Authored by Jakop Mphofu and Donald Dinnie.
The Supreme Court of Pennsylvania was petitioned by the United States Court of Appeals for the Third Circuit to answer two certified questions concerning whether Pennsylvania's public policy against sex trafficking abrogates an insurer's duty to defend and/or indemnify its insured when the insured is alleged to have enabled or profited from such trafficking.
The case arose out of four separate civil complaints in which the respective plaintiffs alleged that, as minors, they were victims of human sex trafficking at the Roosevelt Inn in Philadelphia, Pennsylvania. Each plaintiff filed a lawsuit against the owners, operators, and managers of the hotel (the "insured"), alleging that the insured, acting by and through their agents, were negligent in failing to stop sex trafficking from occurring at the hotel. At the time of the alleged trafficking, the insured maintained primary-layer commercial general liability insurance through various insurers (the "insurers").
Each of the insurers initially defended the insured in the underlying lawsuits subject to reservations of rights. In October 2018, one of the insurers sought a declaration that it had no legal duty to either defend or indemnify the insured. The insurer argued that because the allegations against the insured, if true, would establish that they violated the Pennsylvania Human Trafficking Law, it would be against public policy for the insurer to be forced to defend or indemnify the insured.
Although the insurers argued that they did not have a duty to defend or indemnify based on the language of their respective policies, the court focused on whether Pennsylvania public policy would bar insurance coverage under the circumstances.
The court perceived a tension between the policy of interpreting insurance contracts broadly in favour of coverage and the public policy against coverage where the underlying complaints allege "conduct so repugnant to society that it would violate overriding public policy".
The court reiterated the well-established rule that whether an insurer has a duty to defend its insured is determined by "comparing the four corners of the insurance contract to the four corners of the complaint". The court emphasised that the duty to defend "is a distinct obligation separate and apart from the insurer's duty to provide coverage" and arises when a complaint, on its face, alleges an injury that is at least potentially within an insurance policy's scope of coverage. The duty to defend even extends to claims that are "groundless, false, or fraudulent" so long as the allegations possibly implicate coverage.
The court stated that, adopting the insurers' position and invoking public policy, to abrogate insurance coverage which was otherwise extended to the insured would require the court to divine an "overriding" public policy pronouncement by the Pennsylvania General Assembly by virtue of its enactment of the Human Trafficking Law. The court stated that it did not believe it was within its purview to rank the magnitude of the public policy underlying the various crimes defined in the Crimes Code. It was sufficient for the work of the courts to know that the General Assembly had identified conduct it deemed harmful and dangerous to the maintenance of an orderly society and criminalised it.
The court observed that insurance carriers and their underwriters regularly weigh the risk of insuring the conduct of their insureds. The court was confident that insurance carriers are capable of drafting insurance policies that exclude coverage for damages arising out of violations of these laws as they deem necessary in the exercise of their business judgment. The court noted that insurance policies with coverage exclusions based on the acts of insureds are regularly written and purchased. The court stated that it is not appropriate for the court to act as a "super-scrivener" to insert coverage exclusions that could have been made part of the insurance policy when drafted.
The court held that neither 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. While the General Assembly has expressed the state’s policy against sex trafficking by criminalising 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.
Where policies include a duty to defend, the exclusions must be drafted so that they cover all aspects of the indemnity provided by the policy.