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13-P-1890 Appeals Court
PREFERRED MUTUAL INSURANCE COMPANY vs. VERMONT MUTUAL
INSURANCE COMPANY & others.1
No. 13-P-1890.
Middlesex. October 7, 2014. - June 17, 2015.
Present: Cohen, Wolohojian, & Blake, JJ.
Insurance, Coverage, Insurer's obligation to defend, Defense of
proceedings against insured, Homeowner's insurance,
Business exclusion, Excess Liability Insurance. Contract,
Insurance. Practice, Civil, Summary judgment. Indemnity.
Civil action commenced in the Superior Court Department on
March 30, 2012.
The case was heard by Dennis J. Curran, J., on motions for
summary judgment, and the entry of separate and final judgment
was ordered by him.
Peter C. Kober for Vermont Mutual Insurance Company.
Robert A. Curley, Jr., for the plaintiff.
COHEN, J. This insurance dispute arises from an accident
in which Richard Dubois was injured while working at a residence
in Medford. The residence was owned by Francis and Eileen
1
Joseph Munyon, Richard Dubois, and Laurie Dubois.
2
Munyon, who lived there with their adult son, Joseph.2 In
October, 2009, the Munyons undertook to renovate their second-
floor bathroom and hired Dubois's employer as the plumbing
contractor. On Dubois's first day on the job, he removed old
copper piping and other debris from the bathroom and attempted
to throw it into the backyard from a second-floor deck.
Unbeknownst to Dubois, on the previous day, Joseph had
unfastened the porch railing in order to push the old cast iron
bathtub into the backyard; but when he finished, he left the
railing in an upright position so it appeared to be securely in
place. While leaning against the unsecured railing, Dubois fell
to the ground and was injured. Dubois and his wife later filed
suit against Joseph and his parents, alleging that they were
liable for Dubois's personal injuries and his wife's loss of
consortium.
At the time of the accident, Francis and Eileen were the
named insureds under a homeowner's policy issued by the
defendant, Vermont Mutual Insurance Company (Vermont). In
addition, by virtue of his status as a resident relative,
Joseph, too, was an insured under the Vermont policy.
Independently, Joseph was the named insured under a commercial
lines policy issued by the plaintiff, Preferred Mutual Insurance
2
As these individuals have the same last name, we refer to
them individually by their first names.
3
Company (Preferred), in connection with Joseph's business as a
self-employed licensed electrician. Both Vermont and Preferred
were notified of the Duboises' claims. Vermont assumed the
defense of Francis and Eileen, but refused to defend Joseph.
Preferred undertook to defend Joseph, but did so under a
reservation of rights. As discussed below, the coverage issues
raised by the insurers related to Joseph's role in the
renovation project and whether he was acting in a personal or
business capacity.
The Dubois lawsuit ultimately was successful. After a
trial in 2013, a jury found Francis, Eileen, and Joseph liable
for Dubois's personal injuries and his wife's loss of
consortium. Judgment entered for Dubois in the amount of
$226,218.49, and for his wife in the amount of $12,567.69.
Vermont paid the judgments in their entirety on behalf of
Francis and Eileen, who subsequently obtained a judgment against
Joseph for contribution.3
While the underlying case was pending, Preferred filed the
instant action, naming Vermont, Joseph, and the Duboises as
defendants. In count I of its complaint, Preferred sought a
judgment declaring that its policy did not afford coverage for
the underlying claims and that Vermont was obliged to defend and
3
The parents (collectively) and Joseph were determined to
be joint tortfeasors, each responsible for fifty percent of the
judgment.
4
indemnify Joseph. In count II, Preferred asserted an equitable
claim against Vermont for fifty percent of all defense costs
incurred by Preferred on Joseph's behalf. Preferred and Vermont
filed cross motions for summary judgment, which were decided
after the underlying case had been concluded. After a hearing,
a judge of the Superior Court allowed Preferred's motion and
denied Vermont's motion. The judge ruled that Preferred had no
duty to defend or indemnify; that Vermont had both a duty to
defend and a duty to indemnify; and that Vermont was required to
reimburse the entirety of the defense costs incurred by
Preferred in defending Joseph.
