Third Circuit Holds Harassment Exclusion Bars Coverage for Sexual Assault Suit Under Pennsylvania Law

In Rice Enterprises LLC v. RSUI Indemnity Co., the Third Circuit Court of Appeals affirmed the district court’s finding that the insured was not entitled to coverage from its employer’s liability insurer or its umbrella insurer for an underlying sexual assault lawsuit filed against an owner and operator of multiple McDonald’s restaurants in Pennsylvania.

The insurers denied coverage for a negligence lawsuit filed against the insured by an employee arising out of its employment of a manager who was a “lifetime offender” under Megan’s Law and found to have assaulted and harassed a subordinate employee. The insured’s employer’s liability insurer denied coverage based on the application of two exclusions: one barring coverage for obligations imposed by a workers’ compensation or similar law, and one barring coverage for damages arising out of, among other things, harassment. In turn, the insured’s umbrella insurer denied coverage based on the fact that there were no allegations that the underlying insurance had been exhausted or that other insurance was otherwise unavailable.

In upholding the district court’s dismissal, the Third Circuit first determined that the employer’s liability policy exclusion barring coverage for damages arising out of, among other things, harassment, was clearly applicable, rejecting the insured’s argument for a narrow interpretation of the word “harassment.” Essentially, the insured’s argument was that the underlying lawsuit arose out of sexual misconduct rather than “harassment.” The Third Circuit disagreed, noting that “harassment” includes sexual misconduct in ordinary usage, and declined to opine on the remaining exclusion relied on by the district court. The Third Circuit also upheld the district court’s determination that the umbrella policy had not been triggered, as there was nothing to suggest that the underlying insurance had been exhausted or that it was otherwise unavailable.