Western World Insurance Company, Inc. v. Charles Branch and East Arkansas Youth Services, Inc.

WESTERN WORLD INSURANCE COMPANY, Inc. v.
Charles BRANCH and East Arkansas 
Youth Services, Inc.

97-747                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                Opinion delivered March 26, 1998


1.   Insurance -- construction of policy -- insurer not to be bound to plainly
     excluded risk. -- The terms of an insurance contract are not to
     be rewritten under the rule of strict construction against the
     company issuing it so as to bind the insurer to a risk which
     is plainly excluded and for which it was not paid. 

2.   Insurance -- construction of policy -- effect of unambiguous or ambiguous
     language. -- If an insurance policy provision is unambiguous and
     only one reasonable interpretation is possible, the appellate
     court will give effect to the plain language of the policy
     without resorting to the rules of construction; if, however,
     the policy language is ambiguous and thus susceptible to more
     than one reasonable interpretation, the appellate court will
     construe the policy liberally in favor of the insured and
     strictly against the insurer; whether the language of the
     policy is ambiguous is a question of law to be resolved by the
     court.

3.   Insurance -- construction of policy -- language of sexual-action exclusion
     unambiguously excluded liability resulting from sexual acts by appellee's
     employees or residents -- declaratory judgment reversed. -- Holding that
     the language of a sexual-action exclusion in a general and
     professional liability insurance policy was unambiguous, the
     supreme court gave effect to its plain meaning without
     resorting to the rules of construction, noting that the
     definition of "sexual action" contained in the exclusion was
     written very broadly to include "any behavior with sexual
     connotation or purpose"; that the exclusion provided several
     examples of why this conduct might occur but specifically
     stated "not limited to" and referred to "other reason[s],"
     thus indicating that improper sexual acts might occur for
     reasons other than those listed in the definition; and that
     the last sentence broadened the exclusion with respect to a
     direct action for negligence or under a theory of imputed
     negligence; for those reasons, the supreme court held that the
     sexual-action exclusion unambiguously excluded from coverage
     liability that resulted from sexual acts committed by appellee
     insured's employees or residents and reversed the trial
     court's order of declaratory judgment.

4.   Appeal & error -- argument raised for first time on appeal barred. -- An
     argument not raised below nor ruled upon by the trial court
     was procedurally barred as it was raised for the first time on
     appeal.

5.   Insurance -- freedom to contract -- statutory or public-policy limitation.
     -- An insurer may contract with its insured upon whatever
     terms the parties agree so long as the terms are not contrary
     to a statute or public policy.

6.   States -- public policy -- declared by legislature. -- To determine the
     public policy of the state, the supreme court looks to
     statutes and the constitution because public policy is
     declared by the General Assembly rather than the court.

7.   Insurance -- appellee failed to demonstrate exclusion violated public
     policy. -- The supreme court found no merit to appellee's
     argument that the sexual-action exclusion was void as a matter
     of public policy where appellee failed to cite statutory or
     constitutional authority to demonstrate how the sexual-action
     provision violated Arkansas public policy.


     Appeal from Crittenden Circuit Court; Samuel Turner, Jr.,
Judge; reversed.
     Wright, Lindsey & Jennings, by: Patricia A. Sievers and J.
Charles Dougherty, for appellant.
     Bill W. Bristow, for appellee Charles Branch.
     William P. Rainey, for appellee East Arkansas Youth Services,
Inc.

     Annabelle Clinton Imber, Justice.
     The issue in this case is whether a sexual attack that
occurred at East Arkansas Youth Services, Incorporated ("Youth
Services"), is covered by an insurance policy issued by Western
World Insurance Company ("Western World").  The trial court entered
a declaratory judgment in favor of Youth Services, and Western
World appeals.  We reverse.
     Youth Services is a temporary residential facility for
nonviolent adolescents.  Jacqueline Branch Daves was a resident of
Youth Services at their facility in Crittenden County when she was
allegedly raped by another resident.  Ms. Daves and her father,
Charles Branch, subsequently filed a lawsuit against Youth Services
and its insurance carrier, Western World, alleging that Youth
Services' negligent supervision and deficient safety measures were
the proximate cause of the rape.    
     Youth Services filed a cross-claim asking for a declaratory
judgment that Western World was obligated to provide liability
coverage and to defend the negligence action pursuant to a general
and professional liability insurance policy which was in effect at
the time of the alleged rape.  In response, Western World claimed
that it was exempt from both obligations pursuant to a "Sexual
Action Exclusion" provision which provided that:

     It is agreed that no coverage exists (and therefore no
     duty to defend exists) for claims or suits brought
     against any insured for damages arising from sexual
     action.  Sexual action includes, but is not limited to,
     any behavior with sexual connotation or purpose --
     whether performed for sexual gratification,
     discrimination, intimidation, coercion or other reason.

     It is further agreed this exclusion applies even if an
     alleged cause of the damages was the insured's negligent
     hiring, placement, training, supervision, act, error or
     omission.
     