Vermont now appeals from a separate and final judgment that
entered as a result of these rulings.4 After de novo review, see
Norfolk & Dedham Mut. Fire Ins. Co. v. Cleary Consultants, Inc.,
81 Mass. App. Ct. 40, 47 (2011), we affirm in part and vacate in
part.
1. Relevant policy provisions. a. Vermont policy. The
liability coverage section of the Vermont policy contains a so-
called "business pursuits exclusion" stating that coverage does
not apply to bodily injury "[a]rising out of or in connection
with a business engaged in by an insured." In the "Definitions"
4
The motion judge ruled that issues of fact remained to be
decided as to counterclaims brought against Vermont by the
underlying tort plaintiffs pursuant to G. L. c. 93A and G. L.
c. 176D. Those claims remain pending in the trial court.
5
section of the policy, "business" is defined to include "trade,
profession or occupation."
The "Conditions" section of the Vermont policy includes an
"other insurance" clause, providing that "[t]his insurance is
excess over other valid and collectible insurance except
insurance written specifically to cover as excess over the
limits of liability that apply in this policy."
b. Preferred policy. The "Commercial General Liability
Coverage Part" of the Preferred policy has its own
"Declarations" page, which identifies the named insured, Joseph,
as an "individual," and the business of the named insured as:
"electrician." The policy later provides, in paragraph 1(a) of
section II: "If you are designated in the Declarations as [a]n
individual, you and your spouse are insureds, but only with
respect to the conduct of a business of which you are the sole
owner."
The "other insurance" clause in the Preferred policy
provides, with exceptions not relevant here, that the policy is
"primary" insurance and will provide coverage with any other
"primary" policy "by limits," if (as in the case of the Vermont
policy) the other insurer does not state that it will contribute
by equal shares. The clause further explains that "[u]nder this
method, each insurer's share is based on the ratio of its
6
applicable limit of insurance to the total applicable limits of
insurance of all insurers."
2. Duty to defend. "It is settled that an insurer's duty
to defend is independent from, and broader than, its duty to
indemnify." Metropolitan Property & Cas. Ins. Co. v. Morrison,
460 Mass. 352, 357 (2011), quoting from A.W. Chesterton Co. v.
Massachusetts Insurers Insolvency Fund, 445 Mass. 502, 527
(2005). "An insurer has a duty to defend an insured when the
allegations in a complaint are reasonably susceptible of an
interpretation that states or roughly sketches a claim covered
by the policy terms. The duty to defend is determined based on
the facts alleged in the complaint, and on facts known or
readily knowable by the insurer that may aid in its
interpretation of the allegations in the complaint. In order
for the duty of defense to arise, the underlying complaint need
only show, through general allegations, a possibility that the
liability claim falls within the insurance coverage. There is
no requirement that the facts alleged in the complaint
specifically and unequivocally make out a claim within the
coverage. However, when the allegations in the underlying
complaint lie expressly outside the policy coverage and its
purpose, the insurer is relieved of the duty to investigate or
defend the claimant." Billings v. Commerce Ins. Co., 458 Mass.
7
194, 200-201 (2010) (quotations, citations, and footnotes
omitted).
Relevant here, the underlying complaint alleges that
"Joseph . . . is a licensed electrician . . . who resides at
[the Munyon residence] and has, at all times relevant to this
action, been in charge of the contracting work conducted
[there]." The complaint alleges further that Francis and Eileen
had Joseph "serve as their general contractor," and that Joseph
entered into a subcontract with Dubois's employer for the
performance of the plumbing work on the second-floor bathroom.
The complaint also describes Joseph as the "construction
supervisor" for the renovation work. The complaint further
alleges that the Munyons unhinged the railing of the second-
floor deck in order to dispose of the old bathtub, left it in
place so it appeared to be securely fastened, and failed to warn
Dubois of its condition.
a. Vermont's duty to defend. Based upon the references to
Joseph's occupation and his role in supervising the project,
Vermont contends that its business pursuits exclusion negates
the coverage that otherwise would inure to Joseph as an insured
under his parents' homeowner's policy. The argument is without
merit, however, because the allegations of the complaint,
especially when read in light of Vermont's knowledge that Joseph
was the son of the policyholders and that the residence being
8
renovated was their mutual home, did not conclusively establish
that Dubois's injuries were ones "arising out of" or "in
connection with" Joseph's business.
