Can a general liability policy’s personal injury part provide defense coverage to a hospitality risk and its owner for a civil action charging its owners were involved in sex trafficking? At first blush, one would think not. However, a recent Massachusetts case from the federal district court found that the insurer, Peerless Indemnity Insurance Company, had a duty to defend its insured Bijal, Inc., d/b/a Shangri-La Motel (Bijal or Shangri-La) and its two owners Ashvinkumar Patel and Sima Patel (Patels) against such a claim.
While finding no coverage under the bodily injury coverage of the underlying general liability policy, the court found that on the facts alleged, the personal injury liability form’s coverage for “false imprisonment” created a duty for Peerless to defend a claim brought under the civil liability provisions of a federal criminal statute designed to punish forced labor and human trafficking including sexual trafficking.
A possible risk in hospitality and habitational risks
The possibility of a commercial liability policy incurring an unexpected duty to defend or indemnify for sex trafficking or human trafficking has been recognized for several years. The insurance risk comes from a 2003 federal amendment to allow civil liability for victims of forced labor, human trafficking, or sex trafficking to recover damages and attorney’s fees from actual participants and those persons who benefited and knew or should have known of the crime being committed.
The hotel and motel part of the hospitality industry is particularly vulnerable to this type of suit because oftentimes, sex traffickers will use rented rooms for prostitution or video sessions involving minors. However, there is also the risk for other types of habitational risks that have short-term rentals. Since 2015, some newspapers and social media articles have spoken about shady renters turning Airbnb apartments into “pop-up” brothels.
If the owner of the insured property has no knowledge and no reason to believe that there was sex trafficking going on there would be no liability. However, litigation being what it is, the likelihood that any sex-trafficking lawsuit would not include the property owner where a plaintiff was held against their will is almost nil.
The charges arising out of false imprisonment at the Shangri-La Motel
On May 2, 2012, Clark J. McLean, a convicted sex offender, appeared in Taunton Superior Court charged with kidnapping, raping, and committing sexual assault and batteries against a 27-year old woman (Plaintiff) over three days in June of 2011.
The Plaintiff claimed that in June 2011, Mr. McLean tricked her into traveling from Maine to Massachusetts, under the pretense that he was ill with cancer. Once she arrived in Massachusetts, Mr. McLean brought her to the Shangri-La Motel, where “he commenced a days-long process of severe and sustained abuse—including brutal rape, repeated beatings, forced drugging, humiliation, degradation, starvation, theft, and imprisonment.”
According to the Plaintiff, Mr. McLean prevented her escape from the motel by threatening physical violence against her and her family; by confiscating her car, cell phone, driver’s license, and keys; by withholding food from her; and by force-feeding her drugs. Also, the Plaintiff claimed that Mr. McLean’s told her that he intended to force her to work in a “massage business” where she would have to do whatever the clients wanted, which she understood to mean prostitution.
After three days, the Plaintiff claimed she was able to get away from Mr. McLean after he had her drive to a park, where he told her to wait for him in the car until he returned. When he had not returned for about thirty minutes, she drove away and called her parents. She returned to Maine with their help.
Mr. McLean was subsequently convicted of four counts of indecent assault and battery against the Plaintiff and served a sentence in the county house of correction.
A lawsuit under the federal Human Trafficking Statutes
On October 7, 2015, the Plaintiff sued Mr. McLean, Bijal, and the Patels under federal laws entitled, the “Victims of Trafficking and Violence Protection Act of 2000 and the Trafficking Victims Protection Reauthorization Act of 2003. (Jointly “Human Trafficking Statutes”)
While these are criminal statutes affecting forced labor and human trafficking including sex trafficking, the Human Trafficking Statutes also have a civil cause of action attached. This civil remedy provides:
An individual who is a Plaintiff of a violation of may bring a civil action against the perpetrator (or whoever knowingly benefits, financially or by receiving anything of value from participation in a venture which that person knew or should have known has engaged in an act in violation of this chapter) in an appropriate district court of the United States and may recover damages and reasonable attorneys fees.
Among the claims against the two Patels were that they benefited through the rental to Mr. McLean and that they “knew or should have known” he was engaged in trying to force the Plaintiff into sexual servitude.
The Plaintiff claimed in her pretrial memo that the evidence would show that:
(1) [The Plaintiff] was brutally raped and imprisoned at the Shangri-La Motel for the purpose of forcing her to engage in servitude and commercial sex;
(2) Mr. McLean knowingly and fraudulently recruited, enticed, harbored, transported, obtained, and maintained her to force her to engage in servitude or commercial sex;
(3) the Bijal Defendants harbored and maintained her in reckless disregard of the many facts indicating she might be forced into servitude or commercial sex;
(4) the Bijal Defendants were associated with Mr. McLean, were privy to his severe abuse that was specifically intended to force her into prostitution, and received financial benefits from their participation in this venture; and
(5) as a result, she suffered and continues to suffer severe emotional distress, physical injuries, and economic losses in the form of lost earnings, costs of therapy and rehabilitation, and ongoing therapy costs.
Bijal and the Patels vehemently denied the Plaintiff’s allegations and defended themselves on her supposed lack of credibility and troubled history.
Also, the Bijal defendants’ sought defense and indemnity from their liability insurer, Peerless Insurance, under their general liability and umbrella coverages. After receiving the tender of the suit against its insureds, Peerless issued a reservation of rights.
Peerless’ policies issued to the Shangri-La Motel at the time of the incident
Peerless issued two insurance policies to Bijal, Inc. for the policy period of June 26, 2010, through June 26, 2011. Bijal operated under the trade name of the Shangri-La Motel, a 20+ unit motel at 1495 Fall River Ave, Seekonk, MA.
