Insuring Abuse – The Catholic Church, sexual misconduct, and captive insurance

The Catholic Church in the US is revealed to be using a risk retention group (RRG) to allow dioceses to insure against priests abusing children in the future, leading to questions about sexual misconduct liability.

In the last decade, there has been a reckoning for victims of child sexual abuse, with the mainstream media and social media shining a spotlight on systematic cover ups of the crime, and many survivors coming forward with accounts of decades-old abuse.

In 2002, The Boston Globe published an investigation into the cover up of child sexual abuse within the Catholic Church in Boston. This lead to worldwide investigations finding that the church has covered up abuse reported to them across the US and Canada as well as in countries in Europe, the Pacific, Africa, South-East Asia and South America.

In many of these countries the church has been found to not report known cases of child sexual abuse to police, and move abusive priests to a different diocese when an allegation is made, where many of those priests simply offended again in a new location.

The uncovering of these practices is so widespread that the Wikipedia page on Catholic Church sexual abuses cases is over 33,000 words, which barely scratches the surface of the topic.

Then in October 2017 the #MeToo movement burst forth on social media after a number of allegations against film producer Harvey Weinstein. The movement encouraged victims of sexual abuse to speak out, aiming to show how widespread the issue was.

The Catholic Church

Now in 2020, eight years after the investigations in Boston, Captive Review can reveal that the Catholic Church in the US is using RRGs to insure their dioceses for sexual misconduct liability.

In a current case being heard in the Bankruptcy Court of Western New York, the Catholic Church diocese of Buffalo disclosed that they currently hold a sexual misconduct liability policy through a risk retention group.

The diocese is filing for bankruptcy due to a number of historical sexual abuse cases brought against it. In a statement the diocese said the “reorganisation” of the diocese “aims to provide resolution for the most number of individuals who have been harmed by past by sexual abuse while continuing the work of Catholic ministry”.

Filing for bankruptcy will prevent victims from suing the diocese for compensation. In a statement to the court, the diocese said that they were applying for a chapter 11 because the lack of funds available to pay compensation to victims.

“The diocese acknowledges its moral obligation to compensate victims of abuse fairly and equitably,” the document said.

“Consistent with this moral obligation, it cannot allow any single plaintiff to recover a disproportionate share of the limited funds available from the diocese simply because the plaintiff’s case goes to trial first. Similarly, the diocese cannot ignore the valid claims of other creditors who stand on equal footing with the CVA [Child Victims Act] claimants as general unsecured creditors of the diocese.”

Within the current bankruptcy filing, the judge enquired about the diocese’s current sexual misconduct liability, and lawyers revealed that a Buffalo diocese currently maintains stop-gap insurance for future incidents of sexual abuse, not just historical cases.

“Let’s suppose there was, hopefully we’ll never see it happen but let’s suppose there was, a cause of action that arose on a Child’s Victim Act type case,” the judge said. “A cause of action that arose after 7:19 this morning when the petition was filed.

“Is the diocese fully self-insured on that liability?”

Lawyers for the diocese confirmed that there was a current sexual misconduct policy with a risk retention group.

“There is stop gap insurance for excess, in the excess pool that covers sexual misconduct,” the lawyers confirmed.

“So, your honour, apparently we do have coverage for that as it sits today…we would be self-insured for the initial retention as with any other liability and then the excess coverage would kick in above that.”

The diocese’s argument that filing for bankruptcy is better for victims as if not, the funds available to them may run out before all victims could have their cases heard and settlement paid. In court, the diocese explained this to the judge, and how the RRG is related to settlements.

“Your honour, we believe it’s for the benefit of all of those participants in the [self-insurance] programme,” lawyers from the diocese said in court.

“[The programme] is the source from which the payments that we’re seeking pursuant to this motion will be funded, from those premium dollars that are collected from the various participants as well as the diocese portion of that.”

Bishop Edward B. Scharfenberger, apostolic administrator of the diocese of Buffalo, said that the diocese believed that filing for bankruptcy will be the best thing for victims.

“Our decision to pursue Chapter 11 reorganisation…is based on our belief that this approach will enable the most number of victim-survivors of past sexual abuse in achieving fairness and a sense of restorative justice for the harm they have experienced,” the bishop said.

According to statements made to the bankruptcy court, the Diocese of Buffalo expects to be paying millions of dollars to victims through The National Catholic Risk Retention Group (TNCGG).

“For fiscal year 2019-2020, the diocese has budgeted approximately $7.4m in premium revenue related to the SIP [self-insurance program],” the diocese said.

Sexual misconduct liability

But what exactly is sexual misconduct liability cover? Essentially it’s a form of public liability insurance that an organisation can take out to cover themselves for if an employee or executive has claims of sexual abuse or sexual harassment made against them.

According to Anne-Marie Towle, global captive solutions leader at Hylant, a sexual misconduct policy will usually pay out the damages of a court settlement for sexual abuse.

“The cover is really, as we define it here in the United States, the damages against a person,” she explained. “If there’s a $1m liability, typically if you go to court and the court rules that you’ve got to pay damages to this person, then it covers the damages. It pays out the damages and then associated legal costs with the defence.”

