Rochester diocese files action against insurers

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A battle is shaping up between insurance companies that could be on the hook for what the Roman Catholic of Diocese of Rochester expects to be tens of millions of dollars in costs to cover a rash of newly filed sexual abuse claims

If one insurance company has its way, what the diocese knew about its priests’ behavior and when it knew it could be key to how claims are covered. The diocese and abuse survivors say paying heed to such considerations could skew the case.

Diocesan officials have previously stated hopes that liability insurance would cover all or a substantial portion of what could be a $100 million payout for a mounting pile of claims filed under New York’s recently passed Child Victims Act. 

In a complaint filed Nov. 14  in the Rochester division of the Western District of New York Bankruptcy Court, the diocese targets more than a dozen insurers, alleging that the insurers breached contracts by backing away from CVA abuse claims against the Rochester Catholic diocese. 

Many of the insurers it targets “have advanced similar reservations with respect to the availability of coverage,” the diocese notes in the filing. But only one—the Chicago-based Continental Insurance Co.—so far has filed a court brief publicly staking out a position. For starters, the insurer wants to argue key elements of its case in state court.

“The disputes between Continental and the Debtor are governed by state contract and (state) insurance law,” the insurance company’s Oct. 29 motion states. 

That motion asks only that Rochester Bankruptcy Court Judge Paul Warren lift the automatic hold that bankruptcy filings put on any federal or state court disputes a debtor is involved in. The meat of the argument it plans to make in state court—that the Roman Catholic Church’s and the Rochester diocese’s past papering over of priests’ abusive behavior should excuse Continental from paying at least some CVA claims—is spelled out in a hypothetical state court complaint attached to the main Bankruptcy Court motion.

The diocese and the unsecured creditors committee formed to represent interests of abuse survivors hoping to collect CVA settlements want to keep the dispute in Bankruptcy Court. Each has separately filed papers objecting to the dispute’s removal. 

Already hit with 46 sex-abuse claims involving 61 claimants, the Rochester diocese sought Chapter 11 court protection from creditors in September. Those filings came approximately a month into a one-year window for survivors whose claims otherwise would have been barred under New York’s statute of limitations to sue their alleged abusers. 

The statute normally requires victims claiming to have been abused as children to file by their 23rd birthday. Signed into law last February, the CVA temporarily extends that deadline to victims’ 55th birthday. The law took effect in August and calls for the deadline extension to be in effect for one year.  

The full amount the Rochester diocese could owe to settle CVA claims might not be known for months. Whatever that sum might be, the diocese’s bankruptcy filings indicate that without insurance coverage it could have problems finding money to pay even half of its own $100 million worst-case scenario. 

Without insurance coverage, the diocese believes, it would be hard put to successfully emerge from the Chapter 11.

“The debtor’s ability to propose a confirmable plan of reorganization in this bankruptcy proceeding will be dependent in large part upon the extent to which the debtor can avail itself of coverage under various insurance policies,” attorneys for the diocese state in a court filing.

In the same filing the lawyers add that the diocese had been in talks with a number of insurers and was close to reaching a global settlement that would have spelled out terms under which insurers covered CVA claims. Continental’s bid to transfer the coverage dispute to state court could effectively torpedo the hoped-for global settlement, the lawyers maintain. 

Financial declarations the diocese filed in the bankruptcy show its total assets, including real estate and other property, to fall nearly $50 million short of its expected liabilities. Much of some $63 million in cash assets already is pledged for charitable purposes specified by donors. Diocese officials have so far pledged to future donors that it will not use charitable donations collected in an ongoing campaign to pay sex-abuse claims. 

Testifying at meeting with creditors last month, the diocese’s top financial official, Chief Financial Officer Lisa Passero, said the diocese was counting on insurance coverage to pay for much of its CVA liabilities. The diocese’s chief bankruptcy lawyer, Bond Schoeneck & King PLLC member Stephen Donato, cautioned Passero, however, that insurance coverage might not be not locked up.

In a court declaration, the diocese states that its current liability policy, written by a Lloyds of London syndicate, caps sexual misconduct payouts at $2 million. The diocese also can look to former insurers who do not currently provide coverage but did when the alleged abuses took place. Lloyds of London as well as other British-based insurance companies are among firms targeted in its Nov. 14 Bankruptcy Court action.