     On April 15, 1997, the trial court entered declaratory
judgment in favor of Youth Services.  In its order, the trial court
found that the exclusion applied only to sexual acts committed by
Youth Services' employees, and not to sexual acts committed by its
residents.  Accordingly, the trial court declared that Western
World was required to provide liability coverage and defend the
negligence action filed by Daves and Branch.  From this order,
Western World filed a timely notice of appeal.
               I.  Interpretation of the Exclusion
     For its first argument on appeal, Western World contends that
the trial court erred when it construed the language of the sexual-
action exclusion provision to exclude coverage for sexual acts
committed by Youth Services' employees, but not to exclude coverage
for sexual acts committed by its residents.  Our law regarding the
construction of an insurance contract is well settled.  In Southern
Farm Bureau Cas. Ins. Co. v. Williams, 260 Ark. 659, 543 S.W.2d 467
(1976), we said that:

     The terms of an insurance contract are not to be
     rewritten under the rule of strict construction against
     the company issuing it so as to bind the insurer to a
     risk which is plainly excluded and for which it was not
     paid. 

Thus, if the provision is unambiguous, and only one reasonable
interpretation is possible, we will give effect to the plain
language of the policy without resorting to the rules of
construction.  See Unigard Sec. Ins. Co. v. Murphy Oil U.S.A.,
Inc., 331 Ark. 211,    S.W.2d    (1998); Smith v. Shelter Mut. Ins.
Co., 327 Ark. 208, 937 S.W.2d 180 (1997).  If, however, the policy
language is ambiguous, and thus susceptible to more than one
reasonable interpretation, we will construe the policy liberally in
favor of the insured and strictly against the insurer.  Unigard,
supra; State Farm Fire & Cas. Co. v. Midgett, 319 Ark. 435, 892 S.W.2d 469 (1995); Keller v. Safeco Ins. Co., 317 Ark. 308, 877 S.W.2d 90 (1994).  Finally, whether the language of the policy is
ambiguous is a question of law to be resolved by the court. 
Unigard, supra.
     We hold that the language of the sexual-action exclusion is
unambiguous, and thus we must give effect to its plain meaning
without resorting to the rules of construction.  The definition of
"sexual action" contained in the exclusion is written very broadly
to include "any behavior with sexual connotation or purpose."  The
exclusion then provides several examples of why this conduct may
occur, but specifically says "not limited to" and refers to "other
reason[s]," thus indicating that the improper sexual acts may occur
for reasons other than those listed in the definition.  Moreover,
the last sentence broadens the exclusion by clarifying that Western
World will also not be liable if Youth Services is sued in a direct
action for negligence, or under a theory of imputed negligence such
as respondeat superior.  For these reasons, we hold that the
sexual-action exclusion unambiguously excludes from coverage
liability that results from sexual acts committed by Youth
Services' employees or residents.  Accordingly, we reverse the
trial court's order of declaratory judgment.
     In reaching this conclusion, we are not unmindful of Youth
Services' argument that the exclusion is in conflict with two
provisions in the insurance policy.  This argument, however, was
not raised below nor was it ruled upon by the trial court.  Hence,
the argument is procedurally barred as it is raised for the first
time on appeal.  Wilson v. Rebsamen Ins., Inc., 330 Ark. 687, 957 S.W.2d 678 (1997); Slaton v. Slaton, 330 Ark. 287, 956 S.W.2d 150
(1997).   
                       II.  Public Policy
     The next issue is whether the exclusion is void as a matter of
public policy because the phrase "sexual action" is vague and
overbroad.  It is well settled that an insurer may contract with
its insured upon whatever terms the parties agree so long as the
terms are not contrary to a statute or public policy.  Pardon v.
Southern Farm Bureau Cas. Ins., 315 Ark. 537, 868 S.W.2d 468
(1994); Shelter v. Gen. Ins. Co. v. Williams, 315 Ark. 409, 867 S.W.2d 457 (1993); Guaranty Nat'l Ins. v. Denver Roller Inc., 313
Ark. 128, 854 S.W.2d 312 (1993).  To determine the public policy of
this state, we look to our statutes and constitution, Guaranty
Nat'l Ins., supra; Sterling Drug, Inc. v. Oxford, 294 Ark. 239, 743 S.W.2d 380 (1988), because public policy is declared by the General
Assembly, and not this court.  Davis v. Ross Prod. Co., 322 Ark.
532, 910 S.W.2d 209 (1995); Nabholtz Const. Corp. v. Graham, 319
Ark. 396, 892 S.W.2d 456 (1995). 
     On appeal, Youth Services has failed to draw our attention to
a single statutory or constitutional provision that establishes a
public policy prohibiting sexual-action exclusion provisions. 
Instead, Western World has cited cases from other jurisdictions
that purportedly stand for the proposition that such exclusions do
not violate public policy.  In Smith v. Shelter Mutual Insurance
Co., 327 Ark. 208, 937 S.W.2d 180 (1997), we refused to consider
cases from other jurisdictions once we concluded that the insurance
provision in question did not violate the public policy of this
state.  Youth Services has simply failed to demonstrate how the
sexual-action provision violates Arkansas public policy. 
Accordingly, we find no merit to this argument.
     Reversed.