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Coverage Alert: New York State Vs. The Catholic Diocese of Buffalo and Others

In the February 11th, 2021 edition of the “The Buffalo News” there is an article covering New York State Attorney General Letitia James’ (AG) civil lawsuit against the Diocese of Buffalo, Bishop Malone, and Auxiliary Bishop Grosz. The article focuses on petitioning court approval to hire separate defense counsel for the Buffalo diocese and the two bishops.

This article offers an excellent example of why a diocese should opt for a duty to defend policy instead of a duty to indemnify policy, including D&O insurance comprised of three core, separate insuring agreements, side A, side B, and side C. Click here to understand the difference between 1) duty to defend and a duty to indemnify policy, also known as an excess indemnity policy, and 2) directors’ and officers’ side A, B & C insuring agreements.

Excess indemnity policies combined with a lack of side A, B, and C insuring agreements are common within the diocesan sector. These coverage omissions can be detrimental when a diocese becomes a debtor in bankruptcy, as present in Buffalo. An excess indemnity policy requires the diocese to pay the entire claim first and seek reimbursement from the insurer. However, almost by definition, insolvent dioceses cannot make these upfront payments. Indeed, in many cases, the diocese’s
inability to do so in the face of a deluge of litigation was the principal cause of the insolvency in the first place.

The remedies sought by the AG from the Buffalo diocese are nonmonetary. However, the remedies sought from Bishop Malone and Grosz are monetary. The AG requires them to account for their conduct in the failure to perform their duties in managing the Diocesan Corporation and its assets and make full restitution for the waste and misuse of charitable assets resulting from their breaches of fiduciary duties. Donors could potentially take similar action against the two bishops and other diocese leaders if this case proves to be legitimate.

Based on the article, the diocese petitioned the court to hire separate representation for themselves and the two bishops. The report highlights the concerns expressed by the committee of unsecured creditors, which consists of child sex abuse survivors. The requirement to petition the court is not because of the diocese operating under bankruptcy protection, but rather their excess indemnity language combined with the lack of side A D&O coverage.

The diocese and the two bishops would not have to petition the court had they purchased a duty to defend policy inclusive of D&O side A coverage. Additional benefits beyond the insurer’s duty to defend such an allegation are the Trustees’ dedicated limits. No deductible or retention is applicable under side A coverage. This omission in the coverage arrangement may leave the two bishops to fund their defense and monetary damages.

There are ~190 dioceses in the United States, and the majority do not have D&O side A coverage, and many do not purchase a duty to defend policy. Ideally, a diocese should have both in place to avoid Buffalo’s similar experience. The notion that a duty to defend policy inclusive of D&O Side A, B, and C coverage is more expensive or unavailable is false.