Virginia Electric & Power Co. v. Northbrook Property & Casualty Insurance

Present: Carrico, C.J., Compton, Stephenson, Lacy, Keenan,
Koontz, JJ., and Whiting, Senior Justice

VIRGINIA ELECTRIC AND POWER COMPANY
                                 OPINION BY JUSTICE LAWRENCE L. KOONTZ,
v. Record No. 951919                September 13, 1996

NORTHBROOK PROPERTY AND CASUALTY INSURANCE COMPANY

         FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
                  Melvin R. Hughes, Jr., Judge


     In this appeal we consider whether, under a liability policy

which excludes coverage for suits for bodily injury filed by "an

employee" of the insured, an insurance company has an obligation

to defend an insured where such a suit is brought by an

individual who would be deemed a statutory employee of the

insured under the Virginia Workers' Compensation Act.
     The essential facts of the case are not in dispute.     In

October 1989, Commercial Courier Express (Commercial Courier)

entered into a contract with Virginia Electric and Power Company

(VEPCO) to provide designated courier services to VEPCO.    The

contract included provisions which referenced Commercial

Courier's existing general liability policy (the policy) with

Northbrook Property and Casualty Insurance Company (Northbrook).

     As required by its contract with VEPCO, Commercial Courier

submitted and Northbrook accepted an addendum to the policy

adding VEPCO as an additional insured for suits arising out of

courier services Commercial Courier provided to VEPCO.    The

policy included a standard "duty to defend" clause, as well as

various exclusions from coverage.   One such exclusion eliminated

Northbrook's liability for bodily injury to an employee of the

insured for injuries "arising out of and in the course of
employment by the Insured."   In the context of this case, VEPCO

is the insured party.

     On March 23, 1990, Margaret C. Laveri (Laveri), a Commercial

Courier employee, delivered parcels to VEPCO's office at One

James River Plaza.   Subsequently, in a suit filed against VEPCO,

Laveri alleged that while making the delivery she fell and was

injured after stepping on a slippery substance in VEPCO's

delivery area.
     VEPCO requested that Northbrook defend the Laveri suit under

the duty to defend clause in Commercial Courier's liability

policy.   Northbrook denied coverage, and VEPCO proceeded to

successfully defend the Laveri suit on its own by asserting that

Laveri was its statutory employee as defined by the Virginia

Workers' Compensation Act.    Code § 65.2-302.   VEPCO asserted

that, as a statutory employee, Laveri's sole remedy was under the

Act, Code § 65.2-307, thus barring the civil suit.

     VEPCO then filed a bill of complaint seeking a declaratory

judgment that Northbrook had wrongly refused to provide a defense

to VEPCO as an additional insured under Commercial Courier's

policy.   Northbrook moved to dismiss on the ground that VEPCO had

an adequate remedy at law.    The chancellor transferred the case

to the law docket, granting VEPCO leave to file a motion for

judgment.   VEPCO thereafter filed a motion for judgment asserting

that Northbrook had breached its duty to defend and seeking

damages in the amount of the legal fees expended in defending the

Laveri suit.

     The parties filed cross-motions for summary judgment.        In
its motion, Northbrook asserted various defenses including the

exclusion of coverage for a claim filed by an employee.

Following an ore tenus hearing, the trial court rejected VEPCO's

assertion that the exclusion did not apply to a statutory

employee, reasoning that the language of the exclusion of

coverage for injuries to an employee "suggest[s] an employee in

the context of workers['] compensation."    Accordingly, the trial

court found that Northbrook properly refused to defend the suit

on the ground that Laveri was "an employee of [VEPCO]."    We

awarded VEPCO this appeal.
        We have previously addressed at length the question of an

insurer's duty to defend, holding that the "obligation to defend

is broader than [the] obligation to pay, and arises whenever the

complaint alleges facts and circumstances, some of which would,

if proved, fall within the risk covered by the policy."     Lerner

v. Safeco, 219 Va. 101, 104, 245 S.E.2d 249, 251 (1978).     In

Lerner, we went on to say "that such a provision [to defend]

places no obligation on the insurer to defend an action against

the insured when, under the allegations of the complaint, it

would not be liable under its contract for any recovery therein

had."     Id. (citing Travelers Indem. Co. v. Obenshain, Committee,

219 Va. 44, 46, 245 S.E.2d 247, 249 (1978)).    In addition, we

have explained that:
     [I]f it is doubtful whether the case alleged is covered
     by the policy, the refusal of the insurer to defend is
     at its own risk. London Guar. Co. v. White & Bros.,
     Inc., 188 Va. 195, 199-200, 49 S.E.2d 254, 256 (1948).
      And, if it be shown subsequently upon development of
     the facts that the claim is covered by the policy, the
     insurer necessarily is liable for breach of its
     covenant to defend. Id. at 200, 49 S.E.2d at 256.
Brenner v. Lawyers Title Ins. Corp., 240 Va. 185, 189, 397 S.E.2d

100, 102 (1990).

     However, as will become apparent from our analysis in the

present case and is perhaps self-evident, the obligation to

defend is not negated merely by the unsuccessful assertion of a

claim otherwise facially falling within the risks covered by the

policy.   Various defenses applicable to specific factual

circumstances may be successfully asserted against claims

otherwise covered by the policy.   The insurer has the obligation

to defend the insured in such circumstances even though the

obligation to pay is not ultimately invoked.   It is in this

context that the obligation to defend is said to be broader than

the obligation to pay.   Stated differently, the insurer has a

duty to defend against risks covered by the policy even though

the defense successfully litigates the issue of its lack of

obligation to pay the claim.
     In applying these well established principles to determine

Northbrook's obligation to defend in this particular case, we are

concerned exclusively with the risks covered by the express

provisions of the policy and the allegations of Laveri's motion

for judgment.   As it did in the trial court, Northbrook urges

this Court to interpret the policy in the context of the

provisions of the contract between VEPCO and Commercial Courier.