The first policy for which Shangri-La paid Peerless a premium of $5,141.00 was for the full policy period provided for commercial property, general liability, and personal injury coverage. This policy’s liability coverages had a $1 million limit.
Peerless also issued a commercial umbrella policy for the same policy period for an additional premium of $515.00. This policy provided an additional $1 million in excess liability limits, with the insured having a $10 thousand retention.
The underlying general liability policy provided in its Coverage A to “pay those sums the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ caused by an ‘occurrence.’ The term ‘occurrence’ had its standard meaning of “an accident including continuous or repeated exposure to substantially the same general conditions.”
Coverage B provided liability coverage for “Personal and advertising injury,” which covered personal injury and consequential bodily injury arising out of enumerated offenses: The first covered personal injury was for “False arrest, detention or imprisonment.”
Under the policy, liability coverages A and B were mutually exclusive. By an exclusion, Coverage A excluded personal and advertising injury and Coverage B only provided consequential bodily injury coverage for a covered offense.
The umbrella policy, for all practical purposes, was a follow-form policy that would pay “those sums in excess of the ‘retained limit’ that the insured becomes legally obligated to pay as damages because of ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury.’
Both Coverage A and Coverage B did not apply to ‘bodily injury” or ‘personal and advertising injury’ arising out of a criminal act committed by or at the direction of the insured.” Likewise, the umbrella policy excluded criminal acts from coverage.
Peerless’ arguments against any coverage for defense or indemnity
On December 16, 2015, Peerless filed a motion to intervene in the Plaintiff’s civil case against the Bijal defendants. The court found that the interests of Peerless would be adequately protected by filing a separate declaratory judgment action and rejected its motion to intervene.
Consistent with that decision, on January 11, 2016, Peerless filed an independent action requesting a declaratory judgment that it had no obligation to defend or indemnify any of the Bijal defendants in connection with the lawsuit brought by the Plaintiff.
Eventually, after the lifting of a court-ordered stay of Peerless’ coverage action, Peerless filed for summary judgment against all parties to the Plaintiff’s lawsuit.
In its summary judgment motion, Peerless argued that the Bijal defendants had no rights to defense or indemnity under Coverage A, bodily injury. This coverage, Peerless argued contains an exclusion that it does not apply to “bodily injury arising out of personal . . . injury.”
Since the policy defined the “personal injury” coverage as including damage claim for “False arrest, detention or imprisonment,” and since the Plaintiffs’ claims arose out of her false imprisonment” they arise out of a “personal injury.” Thus, this personal injury claim is barred by the Coverage A exclusion.
Notwithstanding the counterarguments from the Plaintiff, the court ruled on Coverage A’s exclusion that “nothing in the policy here suggests that the exclusion for injuries “arising out of . . . false imprisonment” should be read narrowly.” In applying the accepted legal construction of the policy term “arising out of” as almost a “but for” standard, the court concluded that the Plaintiff’s injuries arose out of her false imprisonment. Thus, per the court, since the Plaintiff’s injuries “ar[o]se out” of her false imprisonment, they were excluded from coverage under the policy’s Coverage A.
The court finds Peerless must defend the motel and its owners
Since Peerless accepted that the Plaintiff’s injuries arose of personal injuries under the policy, it had to convince the judge that other exclusions barred any defense or indemnity under Coverage B. In this effort, it failed.
The gist of the court’s finding under Coverage B was that even though the Plaintiff’s complaint alleged intentional actions, it had the possibility of coverage under the policy for false imprisonment.
The court pointed out that the criminal provision of the Human Trafficking Statutes had a requirement of knowing or reckless conduct by the accused in violating the Human Trafficking Statutes that the civil liability section did not contain.
Under the civil provision of the statute as amended, a civil defendant could have liability if they had knowingly benefited from participation in a venture, which they “knew or should have known,” had engaged in an act in violation of Human Trafficking Statutes.
The court noted that the phrase “knew or should have known,” are words used in the law to describe a negligence standard and summed up its ruling stating:
In short, it is possible for a defendant to be civilly liable without having violated any of the criminal portions of the [Human Trafficking Statutes] because the statute permits recovery under a civil standard even in the absence of proof of intentional conduct.”
The court, after analyzing the general language of the Plaintiff’s complaint against Shangri-La and the Patels found that although the allegations asserted intentional statutory violations, they did not preclude an interpretation that included lesser allegations of negligent conduct. Since under Massachusetts law the duty to defend standard that requires only a “general allegation” susceptible to a “possibility” of liability insurance coverage, the court concluded that:
[T]he claims asserted by [the Plaintiff] are reasonably susceptible to a possibility of insurance liability under Coverage B. That, in turn, means that Peerless has a duty to defend under the policy. The Court expresses no view as to whether Peerless likewise has a duty to indemnify, which, as noted, is determined under a different standard.
Agency Checklists will follow up
Three days after entering the decision regarding Peerless’ duty to defend, the court impaneled a jury on the underlying human trafficking case, which now had Peerless as an intervenor. Last week there were two days of evidence heard but no final resolution on the docket.
If there is any public information, Agency Checklists will update its readers.
for those interested in reading the full court decision, one can do so by clicking on this link here: Lisa Ricchio v. Bijal, Inc. d/b/a Shangri-La Motel; Ashvinkumar Patel; Sima Patel; and Clark Mclean, Defendants, and Peerless Indemnity Insurance Company, Intervenor-Plaintiff,