Case Overview

• Crandall University sought insurance coverage from AIG for legal defense costs and other losses related to the Stackhouse Action (a wrongful termination lawsuit by a former employee, Dr. Stackhouse, dismissed for sexual harassment).
• AIG denied coverage based on a Sexual Misconduct and Child Abuse Exclusion in the insurance policy, arguing that the claim was indirectly tied to sexual misconduct.

Key Legal Issues

1. Does the Sexual Misconduct Exclusion apply, barring coverage for losses from the Stackhouse Action?
   • Specifically, does the claim "arise out of or involve" sexual misconduct, and does sexual misconduct include sexual harassment?
2. Is Crandall entitled to indemnification for legal costs and to select its own legal counsel?

Court's Findings

1. Exclusion Applicability

   • The exclusion clause was deemed unambiguous. Its broad language excludes coverage for claims directly or indirectly involving sexual misconduct, which the court found includes sexual harassment.
   • Dr. Stackhouse’s dismissal stemmed from findings of sexual harassment, making the exclusion applicable.

2. Definition of Sexual Misconduct

   • The court interpreted "sexual misconduct" to include sexual harassment, citing its nature as unwelcome and abusive sexual behavior.

3. Other Arguments

   • Crandall’s claims of ambiguity, conflict with policy terms, and separate insured status were rejected.

4. Choice of Counsel and Legal Costs

   • AIG retained the right to select counsel as per the policy.

Outcome

• The application was dismissed.
• Crandall was ordered to pay $3,000 in costs plus disbursements to AIG.