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Contrary to a lower court ruling, a limitation in professional malpractice policies that caps coverage in the event of a claim of sexual misconduct is not against New York’s public policy, a New York state appellate court ruled last week. The Appellate Division, First Department, in American Home Assurance Co. v. McDonald, 983, unanimously modified a ruling last year by Acting Justice Barbara Kapnick, who said that the insurance company’s limitation of coverage to $25,000 on all claims against an insured if there was an allegation of sexual misconduct was overbroad and would discourage reporting of sexual abuse by clients or patients. Rory M. McDonald, a licensed social worker who was insured by American Home Assurance Co., was sued for malpractice in 1995 by a former patient, Randi K. The policy provided $1 million in coverage, but included a limitation to $25,000 for claims involving allegations of sexual misconduct. The five-judge appellate panel declared that American Home’s duty to indemnify Mr. McDonald was limited to $25,000, including the claims not involving sexual misconduct. Justice Angela M. Mazzarelli, writing for the court, noted that although Washington state had ruled that the limiting provision violated public policy, courts in Illinois and Texas had found that an identical provision would not violate public policy. “The sexual misconduct limitation in the instant policies is clear and unambiguous, and gives the policyholder clear notice of the restrictions. It is not contrary to the public interest to allow insurers to offer varying amounts of coverage depending upon the nature of the claim asserted against the insured . . . ,” she wrote. Nor does the sexual misconduct limitation violate any Department of Insurance regulations, the judge added. Although Ms. K. did not mention sexual misconduct in her complaint, she alleged in her bill of particulars and in her deposition that Mr. McDonald engaged her in an improper sexual relationship. DECLARATORY ACTION American Home brought an action seeking a declaration that the allegations triggered its sexual misconduct provision of the policy and limited its duty to indemnify to $25,000 for all claims. Justice Kapnick ruled the cap applied only to the allegations of sexual misconduct per se; other claims of therapeutic negligence were not so limited, she said. In rejecting the lower court’s interpretation of the provision, Justice Mazzarelli did not find the public policy concerns to be a hurdle. “There is nothing in the record to support the trial court’s concern that the sexual misconduct provision would have a chilling effect upon patients’ reporting of the sexual misconduct of their therapists, or that patients are even aware of the amount of their therapists’ available coverage,” the judge said. “In fact, a more likely inference is that the limitation of coverage would dissuade a psychologist, who might be so inclined, from committing acts of sexual misconduct with his or her patients because he or she knows that his or her insurance policy will not fully cover damages in the event of a lawsuit.” However, the same provision in the policy bought by Mr. McDonald’s partner, Helena Anisfeld, who was also named in Ms. K’s suit, did not apply to her, the appellate court said. There were no allegations as to sexual misconduct against Ms. Anisfeld, and the insurer should give her full coverage for the defense and indemnification of Ms. K.’s negligence claims against her, it ruled. Justices Betty Weinberg Ellerin, Alfred D. Lerner, Israel Rubin and Richard T. Andrias concurred in Justice Mazzarelli’s opinion. Mark J. Bunim and Daniel P. Waxman, of Robinson Silverman Pearce Aronsohn & Berman, represented American Home. David B. Golomb and Stephanie Brand, of Brand & Golomb, appeared for Ms. K. Ms. Anisfeld was represented by Helen J. Lukievics, of Rosen, Preminger & Bloom.

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