In its complaint against the insurers, the diocese names companies that wrote liability policies dating back to 1943. The CVA covers abuses dating at the earliest to the mid-1960s.  

Two New Jersey companies—Firemen’s Insurance of Newark, NJ and Commercial Casualty of Newark, NJ—that fall under Continental’s umbrella provided liability coverage to the Rochester diocese between Aug. 4, 1950, and June 1, 1977.

Attorneys for Continental state in the company’s Oct. 29 filing that the diocese has “tendered numerous lawsuits alleging sexual abuse to Continental” and that the insurance company has agreed to defend the diocese against some but not all of the claims. 

Continental takes the position that claims it should not have to cover would include “any sexual abuse claim, (in which) the Diocese knew prior to the abuse that the relevant priest had engaged in earlier sexual abuse; posed a danger to children; or (had) a propensity to commit sexual abuse,” attorneys for Continental argue in court papers.

Citing claims made in CVA plaintiffs’ lawsuits, Continental’s lawyers maintain that as early as 1962 “the Holy See and its agents, including the Diocese, knew they had a widespread problem of clergy sexually molesting minors, and they participated in the creation and operation of facilities in the Unites States where sexually offending clergy could be sent before they were moved to another parish to work and potentially abuse again.”

By way of example, Continental’s attorneys cite two CVA complaints whose plaintiffs claim the Rochester diocese was well aware of the alleged abusers’ sexual proclivities, but allowed the alleged abusers to have contact with the plaintiffs anyway. 

Citing claims in another CVA action, Continental’s lawyers maintain that the Rochester diocese followed “policies and practices … designed to conceal sexual abuse by clergy and protect it from scandal and liability (including):

  • transfer and reassignment of clergy known or suspected to abuse minors to deflect attention from reports or allegations of child sexual abuse;
  • concealing from parishioners and even other clergy that a priest reassigned to their parish posed a danger of sexual abuse to children;
  • failing to alert parishioners from the priest’s prior assignments that their children were exposed to a known or suspected child molester;
  • failing to report sexual abuse to criminal authorities; and
  • otherwise protecting and fostering the interests of abusive clergy to the detriment of the victims and community, for the purpose of avoiding scandal and public scrutiny.”

Consideration of such factors might seem to work to abuse survivors’ benefit, but the creditors committee is dubious.

“Continental gratuitously contends that commencing its declaratory relief action in state court will expeditiously clarify the availability of resources to pay abuse victims and otherwise to administer the bankruptcy case,” states committee attorney Ilan Scharf of Pachulski, Stang, Ziehl & Jones in Manhattan in the committee’s filing

“Continental’s interests are clearly diametrically opposed to these goals. Continental alone, rather than the Debtor’s estate and sexual abuse survivors, will benefit from litigation in state court,” Scharf asserts. 

Taking the dispute to state court would add considerable discovery demands that would likely parallel discovery needed in the bankruptcy case and thus considerably drive up administrative costs and could reduce the insurance company’s payout, an outcome that would leave less money for abuse survivors.  

“Insurers like Continental will use every means at their disposal to avoid covering sexual abuse claims,” Scharf asserts. “In that vein, Continental seeks a forum it believes would favor its strategy of minimizing exposure to sexual abuse claims by seeking to decouple the coverage litigation from the Chapter 11 case.” 

In a related development, the U.S. trustee wants the Rochester diocese to move some $58 million out of brokerage accounts it currently maintains and put that money in federally guaranteed vehicles. 

Such a move is mandated under a Bankruptcy Code provision requiring funds that might be used to pay creditors be kept in safe instruments, assistant U.S. Trustee Kathleen Schmitt states in a Nov. 14 court filing.

Stating that most of the money in the brokerage accounts traces to restricted charitable donations and can only be used for purposes the original donors specified, the diocese has asked for a waiver to let it keep the money where it is.

While the diocese argues that it is a large and sophisticated investor, that the accounts in question are managed by independent outside financial advisers and that it would not be taking undue risk by keeping the $58 million in brokerage accounts, the U.S. trustee maintains, similar arguments could be made by virtually any debtor. Accepting them would render the Bankruptcy Code’s provision useless.

Though the money in the brokerage accounts might or might not be available to creditors, “the concern of the United States Trustee is that should a failure (result) in the loss of the funds in the accounts, the debtor would still remain liable,” Schmitt adds.

Will Astor is Rochester Beacon senior writer.

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