The first bankruptcy filing spurred by the New York Child Victims Act provides new insight into the volume of claims that could arise and the extent to which the insurance industry might be on the hook.
The act both extends the statute of limitations in the state and opens a one-year window during which victims of child sexual abuse can file claims in civil court, regardless of when the abuse took place. Industry experts expect "shockingly large" settlements of a wave of claims, forcing some insurers to tap into reinsurance.
The Catholic Diocese of Rochester filed for protection under Chapter 11 of the U.S. Bankruptcy Code less than one month after the claims window opened Aug. 14, reporting that 46 lawsuits involving 61 plaintiffs had been commenced. It had previously settled 44 claims related to child sexual abuse over a period of several decades.
The diocese also disclosed that it had received 12 demand letters or notices from potential litigants and that it anticipates "many more claims will be asserted before the ... window closes." It also said it "may have insurance coverage for some" of the claims it faces.
Insurers can shoulder heavy load
A study by Penn State law professor Marie Reilly in September 2018 shows that substantial portions of previous diocese bankruptcy settlements were paid out by insurers. In the cases settled since 2004, there were 10 instances in which insurers were responsible for more than half of the settlement costs.
Although the Rochester diocese is the first Catholic organization in New York to file for bankruptcy, an insurance executive who is familiar with the implications of the act said he expects many organizations to seek relief under Chapter 11. This has been a pattern observed in several other states following the enactment of similar legislation.
Unlike some of those states, however, New York's law applies to both private and public entities, meaning that organizations such as public school systems could be vulnerable to a lawsuit. Other youth-focused organizations like the Boy Scouts of America could face legal action, and the Catholic Archdiocese of New York, one of the largest archdioceses in the U.S., is likely to be targeted.
Reilly said filing for bankruptcy offers dioceses "an attractive option" to deal with what is effectively a mass tort liability.
The day an organization files for Chapter 11, a stay is issued on all state law litigation, and instead of filing a state court complaint, victims of sexual abuse wishing to pursue civil action must instead file a "proof of claim" in the bankruptcy proceedings.
"Their claim will be treated co-equally with all other sex abuse claimants and ultimately provided for if the bankruptcy case is successful through the plan of reorganization," Reilly said.
The bankruptcy court will then set a bar date, something that has happened in all of the Catholic diocese bankruptcy cases so far, Reilly said. That date becomes the end point for the filing of proofs of claims, regardless of whether under New York state law the statute of limitations would have been longer.
Claims are then evaluated and assigned a share of the settlement based on a points system for various factors related to the abuse, Reilly said.
Rochester diocese structure
The Catholic Diocese of Rochester has maintained a Protected Self-Insurance Program, or PSIP, since June 1977, under which it can coordinate and administer an insurance program for itself and 88 parishes within its geographical limits using policies obtained through third-party insurance carriers.
Under the PSIP for the 2019 to 2020 policy year, according to bankruptcy court documents, the diocese maintains third-party coverage for property and liability coverage in excess of a $100,000 per-occurrence retention. Aggregate retentions for property and liability claims total $250,000 apiece.
A combination of Lloyd's of London syndicates have an 80% share of the primary layer of the liability section of the policy, with HDI Global Specialty SE holding a 20% share. There are seven distinct liability coverages provided under the structure, including one for sexual misconduct liability that has a per-occurrence limit of up to $1 million and an aggregate limit of $2 million, including defense costs.
As it specifically pertains to misconduct liability, there is a single excess layer that provides $10 million in coverage. A diagram of the program structure shows W. R. Berkley Corp. as the excess liability insurer.
Structure began to evolve
The types of claims being filed in response to the New York Child Victims Act are likely to trigger the policy in place at the time of the abuse, said Charles Moran, a senior vice president in the Complex Liability Consulting Practice of Marsh Risk Consulting. Many of those will be from the 1970s and 1980s, when policies were generally written using less restrictive language.
Prior to the mid-1980s, general liability policies were written on an occurrence basis, with defense costs paid in addition to the policy limit and an affirmative duty to defend, Moran said. Typically, policies did not have exclusions for sexual abuse or misconduct at this time.
But in the mid-1980s there was a "hardening" of the insurance market, and sexual misconduct claims became more widely known for certain organizations, prompting a shift in coverage structure, Moran said.
"You're going to start seeing entities buying a separate sexual misconduct coverage that would typically be endorsed onto their general liability policy," Moran said. He added that these policies were usually applied on a claims-made basis, with defense costs only included within policy limits.
"They typically have aggregate limits that all apply, and they're typically subject to self-insured retentions," Moran said. "There's potentially coverage there, but it's on a much more limited basis."
In a letter to its members, Salvatore Matano, bishop of the Diocese of Rochester, wrote that although the diocese has not received a "contemporaneous report of sexual abuse of a minor" since 2006, it faces a "significant number of claims," all dating back decades.
One of the biggest challenges that organizations have is identifying their historical insurance coverage, Moran said. A number of factors could have changed since the policy was put into place, including that the insurer responsible for the policy has been placed into runoff or receivership, making it more difficult to locate or receive payment in full.
For example, in the 2018 bankruptcy of the Archdiocese of St. Paul and Minneapolis, the liquidator of Home Indemnity Co. entered a settlement to grant a claim in an amount of $14.2 million. The archdiocese subsequently received an unsolicited offer to purchase the claim for no less than $7.8 million.
More than 400 cases were filed on the day the window opened Aug. 14, and hundreds more are expected to be filed before the window closes.
In early September, New York Gov. Andrew Cuomo issued guidance urging insurers with potential exposure to claims from the law to “act promptly and in good faith.”
State regulatory officials told S&P Global Market Intelligence that the guidance was issued in response to media reports that some of the claims may have policies that have aged or are missing records. There was not a disagreement between insurers and their insured that prompted the guidance, officials said.
The Diocese of Rochester declined to comment.