Insurers Must Defend Hotels Accused of Sex Trafficking of Minors

Insurance companies cannot invoke “overriding public policy” in order to refuse to defend insured hotel owners and managers accused of enabling and profiting off of sex trafficking of minors, even though the state has criminalized such trafficking.

“[N]either an insurer’s duty to defend nor its duty to indemnify is abrogated on the basis of public policy when the insured is alleged to have enabled or profited from sex trafficking,” the Pennsylvania Supreme Court declared yesterday.

The state Supreme Court said that insurers could have created exclusions in their insurance policies for such behavior but did not and it was not appropriate for the court to act as a “super-scrivener” to insert coverage exclusions for the insurers.

The high court explained that while the General Assembly has expressed the Commonwealth’s policy against sex trafficking by criminalizing it, the criminal statute “does not provide a justification for the judicial crafting of an exception to insurance coverage in a policy otherwise silent on the subject.”

The high court added that adopting the insurers’ position to abrogate insurance coverage would require it to divine an “overriding” public policy. “We do not believe it is within the purview of this Court to rank the magnitude of the public policy underlying the various crimes defined in the Crimes Code,” the opinion states.

Emphasizing the breadth of an insurer’s duty to defend, the court said an insurer may not justifiably refuse to defend a claim against its insured “unless it is clear from an examination of the allegations in the complaint and the language of the policy that the claim does not potentially come within the coverage of the policy.” This duty even extends to claims that are “groundless, false, or fraudulent” so long as the allegations possibly implicate coverage.

The case arose out of four civil complaints by plaintiffs who alleged that, as minors, they were victims of human sex trafficking at various hotels in Philadelphia, including the Roosevelt Inn. Each plaintiff filed suit against UFVS Management Co., Roosevelt Motor Inn, Inc., and Roosevelt Inn, as the owners, operators, and managers of the Roosevelt Inn. The plaintiffs alleged that policyholders were negligent in failing to stop sex trafficking from occurring at the inn.

The hotels maintained primary-layer commercial general liability insurance for the Roosevelt Inn through various insurers, including Harleysville Preferred Insurance Co., Nationwide Mutual Insurance Co. and Samsung Fire and Marine Insurance Co. Harleysville, Nationwide, and Samsung each initially defended the policyholders in the underlying lawsuits subject to reservations of rights.

In 2018, Samsung sought a declaratory judgment in the federal district court that it had no legal duty to either defend or indemnify the policyholders in the underlying actions. Samsung argued that because the allegations against the policyholders, if true, would establish that they violated the state’s human trafficking law, it would be against public policy for Samsung to be forced to defend or indemnify them.

The case ended up at the Supreme Court on a request by the Third Circuit Court of Appeals for a clarification on the public policy issue as it dealt with an appeal by the policyholders after a federal district court had ruled in favor of the insurer.

In siding with Samsung, the district court relied upon on a 2004 opinion, Minnesota Fire & Casualty Co. v. Greenfield that permitted an insurer to deny homeowners coverage for an insured alleged to have sold heroin that caused the death of an individual. The Greenfield opinion reasoned that in situations where an insured commits a criminal act with respect to a Schedule I controlled substance, “public policy will not allow coverage under the contract of insurance.”

In the Samsung matter, the district court reasoned that because sex trafficking has been “explicitly criminalized and has a high potential for abuse,” it is comparable to the sale of illegal drugs at issue in Greenfield. The district court suggested that “it may make public policy the basis of a judicial decision only ‘in the clearest of cases.’

The high court disagreed with the district court, noting that the district court did not analyze Insurers’ separate arguments that they had no duty to defend based on the language of each respective policy. The high court found that the district court overstated the legal value of the Greenfield opinion, which as a plurality opinion did not establish binding precedent for future cases and therefore does not control the outcome in the Samsung case.

The high court also said it would not extend the three-justice plurality opinion in Greenfield to policyholders who in this case were never convicted of nor admitted to the commission of a crime.

Roosevelt Inn, LLC and Roosevelt Motor Inn, Inc. filed for bankruptcy during the course of the litigation. RI Settlement Trust was established in the bankruptcy proceedings to assume liability for all tort claims brought against hotel policyholders.

The law firm Reed Smith, counsel to RI Settlement Trust, called the ruling a “significant victory for policyholders in Pennsylvania who face litigation that includes claims based on third parties’ conduct on their business premises could be recharacterized as potentially involving unproven, uncharged criminal law violations.”

The trust’s lawyers explained that if the trust is ultimately successful in establishing its rights to coverage, the beneficiaries would include any tort plaintiffs and claimants that successfully establish their claims under the Roosevelt Inn bankruptcy plan.

The insurers involved in the original litigation include Samsung Fire And Marine Insurance Co., Ltd (U.S. Branch); Harleysville Preferred Insurance Co.; Ace Property and Casualty Insurance Co.; Nationwide Mutual Insurance Co.; Philadelphia Indemnity Insurance Co.; Capitol Specialty Insurance Corp.

The opinion was written by Justice Christine Donohue. Chief Justice Debra Todd and Justices Dougherty, Kevin Wecht, Sallie Updyke Mundy, Kevin Brobson and Daniel McCaffery joined the opinion. Justice David Wecht filed a concurring opinion in which Justice Daniel McCaffery joined.

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