Although there are a few Massachusetts cases involving some
form of business pursuits exclusion in a homeowner's policy,5 our
appellate courts have not had occasion to articulate general,
guiding principles for determining when an activity arises out
of or in connection with the insured's business. In other
States, there is widespread agreement that a two-prong
functional test should be used. The first element of the test
is "continuity" -- that is, the activity in question must be one
in which the insured regularly engages as a means of livelihood;
the second element is "profit motive" -- that is, the purpose of
the activity must be to obtain monetary gain. See 5 New
Appleman on Insurance Law Library Edition § 53.06[2][d][i]
(2014); 9A Couch on Insurance § 128.13 (3d ed. 2006); 3 Windt,
Insurance Claims & Disputes § 11:15 (6th ed. 2013). See also
Springer v. Erie Ins. Exch., 439 Md. 142, 162-164 (2014)
(surveying cases). The two-prong test is so widely utilized
that we accept it as the norm and employ it here.
5
See Worcester Ins. Co. v. Fells Acres Day Sch., Inc., 408
Mass. 393, 412 (1990); Commerce Ins. Co. v. Finnell, 41 Mass.
App. Ct. 701, 702-703 (1996); Metropolitan Property & Cas. Ins.
Co. v. Fitchburg Mut. Ins. Co., 58 Mass. App. Ct. 818, 820-823
(2003).
9
Insofar as the first prong is concerned, the underlying
complaint identifies Joseph as a licensed electrician; however,
the complaint leaves uncertain whether he participated in the
bathroom renovation in that capacity. The complaint
specifically alleges that Joseph served as a general contractor,
contracted with others, and oversaw the work. It also alleges
that in conjunction with disposing of the old bathtub, he
unhinged the railing of the second-floor deck, left it in place,
and failed to warn Dubois of its condition. However, there is
no indication in the complaint that his alleged supervisory or
disposal activities were ones in which he regularly engaged in
connection with his means of livelihood.
Insofar as the second prong is concerned, the complaint
does not indicate whether Joseph's participation in the
renovation project was motivated by profit. Especially when
considered in light of the extrinsic facts known to Vermont, the
complaint leaves it entirely plausible that Joseph contributed
his labor out of a desire to help his parents and improve the
residence in which they all lived.
"It is the insurer who bears the burden of proving the
applicability of an exclusion. In order for an exclusion to
negate an insurer's duty to defend ab initio, the facts alleged
in the third-party complaint must establish that the exclusion
applies to all potential liability as matter of law. If the
10
claimant's factual allegations are susceptible of an
interpretation that leaves room for coverage, or are
insufficiently developed, the insurer must defend unless and
until it demonstrates with conclusive effect on the third party
[i.e., the claimant] that as matter of fact -- as distinguished
from the appearances of the complaint and policy -- the third
party cannot establish a claim within the insurance." Norfolk &
Dedham Mut. Fire Ins. Co. v. Cleary Consultants, Inc., 81 Mass.
App. Ct. at 52 (quotations and citations omitted). Because the
facts alleged in the Dubois complaint do not establish that the
business pursuits exclusion applies to all potential liability
as matter of law, Vermont had a duty to defend and should not
have disclaimed outright.
b. Preferred's duty to defend. Vermont argues in the
alternative that even if it had a duty to defend, so did
Preferred, and, by operation of the policies' "other insurance"
clauses, Preferred was required to shoulder that burden alone.
Unlike the motion judge, we agree with Vermont that Preferred
also had a duty to defend, because the claims asserted in the
complaint are potentially within the scope of Preferred's
coverage. However, as explained in the following section, we
reject Vermont's position that the operation of the "other
insurance" clauses relieved Vermont of its own, independent duty
to defend.