     While referring to several provisions of that contract in

rendering its judgment, the trial court expressly ruled that "the

focus must remain on the insurance contract at issue between
[Northbrook and VEPCO]."   Assuming, without deciding, that the

applicable rules of evidence would have permitted consideration

of the provisions of the Commercial Courier/VEPCO contract to

determine the intended coverage of the insurance policy,

Northbrook's failure to assign cross-error to the trial court's

failure to do so precludes our consideration of that issue.     Rule

5:18(b).

     We turn then initially to the allegations of Laveri's motion

for judgment.   That pleading alleged that Laveri was a "business

invitee" of VEPCO and that, as a result of VEPCO's negligent

maintenance of its delivery area, she was injured while making a

delivery to that area "in the course and scope of her then

employment."    Unquestionably, if proven at trial, these

allegations would fall within the ambit of the risks for which

the policy's general liability provisions for bodily injury

afford protection to VEPCO.
     A fair reading of the record makes it clear, and the parties

are not in disagreement, that at the time of her injury Laveri

was an employee of Commercial Courier.   Similarly, it is clear

that Northbrook's decision, and the risk it ran, not to defend

against her claim was based on the provision of the policy that

excluded coverage for bodily injury to an employee of the

insured.   Thus, the sole question is whether the trial court

correctly ruled that Laveri's status as a statutory employee of

VEPCO for purposes of workers' compensation brought her within

the definition of the term "employee" as used in the coverage

exclusion contained in the policy.
     Exclusionary language in an insurance policy is to be

construed most strongly against the insurer, and the burden is

upon the insurer to prove that an exclusion applies.    Johnson v.

Insurance Co. of No. America, 232 Va. 340, 345, 350 S.E.2d 616,

619 (1986).   This is true whether the insurer is asserting the

exclusion to deny liability for payment or to avoid its duty to

defend the insured.   Accordingly, Northbrook bears the burden of

showing that the policy clearly intended the term "employee" as

used in the exclusion to include a statutory employee as defined

in Code § 65.2-302 of the Virginia Workers' Compensation Act.
     Northbrook asserts that the policy contemplated use of the

statutory definition of the term "employee" found in the Act, as

shown by the use of the phrase "[a]n employee of the Insured

arising out of and in the course of employment by the Insured" in

the exclusion provision.   (Emphasis added.)   Indeed, the trial

court agreed with this assertion, noting that: "It is significant

that this policy language while mentioning the word 'employee'

also mentions 'arising out of and in the course of employment,'

words that suggest an employee in the context of workers[']

compensation . . . ."   We disagree.

     The Act defines statutory employees for the specific purpose

of applying workers' compensation laws.   Thus, we hold that the

statutory definition contained in the Act will not be applied to

an insurance policy unless the policy provides by reference to

the specific statute that the statutory definition is intended to

be applied.   Cf. United Services Auto. Ass'n v. Pinkard, 356 F.2d

35, 37-38 (4th Cir. 1966) (workers' compensation rationale used
where employee exclusion specifically precluded coverage for

injury arising out of employment "if benefits thereof are in

whole or in part either payable or required to be provided under

any [workers'] compensation law").

      In American Reliance Insurance Co. v. Mitchell, 238 Va. 543,

385 S.E.2d 583 (1989), an insurance policy "excluded coverage for

'bodily injury to any farm employee . . . arising out of and in

the course of his employment by any insured.'"     Id. at 545, 385

S.E.2d at 584.     In addressing the employee exclusion clause, the

insurance company urged the application of workers' compensation

analysis to expand the definition of employee to include persons,

including the injured party in that case, who would be eligible

for workers' compensation benefits even though they were merely

occasional or irregular laborers.     We declined to apply workers'

compensation definitions in interpreting the term "farm

employee", holding that the plain and generally accepted meaning

of employee "connotes continuous service of a person who works

full time for another for a consideration."     Id. at 549, 385

S.E.2d at 586.

      The same rationale we employed in Mitchell applies here.

While it is true that the exclusion in the policy uses language

evocative of a workers' compensation law definition of

"employee," nothing in the policy expressly designates the Act as

providing the definition for terms used in the coverage

exclusion.     Id. at 548, 385 S.E.2d at 586; cf. Pinkard, 356 F.2d

at 37. * T   Thus, as in Mitchell, the plain and generally accepted
      *
       We note that a separate exclusion within the policy
meaning of the term "employee" is controlling.   Using that

definition, we hold that, although deemed a statutory employee

for purposes of workers' compensation, Code § 65.2-302, Laveri

was not an employee of VEPCO within the plain meaning of the

policy.   Accordingly, the trial court erred in determining that

the employee exclusion clause of the policy permitted Northbrook

to refuse to fulfill its obligation to defend VEPCO.

     For these reasons, we will reverse the judgment of the

circuit court and enter judgment for VEPCO, and the case will be

remanded for a determination of damages.
                                            Reversed and remanded.




(..continued)
excludes coverage for "[a]ny obligation of the Insured under a
workers' compensation, disability benefits or unemployment
compensation law or any similar law." In the trial court,
Northbrook relied on this exclusion to bolster its argument that
the policy excluded generally any claim that was subject to
workers' compensation law. Northbrook did not reassert this
argument on appeal.