Executive Summary: Key Legal and Evidentiary Issues

• Central issue was the interpretation of a Sexual Misconduct Exclusion in Crandall’s insurance policy.

• The exclusion barred coverage for claims “in any way involving, directly or indirectly” sexual misconduct.

• Crandall argued the exclusion applied only if it or its insured agents were directly accused of misconduct.

• AIG denied coverage, asserting the claims arose indirectly from a sexual harassment finding against a professor.

• The courts found no ambiguity in the exclusion and upheld its broad application.

• Appeal was dismissed with costs of $2,500 awarded to AIG.

Background of the dispute

In November 2023, Crandall University received a report from an external investigation triggered by anonymous harassment allegations on a social media account named @DoBetterCrandall. The investigation expanded to include Dr. Stackhouse, a professor, who was placed on leave during the process. The final report, dated November 15, 2023, concluded that Dr. Stackhouse had, among other things, sexually harassed a female student.

On November 22, 2023, Crandall terminated Dr. Stackhouse’s employment for cause and issued a public news release that named him and included a summary of the report’s findings.

In response, Dr. Stackhouse filed a lawsuit against Crandall, seeking damages for wrongful dismissal and defamation. His wife later joined the action, which was amended to add claims for privacy-related torts. Crandall sought insurance coverage for this action under its “Not-For-Profit Risk Protector” policy issued by AIG Insurance Company of Canada.

Policy terms and the exclusion clause

AIG denied coverage, citing Endorsement #18 titled “SEXUAL MISCONDUCT AND CHILD ABUSE EXCLUSION (D&O AND EPL COVERAGE SECTIONS).” The endorsement excludes coverage for claims “alleging, arising out of, based upon or attributable to, or in any way involving, directly or indirectly, any Sexual Misconduct.” “Sexual Misconduct” is defined as “any licentious, immoral or sexual behavior, sexual abuse, sexual assault, or molestation intended to lead to or culminating in any sexual act against any individual(s)”.

Crandall contended that the exclusion only applied when the insured itself was accused of sexual misconduct, and that claims based on defamation and wrongful dismissal should not be excluded.

Lower court's findings

In Crandall University v. AIG Insurance Company of Canada, 2024 NBKB 151, the Court of King’s Bench ruled against Crandall. The judge found the language of the exclusion to be unambiguous and interpreted it to exclude claims that arise even indirectly from sexual misconduct. The judge concluded that the Stackhouses’ claims were indirectly based on the findings of sexual harassment in the investigative report and thus were captured by the exclusion.

Court of Appeal ruling

The New Brunswick Court of Appeal, in a unanimous decision delivered by Justice French (with Chief Justice Richard and Justice Quigg concurring), dismissed Crandall’s appeal on May 1, 2025. The Court affirmed the lower court’s interpretation that the exclusion applied even when no direct accusation of misconduct was made against the insured. It held that the language “in any way involving, directly or indirectly” must be given effect and encompassed the Stackhouses’ claims, as they were rooted in the sexual harassment findings that led to Dr. Stackhouse’s termination.

Crandall had argued that excluding such claims was commercially unreasonable and contrary to the policy’s intent to cover wrongful dismissal and defamation. However, the Court rejected these submissions, stating that exclusions are meant to carve out otherwise covered claims and must be interpreted according to their plain language when unambiguous.

Final outcome

The appeal was dismissed and AIG was awarded $2,500 in costs. The Court concluded that the claims advanced by the Stackhouses involved, at least indirectly, sexual misconduct and therefore fell within the scope of the exclusion, even though Crandall was not directly accused of such misconduct.