Jason Flaxbeard, senior managing director at Beecher Carlson, explained that there are two main specific types of sexual misconduct liability cover.

“There’s two types of policies, there is current and there are claims made,” he said. “If you wrote a current policy back in 1980 and there was a claim, then that policy shouldn’t drop.

“However the limits from 1980 are probably inadequate for now. So nobody wants to write claims made [policy] now, because if you write [it] you may be picking up some of the tail that existed in those prior policies.”

The diocese of Buffalo obtains its sexual misconduct liability cover from The National Catholic Risk Retention Group (TNCRRG), an RRG that was domiciled in Vermont in the 1980s.

“We now operate in 21 states and are authorised to write liability insurance in all 50 states, subject to the requirements of the federal LRRA [Liability Risk Retention Act]. We also insure a multitude of exposures for the Catholic Church throughout the country,” TNCRRG states on their website.

“TNCRRG is 100% owned by, and exclusively devoted to satisfying the needs of, Roman Catholic organisations.”

The RRG has been providing sexual misconduct liability coverage for many years. “[TNCRRG has] demonstrated leadership in the creation and provision of insurance coverage elements needed to properly cover Church ministries,” they state.

“Some examples (now frequently adopted by other insurers) include: Sexual Misconduct Limited Coverage (which no one was underwriting when TNCRRG first offered its full policy limits for this exposure).”

According to Towle, many more organisations are currently looking at putting sexual misconduct liability into their captive.

“It’s somewhat common to write [sexual misconduct liability] in the captive or risk retention group as long as they have limits that are going to be appropriate with capitalisation that’s going into the captive, she explained.

“Right now we’ve actually had some enquiries from several organisations about establishing a captive because this particular market is very, very difficult to place.”

USA Swimming

One organisation that has had large amounts of media coverage when it comes to child sexual abuse is USA Swimming. The organisation is the national governing body for swimming in the United States, and consists of more than 3,000 swimming clubs, 400,000 swimmers, and 2,500 officials and coaches.

USA Swimming has had a captive since the 1980s, one of the earlier adopters of the risk management technique. George Ward, the former senior director of risk management at USA Swimming, told Captive Review that USA Swimming formed a captive because of the limited options in the traditional market.

“Back in the mid 80s AIG, who had been writing most of USA Swimming’s insurance, offered $1m coverage for $1m premium,” Ward explained.

“So USA Swimming said, well we better start a captive. A captive was formed and it was called the United States Sports Insurance Company, USSIC for short.”

The captive was formed in Barbados, but had in later years been brought back onshore to DC, where it is domiciled today.

Interestingly USSIC was originally formed not because of concerns about sexual misconduct liability, but because of injuries involving racing starts. With young swimmers, serious injuries when doing racing starts into the pool are possible.

According to Ward, it wasn’t until around 2008 when USA Swimming started seeing claims of sexual abuse coming to the organisation. It was at this point that USA Swimming developed the Safe Sport programme, which launched in 2010.

Safe Sport is, in the words of USA Swimming, an “abuse protection programme”. After being developed a decade ago, the initiative is well-known, with USA Swimming’s website even publishing a complete, public list of all individuals who have been suspended or banned due to sexual abuse.

“USA Swimming’s Safe Sport programme, a comprehensive abuse prevention programme, consists of a multi-layered approach to keep kids safe, including: required policies and best practice guidelines; mandatory screening, including criminal background checks and employment screening; training and education; monitoring, supervision and mandatory reporting,” USA Swimming’s website states.

“These measures are informed by experts in the field of child safety and are among the strongest safeguards found in youth-serving organisations.”

Market capacity

The trend of putting sexual misconduct insurance into a captive or RRG may only increase. With the current market situation, the little capacity that was available is decreasing rapidly.

Flaxbeard explains that there are a couple of key developments in recent years that have really pushed organisations to look at using alternative risk financing for sexual misconduct insurance.

“I think what’s happening now is that the border insurance market is getting very hard anyway,” he explained. “So there’s a lot more underwriting pressure on any account that has sexual misconduct liability exposure.

“Underwriters don’t need to write this business to make a profit. They don’t need to run this class of business to deliver to management their profit goal. So a lot of them are just saying, well, we’re not going to. We don’t know what the extent of the litigation around this space is going to be.”

Litigation for compensation for sexual abuse is another reason why capacity is limited.

“The fact of the matter is that to bring one of these cases through any captive or the insurance market, the legal expenses are enormous,” he explained.

“So you’ve got legal expenses. You’ve got settlement expenses. And settlement expenses, as you may have noticed, is one of the reasons why this hardening market has occurred because a $1m settlement isn’t that much anymore. People don’t see a million dollars as a big chunk of change.”

Towle echoes this, highlighting that a settlement awarded by a court could potentially be much more than what an organisation is insured for, pointing out that the uncertainty presents problems for underwriting.

“Even if you have policy limits here in the US, a judge could still come in and award more,” she explained. “Even if your policy limits [damages paid] to $5m, the judge or jury could say that because of the damage and the harm done, you owe them $100m.

