Policyholder Pulse
Times of crisis can bring out the best in people. Unfortunately, times like this can also be an opportunity for exploitation of inexpensive, and potentially forced, labor. As America reopens its economy, it is likely that we will begin to see a surge in many industries. The resulting demand for labor, coupled with unprecedented unemployment and related desperation not only in America, but worldwide, could lead unscrupulous individuals and companies to exploit American and foreign workers. We saw this with previous disasters, such as Hurricane Katrina, where foreign laborers were exploited in the rebuilding process with false promises of citizenship. Now, to be clear, exploitation occurs even during times of economic prosperity; however, it can be even more pronounced and egregious when people must deal with uncertainties and hardships never before experienced in their lifetimes.
Companies must take care to understand their supply chains, or potentially be held liable for benefiting from forced labor practices of which they are found to have known or “should have known.” For example, a company’s retention of contractors, vendors, or other agents that utilize forced labor could open that company up to potential liability. Particularly in industries that regularly use contractors to ramp up labor forces, such as construction, companies should also understand how their insurance may cover defense costs and liability in the event of a claim alleging benefit from forced labor.
A company that either directly or indirectly utilizes or benefits from forced labor that is subsequently sued because of its actions or inaction will likely first turn to their Commercial General Liability insurance policies.
CGL Insurance Coverage
CGL policies generally provide the primary liability insurance coverage for most companies. CGL policies typically include two major coverage sections. One section, “Coverage A,” includes coverage for “bodily injury” and “property damage.” These provide coverage to the insured against claims made for injury to persons, including death, and physical damage to, or loss of use of, tangible property. “Coverage B” includes coverage for “personal and advertising injury.” Personal and advertising injury generally covers claims for torts such as invasion of privacy, slander and libel, as well as false arrest, detention and imprisonment.
Whether a forced labor claim would fall within a CGL policy’s insuring agreements would depend largely on the specific allegations, such as whether the claimants allege they were physically hurt or restrained. Assuming the allegations do trigger coverage, a typical CGL policy also has exclusions that could limit potential coverage.
Potentially Applicable Exclusions Under CGL Policies
Counterintuitively, Coverage A and Coverage B, as mentioned above, are mutually exclusive. For example, Coverage B, which provides coverage for personal and advertising injuries, will exclude coverage for bodily injury and property damage, which is contained under Coverage A. This occurs for a number of reasons, including the fact that each side of coverage may have different deductibles and coverage amounts. As a result, allegations that trigger one Coverage may fall within exclusions to the other. However, a claim potentially triggering either Coverage requires the insurer to provide a defense of the claim.
Additionally, CGL policies also typically have exclusions for criminal acts. This exclusion may be raised by insurers seeking to deny coverage where claims involve forced labor trafficking, as such conduct is illegal under state and federal law. However, civil claims for forced labor do not necessarily require a predicate crime, so such an exclusion may not apply.
Relatedly, CGL policies also usually contain exclusions from coverage for other intentional torts, such as assault and battery. The applicability of such exclusions largely depends on the specific allegations in the claim. Where forced labor claims against companies are for secondary liability, such exclusions are unlikely to apply.
It is important to remember that insurers have a duty to defend an insured in any action in which a reasonable interpretation of the allegations provides the potential for coverage. So long as the complaint against the insured can reasonably be premised on civil negligence and/or recklessness, and not criminal conduct, an insurer will be obligated to provide a defense. Whether the insurer has a duty to indemnify will often be determined only after the facts are established that caused the harm or loss.
Other Types of Coverage
While CGL policies offer potential coverage for claims that involve forced labor, other insurance coverage may also apply. For example, professional liability policies will typically cover claims for alleged conduct in providing professional services. For example, recruiters of forced laborers could potentially have coverage under this type of policy.
Further, directors and officers liability policies may provide coverage in instances where shareholders alleged that the company’s involvement with forced labor resulted in a stock drop or other damage to the shareholders.
Conclusion
Once the economy starts to fully recover from COVID-19, labor will likely not only be readily available, but individuals will also be desperate to return to work. These circumstances are ripe for labor abuse—and for claims of abuse. Companies must be cognizant and informed about the source of their labor.
Issues surrounding potential liability resulting from a direct or indirect use or benefit of forced labor may increase in the aftermath of the pandemic. Companies at risk of this issue in their supply chain should consult with experienced insurance attorneys to evaluate their insurance policies and indemnity agreements to maximize their protection should any legal claims be asserted against them involving allegations of forced labor.