Toiah Gordon v. Continental Casualty Company

(Abuse or Molestation Exclusion Applied to Bar Coverage of Claims for Sexual Assault and Negligent Hiring, Supervision and Retention by Owner of a Massage Spa)

(December 2024) - In Gordon v. Continental Cas. Co., -- Cal. App. 5th -- (December 3, 2024), the California Second District Court of Appeal found that an “Abuse or Molestation Exclusion” applied to bar an insurer's duty to defend massage spa owners in connection with a lawsuit filed by three customers of the spa alleging sexual battery related causes of action and negligent hiring training and supervision. The insureds stipulated to liability and judgment in the amount of $6.8 million and assigned their rights under a commercial liability policy issued to the Spa by Continental Casualty Company (“Continental”) to the plaintiffs.

In a case of first impression, the Court of Appeal found that the plaintiff customers were in the care, custody or control of spa co-owner and operator of the spa, Zongwei Shen, such that part (a) of the exclusion applied to bar coverage of Shen. In addition, the Court of Appeal found that part (b) of the exclusion applied to bar coverage of co-owner and spa manager, Zhong Xin, for the negligent hiring, retention, and supervision of Shen.

Continental issued a commercial liability policy to Shen, doing business as the Nobles Massage Spa ( the “Spa”). The policy covered Shen and Xin. The policy afforded coverage for bodily injury, property damage and personal and advertising injury. In addition, the policy included an abuse or molestation exclusion endorsement which states:

“This insurance does not apply to bodily injury, property damage or personal and advertising injury arising out of : (a) the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or (b) the negligent(i) employment, (ii) investigation, (iii) supervision, ( iv) reporting to proper authorities, or failure to report, or (v) retention of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by (a) above.”

The Court of Appeal rejected the plaintiffs’ argument that they had to be in the exclusive care, custody or control of Shen during their massages. The Court of Appeal noted that the phrase “care, custody or control” used the word “or” such that each term should be read separately. Hence, for the exclusion to apply Continental need only show that the plaintiffs were in the “care or custody or control” of Shen. In that regard, the Court of Appeal found that the plaintiffs were in the care and control of Shen at the time they were receiving their massages.

The Court of Appeal also rejected Xin’s argument that subpart (b) of the exclusion did not apply to “negligent training” of Shen. Rather, the Court of Appeal noted that the exclusion applied to injury “arising out of” of the negligent hiring, retention, or supervision of Shen which included negligent training.