11
The existence of Preferred's duty to defend turns on the
allegations of the complaint as they relate to the policy's
description of the risks covered. Joseph is identified in the
"Declarations" as an "individual," and, pursuant to the
provisions of section II, paragraph (1)(a), is an insured "only
with respect to the conduct of a business of which [he is] the
sole owner." That business is identified in the "Declarations"
as "electrician." The underlying complaint alleges that Joseph
is an electrician, who "has . . . been in charge of" the
renovation project. Although the complaint later characterizes
Joseph as a "general contractor," that characterization is not
mutually exclusive with his performing services as an
electrician. The allegations do not negate the possibility that
he was engaged to work on the renovations as an electrician, and
that his supervisory activities and/or his removal and disposal
of the bathtub, were ancillary to his electrical work and
performed in the conduct of his business. Because the
allegations of the complaint do not "lie expressly outside the
policy coverage and its purpose," Herbert A. Sullivan, Inc. v.
Utica Mut. Ins. Co., 439 Mass. 387, 394-395 (2003), Preferred
appropriately chose to defend under a reservation of rights and
to file a declaratory judgment action as a means of determining
its obligations.
12
c. Effect of "other insurance" clauses. Because the
motion judge ruled that only Vermont had a duty to defend, he
did not reach the additional argument made by Vermont concerning
the operation of the policies' respective "other insurance"
clauses. Vermont correctly observes that Preferred's clause is
a "pro rata clause" (providing that the policy will contribute
to the loss in the proportion that its policy limit bears to the
total limit of all available policies), while Vermont's clause
is an "excess clause" (providing that the policy will not
contribute to the loss until other available insurance is
exhausted). See Mission Ins. Co. v. United States Fire Ins.
Co., 401 Mass. 492, 495 n.3 (1988). Vermont also observes that
when an excess clause competes with a pro rata clause, the
excess clause ordinarily will be given effect. See id. at 496.
On this basis, Vermont takes the position that even though each
policy is designed as primary insurance and each provides the
insured with defense coverage separate and apart from indemnity
coverage, the operation of the "other insurance" clauses
transforms the Vermont policy into an "excess policy" and
relieves it of its contractual duty to defend.
This argument reflects a fundamental misunderstanding of
the nature and purpose of "other insurance" clauses that, like
the ones involved here, make no reference to the insurers'
13
defense obligations.6 Such clauses are provisions "designed to
establish a policy's relationship with other policies covering a
loss." Id. at 495 (emphasis supplied). As one commentator has
emphasized, they "speak only to loss allocation. In the
liability insurance context, 'losses' are either covered
judgments or settlements on the behalf of insureds. 'Other
insurance' clauses thus relate only to insurers' indemnity
obligations, and they do not even purport to address the
allocation or apportionment of defense costs." Richmond, Issues
and Problems in "Other Insurance," Multiple Insurance, and Self-
Insurance, 22 Pepp. L. Rev. 1373, 1429 (1995) (emphasis
supplied).
Put another way, regardless of how the "other insurance"
clauses may have operated in the event that both Vermont and
Preferred were required to indemnify Joseph, they have no
bearing on Vermont's concurrent duty to defend him. See
American Fid. & Cas. Co. v. Pennsylvania Threshermen & Farmers'
Mut. Cas. Ins. Co., 280 F.2d 453, 458-460 (5th Cir. 1960). When
a primary policy is not a true excess policy, but merely "is
deemed 'excess' by virtue of other collectible insurance, the
limiting language is directed to its obligation to contribute to
6
For extensive discussion of the operation and
enforceability of an "other insurance" clause expressly
purporting to relieve an insurer of its defense obligation if
there is another insurer with a duty to defend, see Nautilus
Ins. Co. v. Lexington Ins. Co., 132 Haw. 283, 295-297 (2014).
14
a settlement or judgment, not to its duty to defend." GMAC v.
Nationwide Ins. Co., 4 N.Y.3d 451, 456 (2005).
