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Nautilus Insurance Co. v. Motel Management Services, Inc.

United States District Court, E.D. Pennsylvania

May 24, 2018

NAUTILUS INSURANCE COMPANY
v.
MOTEL MANAGEMENT SERVICES, INC., d/b/a Neshaminy Inn and E.B.

          MEMORANDUM OPINION

          Savage, J.

         Nautilus Insurance Company seeks a declaration that it has no duty to defend and indemnify its insured, Motel Management Services (MMS), in a pending state court action alleging MMS was negligent in failing to prevent human sex trafficking from occurring on its property.[1] Moving for judgment on the pleadings, Nautilus argues that coverage is excluded by the assault and battery exclusion because the claim in the underlying action is for assault. It also argues that as a matter of public policy, it has no duty to defend or indemnify an insured for allegations of human trafficking.

         After reviewing the policy and the plaintiff's complaint in the underlying action, we conclude that because the claims are for the negligent failure to prevent an assault or battery, they are not covered. Therefore, we shall grant Nautilus's motion and declare that it has no duty to defend and indemnify MMS.

         The Underlying Action

         Beginning in 2014, E.B., a minor female, alleges that she was “recruited, enticed, solicited, harbored and/or transported to engage in commercial sex acts” at a motel owned and operated by MMS.[2] Traffickers advertised online that E.B.'s services were available at the motel.[3] She alleges the traffickers took her to the motel and checked into a room where she was forced to engage in commercial sex acts.[4] The motel employees consistently directed E.B. and the traffickers to the same room towards the back of the property each time.[5] The room was always paid for in cash from the money E.B. earned from engaging in commercial sex activity.[6]

         E.B. alleges she was “visibly treated in an aggressive manner” by her traffickers.[7]Indeed, she claims she was held at gunpoint and threatened to engage in sex acts not only with her paying customers, but also with her traffickers.[8] And while she was engaged in forced sexual activity, men and other minors entered and exited the room.[9]

         E.B. claims that MMS facilitated her exploitation by knowingly permitting the traffickers' activity on its property.[10] E.B. also contends that MMS failed to intervene or stop human sex trafficking, and to report the traffickers' illegal conduct to the authorities.[11] She also claims that MMS financially profited from her being exploited for sex trafficking by renting motel rooms to her traffickers.[12]

         E.B. brings claims for negligence, negligence per se, negligent infliction of emotional distress, and intentional infliction of emotional distress. As to the negligence per se claim, she avers that MMS's conduct violated Pennsylvania's Human Trafficking Law, 18 Pa. Cons. Stat. § 3001 et seq., which criminalizes the recruitment, enticement, harboring or transporting of a minor for the purpose of the minor engaging in any commercial sex act.

         At the time of the alleged sex trafficking incidents, MMS was covered by an insurance policy issued by Nautilus. We must decide whether Nautilus has a duty to defend and indemnify MMS in the state court action. In other words, we must determine whether any of the claims in the underlying complaint are potentially covered by the policy.

         Standard of Review

         The interpretation of an insurance contract is a question of law. Am. Auto. Ins. Co. v. Murray, 658 F.3d 311, 320 (3d Cir. 2011). Whether a claim is within a policy's coverage or is barred by an exclusion may be determined on a motion for judgment on the pleadings. Allstate Fire & Cas. Ins. Co. v. Hymes, 29 A.3d 1169, 1171 (Pa. Super. 2011). All the well-pleaded factual assertions in the underlying complaint against the insured are accepted as true. 5C Charles Alan Wright & Arthur R. Miller, Fed. Prac. & Proc. Civ. § 1368 (3d ed., Apr. 2016) (citing Allah v. Al-Hafeez, 226 F.3d 247, 249-50 (3d Cir. 2000)). Applying these principles, we examine the insurance policy and the allegations in the underlying state court complaint.

         Interpretation of Insurance Contracts

         Where the insurer relies on a policy exclusion as the basis for denying coverage, it has the burden of proving that the exclusion applies. State Farm Fire & Cas. Co. v. Estate of Mehlman, 589 F.3d 105, 111 (3d Cir. 2009); Wolfe v. Ross, 115 A.3d 880, 884 (Pa. Super. 2015). Policy exclusions are strictly construed against the insurer and in favor of the insured. QBE Ins. Corp. v. Walters, 148 A.3d 785, 788 (Pa. Super. 2016); see also Mut. Benefit Ins. Co. v. Politsopoulos, 115 A.3d 844, 852 n.6 (Pa. 2015) (citing Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 106 (Pa. 1999)); Peters v. Nat'l Interstate Ins. Co., 108 A.3d 38, 43 (Pa. Super. 2014).

         Duty to Defend

         An insurance carrier's duty to defend is distinct from its duty to indemnify. It is interpreted more broadly than the duty to indemnify. QBE Ins. Corp., 148 A.3d at 788 (quoting Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 896 n.7 (Pa. 2006)). An insurer may have a duty to defend even though it may have no duty to indemnify. Id. (quoting Selective Way Ins. Co. v. Hosp. Grp. Servs., Inc., 119 A.3d 1035, 1046 (Pa. Super. 2015) (en banc)). A duty to indemnify does not arise until the insured is found liable for a covered claim. Id.

         Because the duty to defend is broader than the duty to indemnify, the complaint in the underlying action must be construed liberally. The factual allegations must be accepted as true, and all doubts as to coverage resolved in favor of the insured. Id. (citing Donegal Mut. Ins. Co. v. Bauhammers, 938 A.2d 286, 290 (Pa. 2007)). To prevent artful pleading designed to avoid policy exclusions, it is necessary to look at the factual allegations in the complaint, not how the plaintiff in the underlying action frames the request for relief. Id. (citing Donegal, 938 A.2d at 291). In other words, the focus of the coverage inquiry is on the substance, not the form, of the allegations.

         Whenever the complaint sets forth facts raising claims that could possibly come within the policy's coverage, the insurer's duty to defend is triggered. Id.; Erie Ins. Exch. v. Muff, 851 A.2d 919, 931 (Pa. Super. 2004). Consequently, an insurer is obligated to defend the insured against any suit arising under the policy even if the suit is “groundless, false, or fraudulent” so long as there is a possibility of coverage. Selective Way Ins. Co., 119 A.3d at 1046 (citation omitted). If a single claim in a multiple-claim complaint is potentially covered, the duty to defend attaches until the underlying plaintiff can no longer recover on a covered claim. Frog, Switch & Mfg. Co. Inc. v. Travelers Ins. Co., 193 F.3d 742, 746 (3d Cir. 1999) (citing Erie Exch. v. Transam. Ins. Co., 533 A.2d 1363, 1368 (Pa. 1987)).

         Analysis

         The policy provides that Nautilus “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury' or ‘property damage' to which this insurance applies.”[13] However, Nautilus “will have no duty to defend the insured against any ‘suit' seeking damages for ‘bodily injury' or ‘property damage' to which this insurance does not apply.”[14] The policy explains that it applies “to ‘bodily injury' and ‘property damage' only if . . . [t]he ‘bodily injury' or ‘property damage' is caused by an ‘occurrence.' ”[15] “Occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”[16]

         Nautilus argues that because the allegations of sex trafficking state a cause of action arising out of an assault, it has no duty to defend or indemnify MMS because assault and battery are explicitly excluded from coverage.[17] Under the All Assault or Battery Exclusion, the policy excludes coverage for bodily injury that is “[a]ctual or alleged assault or battery, ...


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