Starr Indemnity & Liability Company v. Choice Hotels International, Inc.

Background

A lawsuit filed in the District of South Carolina alleged that B.H. was held captive and forced to engage in commercial sex at a Quality Inn in Columbia, South Carolina. The hotel was operated by Maniben, LLC, a Choice franchisee. B.H.’s complaint asserted claims under the William Wilberforce Trafficking Victims Protection Reauthorization Act of 2008 and South Carolina law against Choice.

Starr had issued two comprehensive general liability policies to Maniben, and both policies named Choice as an additional insured. Choice demanded that Starr defend and indemnify it in the underlying lawsuit. Starr denied the request, relying on an Abuse or Molestation Exclusion. While this case was pending, the underlying lawsuit was dismissed without prejudice, and Choice stopped seeking indemnification. The remaining issue was Starr’s duty to defend Choice.

The parties agreed that New York law governed. After a bench trial, the court considered the allegations in the underlying complaints, the policy language, and the parties’ arguments.

Applicable Insurance Rules

Under New York law, an insurer’s duty to defend is broader than its duty to indemnify. The duty to defend arises when the allegations in the underlying complaint suggest any reasonable possibility of coverage. To avoid defending based on a policy exclusion, the insurer must show that the allegations fall completely within the exclusion, that the exclusion has no other reasonable interpretation, and that there is no possible factual or legal basis for indemnity under the policy. Exclusions are narrowly interpreted.

The relevant exclusion stated that the insurance did not apply to bodily injury, property damage, or personal and advertising injury arising from actual or threatened abuse or molestation of any person while in the “care, custody or control” of an insured. It also excluded certain negligent employment, investigation, supervision, reporting, or retention of a person for whom an insured was legally responsible when that person’s conduct would otherwise be excluded.

Meaning of “Care”

Starr argued that B.H. was in Choice’s or Maniben’s “care” because she was present at the hotel, was a business invitee, and was owed a common-law duty of care. The court rejected that interpretation as strained. It explained that the exclusion placed “care” alongside “custody” and “control,” and did not refer to a legal duty of care. The court therefore gave “care” its ordinary meaning: responsibility for, supervision of, management of, or serious attention to a person’s safety and well-being.

The court also rejected Starr’s proposed bright-line rule that a hotel guest is automatically in the hotel’s care whenever abuse or molestation occurs on hotel premises or while the hotel owes the guest a legal duty of care. Whether a person is in an insured’s care, custody, or control depends on the circumstances and the allegations in the underlying pleadings. Presence on the insured’s premises may be relevant but is not by itself conclusive.

Why the Exclusion Did Not Eliminate the Duty to Defend

The court concluded that the allegations did not fall entirely within the Abuse or Molestation Exclusion. The complaints described the traffickers’ direct and violent control over B.H., including preventing her from speaking with hotel staff and taking her phone and identification. They also alleged that Choice knew or should have known about the trafficking. Under the trafficking statute, a defendant may face civil liability based on a venture it should have known involved trafficking; actual knowledge is not always required.

Because the complaints alleged that the traffickers concealed the venture from the insureds, the alleged trafficking could not reasonably be characterized entirely as abuse or molestation occurring while B.H. was in an insured’s care, custody, or control. The allegations also described events outside the hotel, including B.H.’s abduction from the street and her being sent to a nearby area to meet commercial-sex buyers. Those allegations could not reasonably be said to have occurred while she was under an insured’s care, custody, or control.

The complaints referred to false imprisonment, even though B.H. did not assert a separate false-imprisonment cause of action. The court viewed those allegations as closely connected to the alleged kidnapping and trafficking. Because false imprisonment was included within the policies’ definition of personal injury and the allegations did not fall within the Abuse or Molestation Exclusion, they independently supported a duty to defend.

The court also rejected Starr’s alternative argument concerning the exclusion for negligent investigation or reporting. That part of the exclusion addressed negligence involving a person for whom an insured was legally responsible and whose conduct would be excluded under the first paragraph. It did not create an exclusion for an insured’s failure to investigate or report a victim’s circumstances.

Disposition

The court concluded that the allegations in the underlying lawsuit did not fall entirely within the Abuse or Molestation Exclusion. It held that Starr had wrongfully disclaimed its duty to defend Choice and stated that judgment would be entered for Choice.

Choice was directed to file a proposed judgment within seven days. Starr could respond within three business days after that filing. Choice could file an application for attorneys’ fees within twenty-one days. The court also directed the Clerk to terminate motions at docket numbers 37, 39, 47, 61, and 68.