Insurance: Carriers must defend hotel against suit alleging it aided sex trafficking

Where two insurers sought a declaration they had no duty to defend or indemnify a company against a lawsuit it aided sex traffickers operating out of a hotel in Chesapeake, the policyholder’s motion to dismiss was granted. The underlying suit was within the scope of coverage and not subject to any exceptions.

Background

Peerless Indemnity Insurance Company and Ohio Security Insurance Company seek a declaration that they have no duty to defend or indemnify Tilma Inc. in an underlying lawsuit that accused Tilma of aiding sex traffickers operating out of a hotel in Chesapeake. Tilma has filed a motion to dismiss and plaintiffs have filed a motion to amend.

Prudential concerns

Tilma argues that the court should dismiss the complaint out of “prudential concern.” The court disagrees. Generally, a district court should issue a declaratory judgment “(1) when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue[] and (2) when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.” Both criteria are satisfied in this case.

Coverage B

Coverage B covers “personal and advertising injuries,” which include injuries “arising out of . . . [f]alse arrest, detention[,] or imprisonment.” The underlying lawsuit alleges that Tilma knew or should have known that Doe was being detained. Therefore, because the underlying lawsuit alleges detention by force and intimidation, it also alleges a personal and advertising injury covered by the policy.

Exclusions

The policy excludes coverage for “‘[p]ersonal and advertising injur[ies]’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”

While the underlying complaint alleges that Tilma “knew” its participation in the traffickers’ activities would harm Doe, there is no allegation that Tilma “caused” or “direct[ed]” the traffickers’ actions or any harm to victims. Instead, the underlying complaint alleges that Tilma’s lack of action or lack of knowledge makes it civilly liable.

The underlying lawsuit alleges that Tilma intentionally acted in ways that allowed Doe’s sex trafficking to continue. But an intentional tort is a “tort committed by someone acting with general or specific intent.” And the underlying lawsuit does not allege that Tilma itself sexually trafficked Doe or directed Doe’s traffickers to commit their intentional tort.

The policy also excludes coverage for “‘[p]ersonal and advertising injur[ies]’ arising out of a criminal act committed by or at the direction of the insured.” This exclusion fails for the same reason the last one did. While the underlying lawsuit asserts that Doe’s traffickers committed crimes, and that Tilma benefitted from that conduct, it does not allege that Tilma “committed” or “direct[ed]” the criminal conduct.

Plaintiffs assert that Tilma’s alleged conduct falls under an exclusion that bars coverage for “‘[p]ersonal and advertising injur[ies]’ for which the insured has assumed liability in a contract or agreement.” But the complaint cites no contract or agreement in which Tilma assumed liability for sex trafficking. Additionally, this exclusion fails because of the very next sentence in the policy: “This exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement.”

Public policy

Plaintiffs allege that Virginia public policy prohibits insurance coverage for criminal acts prohibited by the Trafficking Victims Prevention and Protection Reauthorization Act, thereby absolving them of any duty to Tilma. Virginia courts do prohibit insurance coverage in “cases where the insured acts with specific intent to cause harm.” However, beneficiary liability under the Act does not require—and the underlying complaint does not allege—specific intent on the part of a beneficiary.

Occurrence

Plaintiffs ask the court to find that, to the extent that the policy affords coverage for the underlying lawsuit, all allegations in that suit constitute one “occurrence.” If, as the underlying complaint alleges, Tilma “knew or should have known” that its actions would lead to Doe continuing to be trafficked, then that harm was the probable consequence of Tilma’s actions. Put simply, the underlying complaint does not allege any occurrences.

Amend

Three of the original complaint’s claims remain in the proposed amendment. The court finds those counts futile as pleaded. The plaintiffs also add two new claims for breach of contract and unjust enrichment, seeking recoupment of monies paid to defend Tilma.

Since the court has found that Tilma’s alleged conduct was covered under the policy, there is a legally enforceable obligation, and no party has breached that obligation. And since the policy does afford coverage to Tilma, there was no unjust enrichment in this case. So both counts are futile.

Defendant’s motion to dismiss granted. Plaintiffs’ motion to amend denied.

Peerless Indemnity Insurance Company v. Tilma Inc., Case No. 2:24-cv-492, July 22, 2025. EDVA at Norfolk (Walker). VLW 025-3-305. 15 pp.