A carrier’s obligation to defend is a vital piece of the protection the insured has paid for and deserves. Many insureds cannot afford to independently fund a full defense to defeat any frivolous claims. Courts have recognized this and almost universally note the duty to defend is expansive and much broader than the duty to indemnify.
The carrier’s decision on whether to defend is often made at an early date and before discovery has revealed all facts. Despite this, the wrong decision can be costly as the Ninth Circuit recently made clear.
Bramblett v. Allied World Specialty Ins. Co., 2026 WL 925516 (9th Cir. Apr. 6, 2026)
Bramblett involved a coverage dispute for a lawsuit involving allegations of sexual misconduct and harassment undertaken by an employee of a substance abuse treatment center. Multiple patients made claims against the center based on the employee’s misconduct. The Ninth Circuit’s memorandum order provides a limited discussion of the facts and the background below is pulled from the complaint filed in the underlying lawsuit as well as summary judgment filings in the coverage lawsuit.
Background
American Behavioral Health Systems (ABHS) offers in patient substance abuse treatment at various locations. In 2017, ABHS hired Douglas Stephens to work at its Spokane facility. Stephens was eventually promoted to a supervisory role at the Spokane location.
In his role as an employee of ABHS, Stephens allegedly engaged in various sexual misconduct with various patients at the facility. This alleged misconduct included:
- Conducting unauthorized strip searches of patients;
- Conducting pat-downs of patients;
- Hugging and rubbing the back and shoulders of patients;
- Touching of patients’ genitals and buttocks;
- Questioning patients about their sexual history and orientation; and
- Making other sexually harassing statements and unwanted sexual advances.
Stephens remained employed with ABHS for nearly three years until his employment ended in the summer of 2020.
Coverage with Allied World
During the relevant time periods, ABHS was insured under a Healthcare Organizations Management Liability Pack policy issued by Allied World. The Allied World Policy contained Employment Practices Liability coverage in which liability coverage would be provided for claims arising from “Third Party Wrongful Acts” that were made against the insured. Third Party Wrongful Acts was defined to include:
(1) Discrimination against a Third Party based upon such Third Party’s…sex; or
(2) Harassment directed against a Third Party, including sexual harassment, unwelcomed sexual advances, and requests for sexual favors or other misconduct of a sexual nature.
In addition, the policy contained a Sexual Abuse Exclusion providing that the Allied World Policy:
Shall not cover any Loss in connection with any claim…alleging, arising out of, based upon, attributable to or in any way relating to any actual or alleged sexual molestation or sexual abuse.
Underlying Lawsuit
In August 2020, a group of former patients (Patients) sued ABHS for Stephens’ misconduct while he was employed by ABHS. The factual allegations in the complaint setting out Stephens’ misconduct were similar to those outlined above. The Patients further alleged that this conduct was sexual harassment and sexual abuse and constituted discrimination under Washington law. Additionally, the Patients alleged that ABHS violated Washington Law Against Discrimination as a result of permitting Stephen’s sexual harassment and sexual abuse.
ABHS send a copy of the complaint to Allied World with a request for coverage under the Allied World Policy. Allied World denied coverage including a defense to ABHS. In doing so, Allied World claimed that the Sexual Abuse Exclusion was triggered and barred coverage for all claims made by the Patients.
After the denial, the Patients and ABHS reach a resolution of the Underlying Lawsuit. The resolution included a consent judgment of just over $2.4 million being entered in favor of the Patients and against ABHS.
Coverage Lawsuit
The Patients filed a lawsuit against Allied World in an attempt to collect their judgment against ABHS. In the coverage lawsuit, the Patients set out claims that Allied World had wrongfully refused to defend ABHS in the Underlying Lawsuit and was liable for breach of contract. Additionally, the Patients alleged Allied World’s refusal to defend constituted common law bad faith and was also a violation of Washington’s Insurance Fair Conduct Act. The Patients argued to the Court that even if some of the allegations in the Underlying Lawsuit were excluded, the harassment and discrimination allegations were not excluded.
Allied World countered that its denial was proper as the Sexual Abuse Exclusion precluded coverage and its obligation to provide a defense of the Underlying Lawsuit. Allied World argued that the Patients’ allegations of discrimination and harassment in the Underlying Lawsuit were so intertwined with and related to the allegations of sexual abuse that the Sexual abuse exclusion must be applied to the entirety of the Underlying Lawsuit.
All parties eventually moved for summary judgment and the district court agreed with Allied World’s position. The court determined that the allegations of discrimination and harassment, which were potentially covered, were too connected with the allegations of sexual abuse. The court refused to analyze each allegation of wrongdoing separately and instead ruled the Sexual Abuse Exclusion applied to the entire lawsuit.
Ninth Circuit Decision
On appeal, the Ninth Circuit strongly disagreed with Allied World and the District Court. In doing so, the Ninth Circuit set out that the insurer’s duty to defend arises when the policy could conceivably cover the allegations contained in the complaint and the insured must provide a defense until no remaining claims are covered. Additionally, the insurer must give the insured the benefit of the doubt when determining whether the policy covers allegations in the complaint.
Taking these standards into account, the Ninth Circuit determined the Underlying Lawsuit contained both covered and uncovered allegations. Specifically, the allegations concerning Stephens’ verbal sexual harassment of the Patients did not fall within the Sexual Abuse Exclusion. Additionally, it was at least conceivable that strip searches (that did not involve physical touching) and the excessive hugging did not constitute sexual abuse that would fall within the exclusion. Under Washington law, ABHS could have been found liable solely for this conduct undertaken by Stephens. Therefore, Allied World was required to provide ABHS with a defense and breached the insurance contract when it failed to defend the Underlying Lawsuit.
The Ninth Circuit did not stop. The Court also found that Allied World’s refusal to defend was based on a questionable coverage position and Allied World had acted in bad faith as a matter of law. As a result, Allied World was estopped from denying its indemnity obligation and was responsible for paying the full amount of the judgment. Further, Allied World’s conduct also violated the Insurance Fair Conduct Act and the district court was permitted to award treble damages or attorneys’ fees to the Patients.
An outright refusal to defend is a dangerous strategy for an insurer. This is particularly true when the insurer is relying on an exclusion and that must be interpreted narrowly. Failure to give the insured the benefit of the doubt in such situations comes with steep consequences as Allied World discovered.
Need Assistance with a Bad Faith Situation?
Kirk Presley enjoys helping individuals and other lawyers with bad faith cases.
If you would like to speak with him about a bad faith case email him at kirk@presleyandpresley.com or call him at (816) 931-4611.