had a claims-made, directors and officers (D&O) liability insurance policy.
USAG's claims ripened into an insurance-coverage lawsuit in Indiana state court which was removed to federal court under diversity jurisdiction. The Nassar-related litigation and investigations forced USAG into bankruptcy. In an adversary proceeding, the bankruptcy court issued proposed findings and conclusions, including that the initial Nassar-related claims were timely made and that a wrongful-conduct exclusion applied to only those claims for which Nassar was criminally convicted. The district court adopted those findings and conclusions in a January 13, 2020 order.
Liberty appeals, and we have jurisdiction because that order has the "practical effect" of an injunction under 28 U.S.C § 1292(a)(1). We conclude that USAG's claims were timely made during the policy period, and that the wrongful conduct exclusion in the Liberty policy applies to ten instances of Nassar's sexual abuse, but not to all claims related to his abuse. We also decide that a bodily injury exclusion in the policy does not preclude coverage, and that insurance coverage is proper for various government investigations and other matters. Finally, the policy contains a $250, 000 "Third Party EPL" sublimit. The bankruptcy court should have considered extrinsic evidence about the meaning of this endorsement, so we remand for further proceedings on that question.
Larry Nassar was a physician and professor at Michigan State University (MSU). In 1987, he began to volunteer in a medical capacity for USAG. Over the decades, his involvement in the organization grew, and he became a central figure in USAG's program, drafting medical guidelines, lecturing at conferences, assisting other medical personnel, treating hundreds of athletes, and traveling with the U.S. Olympic team.
The world now knows that instead of generosity or patriotism, Nassar's involvement with USAG was motivated by his desire to gain access to female athletes whom he victimized. He persuaded his victims that his methods of abuse were medically necessary, and on thousands of occasions over almost 30 years, Nassar sexually assaulted and abused hundreds of young women and girls under the guise of medical treatments.
Some dispute exists about when and to whom allegations against Nassar were first made. Several athletes allege they filed complaints against him as early as 1998 and in the early 2000s. USAG says those allegations were made to individual member gyms, not to USAG. In June 2015, a coach notified USAG's senior vice president that an athlete had complained about how and where Nassar had touched her. This allegation set off a series of events that led to the FBI's involvement in July 2015. USAG received its first written demand letter from a former athlete on May 25, 2016.
In September 2016, the Indianapolis Star published an article in which two former gymnasts accused Nassar of sexual abuse. That month, MSU terminated Nassar. The day before he was fired, Nassar took his work laptop to a computer store and paid to wipe all its content. The next day, hard drives containing thousands of images of child pornography were found in Nassar's trash. Nassar was arrested in December 2016, and the next year he was convicted in federal court of possessing child pornography, including recordings he had made of his abuse. He received consecutive sentences totaling 60 years.
Nassar was also prosecuted in Michigan state court for criminal sexual conduct in two counties. He signed written plea agreements in Ingham County and in Eaton County, and he agreed under oath to their terms on the record. In Ingham County, he pleaded guilty to seven counts of first degree criminal sexual conduct, and in Eaton County he pleaded guilty to three counts of first degree criminal sexual conduct. Other charges were dismissed in exchange for compliance with the plea agreements.[2] The state also agreed not to further prosecute Nassar for 115 other criminal sexual conduct charges reported to the MSU police, listed in an appendix to the plea agreements.
The plea agreements also provided that Nassar waived any and all defenses, including that his criminal conduct was for a legitimate medical purpose. Nassar also agreed that at sentencing, testimony from any victim could be considered, including all victim impact statements. At the Ingham County sentencing hearing-which lasted seven days-156 of 265 victims spoke or contributed statements to the court. At the Eaton County sentencing-which lasted three days-65 victims spoke or contributed statements.
Nassar was sentenced to 40-175 years in Ingham County, and to 40-125 years in Eaton County. These state sentences were ordered to be served concurrently, but consecutive to Nassar's federal sentence. Both the federal and state convictions resulted in effective life sentences for Nassar.
As a result of Nassar's sexual abuse, U.S. AG has faced numerous Congressional, federal, and state investigations. USAG has also been named in numerous lawsuits and is at risk of decertification as the national governing body of gymnastics by the United States Olympic & Paralympic Committee ("USOPC").
This appeal concerns USAG's claims against one insurer, Liberty. USAG purchased a claims-made D&O policy from Liberty, which had a coverage period of May 16, 2016 through May 16, 2017. That policy, the coverage of which is at issue here, defines many of the terms the parties dispute. The policy also contains what has been termed a wrongful conduct exclusion (also called an intentional-acts exclusion) which bars coverage for claims "made against any Insured"[3] "based upon, arising from, or in any way related to" "any deliberately dishonest, malicious, or fraudulent act," "or any willful violation of law by any Insured/' provided such conduct was "finally adjudicated" and "in fact occurred."
In 2018, USAG sued seven insurers, including Liberty, in Indiana state court, alleging they had a duty to defend the lawsuits USAG faced and to pay expenses incurred from the investigations. The insurers removed the case to the U.S. District Court for the Southern District of Indiana under diversity jurisdiction, 28 U.S.C. § 1332. The combined weight of the lawsuits and the investigations forced USAG to file for bankruptcy under Chapter 11. This insurance coverage litigation took place in an adversary proceeding as part of that bankruptcy. The district court retained jurisdiction over the matter under 28 U.S.C. § 1334(b).
The parties cross-moved for summary judgment. USAG sought coverage on various claims, including what are termed, cumulatively, the "Nassar-related claims": "athlete lawsuits" by hundreds of gymnasts seeking to hold USAG responsible for allowing the abuse to take place, causing them to suffer physical, mental, and emotional damage; "revocation lawsuits" by coaches and owners of gyms affiliated with USAG alleging financial losses due to USAG's handling of Nassar; the costs of complying with Indiana, Congressional, and USOPC investigations; and the costs related to the deposition of and grand jury testimony by a USAG employee, Amy White.
In response, and in its own motion, Liberty argued (among other things) that none of the Nassar-related claims are covered under the policy. Liberty also contended that the first of the claims predated the coverage period. To Liberty, the conduct exclusion barred coverage for all the claims because Nassar, an insured, engaged in wrongful conduct finally adjudicated in his criminal cases, or that the claims were at least related to that conduct.
In non-core matters, a bankruptcy court is tasked with preparing proposed findings of fact and conclusions of law for the district court's review. 28 U.S.C. § 157(c)(1). The court proposed that partial summary judgment be granted to each party. Among its findings, the bankruptcy court concluded that the first written demand against USAG relating to Nassar's abuse occurred on May 25, 2016, within the policy period. That court also found that Liberty had a duty to defend all the Nassar-related claims. Rejecting Liberty's policy interpretation as too broad, the court submitted that the wrongful conduct exclusion barred coverage for only those suits seeking damages for the ten counts of sexual abuse for which Nassar was convicted.
The court also considered other disputes now before us. The policy includes a bodily injury exclusion that barred coverage for physical, emotional, and mental damages, but an exception limits the exclusion to certain types of cases. The policy also had a $250, 000 sublimit for "Third-Party EPL" (Employment Practices Liability, although the acronym is not defined in the policy). The bankruptcy court concluded that the third-party claim...
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