3. Duty to indemnify. The duty to indemnify turns on a
different universe of facts -- those contained in the summary
judgment record, which includes, among other things, the
parties' agreed upon facts and deposition testimony.7
a. Vermont. After consideration of the summary judgment
record in the light most favorable to Vermont, we conclude, as
matter of law, that Vermont cannot carry its burden of proving
the applicability of its business pursuits exclusion. As to the
continuity prong of the two-part test, the record does not
permit the conclusion that Dubois's injuries arose from any
activities in which Joseph regularly engaged as a means of
livelihood. In response to Preferred's statement of facts,
Vermont admitted that Joseph did not act as a general contractor
or construction supervisor on the job, he was not licensed as a
construction supervisor, he never ran a business as a
construction supervisor, and he never earned money as a
construction supervisor. So far as the record reveals, the only
business in which Joseph was continually engaged was his
business as an electrician, and the record is devoid of evidence
7
We view that record under familiar summary judgment
standards. See generally Herbert A. Sullivan, Inc. v. Utica
Mut. Ins. Co., supra, at 393-394.
15
that Dubois's injuries were connected with or incidental to any
work performed by Joseph in that capacity.
As to the "for profit" prong, Vermont argues that a profit
motive may be inferred from evidence that Joseph's parents
forgave a few hundred dollars of an approximately $2,000 debt
that he owed them for helping him pay his taxes. Vermont also
argues that Joseph expected to earn goodwill by working with
other tradesmen who might recommend him in the future. We think
that this showing is far too thin to meet Vermont's burden of
demonstrating the second prong; regardless, Vermont must satisfy
both prongs for the business pursuits exclusion to apply, and
this it cannot do.
b. Preferred. Because the question of Preferred's duty to
indemnify turns on the coverage granting provisions of its
policy and not upon an exclusion, it is not Preferred's burden
to negate coverage; it is the burden of the party seeking to
establish coverage (in this case Vermont) to show that the claim
is within the policy. See Markline Co. v. Travelers Ins. Co.,
384 Mass. 139, 140 (1981). After consideration of the summary
judgment record, we conclude, as matter of law, that Vermont
cannot demonstrate that the Preferred policy affords coverage to
Joseph. The Preferred policy covered Joseph only "with respect
to the conduct of a business of which [he was] the sole owner,"
16
and that business was designated as "electrician."8 Here, the
record reveals no facts from which it reasonably may be inferred
that Joseph was conducting his business as an electrician at any
time relevant to the occurrence of the accident.
4. Conclusion. The judgment as to count I of Preferred's
complaint is affirmed insofar as the judgement declared that:
(1) Vermont had a duty to defend Joseph in the underlying
action; (2) Vermont had a duty to indemnify Joseph; and (3)
Preferred had no duty to indemnify Joseph. However, insofar as
the judgment on count I declared that Preferred had no duty to
defend Joseph, the judgment is vacated and shall be replaced by
a declaration that Preferred had a duty to defend Joseph. The
judgment as to count II is vacated and shall be replaced by a
declaration that Preferred is entitled to equitable contribution
and that Vermont shall reimburse fifty percent of the defense
8
Vermont argues that a schedule appended to the Preferred
policy, which identifies "hazards" by location and description,
may be read to suggest that Joseph is covered as a general
contractor. Passing whether the schedule forms a part of the
policy, we think that Vermont's interpretation of the schedule
is unreasonable. More fundamentally, the summary judgment
record contains an admission by Vermont, in response to
Preferred's statement of facts, that Joseph did not serve as a
general contractor on this project. Accordingly, Vermont cannot
contend that Joseph is entitled to coverage on that basis.
17
costs expended by Preferred in defending Joseph.9
So ordered.
9
Unlike Vermont, Preferred commendably assumed Joseph's
defense under a reservation of its rights and brought a
declaratory judgment action as a means to demonstrate with
conclusive effect on the Duboises, as well as Joseph, that the
underlying claims were outside the scope of the Preferred
policy. That does not mean, however, that Preferred is entitled
to be fully reimbursed by Vermont for the fees and costs
incurred in providing Joseph with a defense. The pleadings
reflect that Preferred sought only to be reimbursed fifty
percent; furthermore, both parties represented at oral argument
that if we were to conclude that both insurers had a duty to
defend, the proper method of allocation in this case would be
for them to share the defense costs equally.