“So along those lines it could be much higher than your policy limits. And so how do you define that and how do you underwrite it, too? And then what are your procedures and what are your triggers and your policy?”

Litigation

On top of this, many states in the US are changing their laws, giving victims of childhood sexual abuse more time to bring their claims forward. Previously there were various time constraints, with statute of limitations. Now many states are allowing more time, as studies show that the vast majority of victims of child sexual abuse do not come forward about their abuse for many years. Forty-four states have abolished statue of limitations for criminal childhood sexual abuse, while twelve have abolished the statue of limitations for civil cases as well.

According to Child USA, a thinktank for child protection, only about one third of victims actually disclose their abuse as children, with many waiting until middle age to be able to tell someone else.

“Most victims of child sex abuse miss the statute of limitations because trauma affects them in a way that causes them to delay disclosure of their abuse until they are older,” Child USA said.

“Statistically, one third of the victims of child sex abuse disclose as children and another one third never disclose. Studies show that the average age to disclose is 52, with the median age of 48.”

What this means for sexual misconduct liability is that organisations are having to look at their liability for a much longer period, and as Towle pointed out, attempt the difficult task of underwriting historical liability.

“You’ve got a lot of states opening up the look back period,” Flaxbeard said. “So there used to be a statute of limitations in most states, that allowed claims to come in for some period after you turned 18.

“Now a lot of states are ripping those apart, saying we can go back as far as you want to go. So what companies like USA Swimming and others are having to do is look back, in some cases to the 1950s or whenever their charter was founded, to understand what their liability could be.

“And that is proving more and more of an issue. No carrier wants to write that. Nobody wants to write 1950s coverage.”

Together these factors are making it extremely difficult for organisations to obtain sexual misconduct liability. Which is where risk management within organisations, and not just obtaining insurance through the captive, comes into play.

“The settlements are getting higher and higher and higher, and juries are getting more lenient towards offering what we see as penal verdicts. So you couple that with the hardening market and people pulling capacity away from this space,” Flaxbeard said.

“Where do you put this risk? There is only one place left and that is your own balance sheet. And you’re going to put it on your balance sheet, which includes you captive, the only thing you can do is tighten up your procedures and your protocols. Make sure that, like USA Swimming, you’ve got an initiative which details and documents what people should do in all situations.”

What next?

When it comes to the Catholic Church and sexual misconduct liability, the question to be asked is if organisations have to put the risk on their own balance sheet, why is the church relying on its own RRG’s insurance limits instead of using its enormous wealth to compensate victims?

The actual wealth of the Catholic Church has said to be too great to calculate, but a 2018 investigation found that its wealth in Australia alone, a country of 24 million, is AUD$30bn. The official Australian government census states that 22.6% of the country identifies as Catholics, on par with the 22% of Americans that are Catholic.

Instead organisations like TNRRG exist, allowing dioceses access to sexual misconduct policies. Some of those involved in the church have also pushed back against the public perception of the institution.

In the opening letter of TNRRG’s 2018 annual report, president Daniel O’Hara wrote that the media has “subjected” the church to scrutiny and that the attempts of the church to address this issue had been ignored.

“In 2018 the Catholic Church in the United States was again in the spotlight for its efforts to combat the scourge of sexual abuse by clergy and lay persons,” he wrote.

“Reports from civil investigators and prosecutors, politicians and other public officials heightened awareness of this critical issue and subjected the Church to further scrutiny. While some of this attention was helpful, much of what the Church has done to address these issues has gone unreported outside of Church circles.”

One of the examples O’Hara uses as a measure introduced by the church to “address” the issue of child sexual assault is similar to USA Swimming’s Safe Sport programme. It’s called VIRTUS, and provides “education, training and compliance resources that have been proven to be so effective”.

Given all of this, the Catholic Church’s message to the world seems to be that while child sexual abuse was bad in the past, that now the church is prepared for the future.

“We too insistently beg forgiveness from God and from the persons involved, while promising to do everything possible to ensure that such abuse will never occur again;” Pope Benedict XVI said in a June 2010 homily.

However in a letter to Irish Catholics published by Pope Benedict in March 2010 on the topic of child sexual abuse, the leader of the church seemed to blame secularization of society for the increase in reported abuse cases.

“In recent decades, however, the Church in your country has had to confront new and serious challenges to the faith arising from the rapid transformation and secularization of Irish society,” the Pope wrote.

“Fast-paced social change has occurred, often adversely affecting people’s traditional adherence to Catholic teaching and values.”

And the current pope, Pope Francis, accused victims of child sexual abuse in Chile of lying, saying that he had seen no proof that Bishop Juan Barros helped cover up abuse, and that it was “all calumny”. He later apologised for his comments.

The diocese is now protecting itself and its RRG from litigation that could result in high claims on its sexual misconduct liability. This is positive for the church when it comes to protecting its finances, but potentially bad for victims who may have been awarded a larger settlement through the courts than what the diocese will now be able to pay.

Other organisations may rely on insurance and captives to be able to pay these claims, the Catholic Church, with immeasurable wealth, may not.

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