State Farm Fire & Casualty Co. v. Reed

OPINION

HIGHTOWER, Justice.

This cause presents the question whether there is coverage under a homeowners insurance policy that excludes coverage for “business pursuits” of an insured except those pursuits that are “ordinarily incidental to non-business pursuits.” Joseph and Francis Reed (the Reeds) and Michael and Sheree Ford (the Fords) filed a declaratory judgment action against State Farm Insurance Company (State Farm) seeking a declaration of coverage under a homeowner’s insurance policy (policy) it issued for liability arising out of the death of the Fords’ child while at a home child care center operated by Ms. Reed. The trial court granted summary judgment for the Reeds and the Fords, holding that the child’s death was caused by an activity that was ordinarily incidental to non-business pursuits. The court of appeals affirmed. 826 S.W.2d 659 (1992). We affirm the judgment of the court of appeals.

Frances Reed operated a registered family home for day care services at her home. In 1987, eighteen month old Michael Ford III drowned in a puddle of water that settled on a tarp covering a swimming pool after crawling through a hole in the fence that separated a play area from the swimming pool. The *699Fords sued the Reeds for wrongful death, The Reeds notified State Farm of Michael’s death and sought coverage under their policy. State Farm concluded that coverage was excluded under the Reeds’ policy1 because Michael’s death resulted from a business pursuit and defended the Reeds under a reservation of rights. After a non-jury trial, the trial court rendered judgment against the Reeds for $480,000 plus interest.2

The Reeds and the Fords filed this declaratory judgment action seeking a declaration that the judgment was covered by the policy. State Farm moved for summary judgment, alleging that there was no coverage based on the policy exclusion of coverage for any business pursuits. The Reeds and the. Fords also moved for summary judgment, asserting that there was coverage based on the exception to the business pursuits exclusion for activities which are ordinarily incidental to non-business pursuits. The trial court granted summary judgment for the Reeds and the Fords and denied summary judgment for State Farm, holding that the exception to the “business pursuits” policy exclusion applied since Michael’s death was caused by a business activity that was ordinarily incident to a non-business pursuit. The court of appeals affirmed, stating that “one of the causes of the child’s injury was the negligent failure to maintain the fence, an activity ordinarily incidental to a non-business pursuit. Therefore we hold that the court did not err in finding that the facts of the case fit the exception to the exclusion.” 826 S.W.2d at 668.

I.

State Farm asserts that there is no coverage un(jer the policy because Michael’s death was result of an activity that was a business pursuit and the “ordinarily incidental» exception does not apply. We disagree.

A.

Generally, a contract of insurance is subject to the same rules of construction as other contracts. Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex.1987). If the policy is worded so that it can be given only one reasonable construction, it will be enforced as written. Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex.1984). However, if a contract of insurance is susceptible to more than one reasonable interpretation,3 we must resolve the uncertainty by adopting the construction most favorable to the insured. Nat’l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.1991). An intent to exclude coverage must be expressed in clear and unambiguous language. Id.

B.

Whether child care in the home for which some remuneration is received is excluded as a “business pursuit”, or is an exception to this exclusion because it is “incident to non-*700business pursuits,” is unclear. John Allen Appelman, 7A Insurance Law and Practice, § 4501.11, at p. 280-81 (1979). Other jurisdictions have taken three different approaches. The first approach is illustrated by Stanley v. American Fire & Casualty Co., 361 So.2d 1030 (Ala.1978), in which a one year old was injured when she fell backwards in a bed of hot coals in the fireplace of her baby-sitter. The Alabama Supreme Court focused on the ongoing nature and profit aspect of the enterprise and held that child care for compensation was a business pursuit and was not ordinarily incident to non-business pursuits.4 This approach has been criticized because it focuses too much on the business nature of child care and always renders the exception to the exclusion inapplicable in the child care context regardless of the specific activity that actually created the liability. See, e.g., Allstate Ins. Co. v. Kelsey, 67 Or.App. 349, 678 P.2d 748 (1984) (Warren, J. dissenting), review denied, 297 Or. 227, 683 P.2d 91 (1984); see also Developments in Maryland Law, 49 Maryland L.Rev. 509, 823 (1990).

The second approach is illustrated by Crane v. State Farm Ins. and Casualty Co., 5 Cal.3d 112, 95 Cal.Rptr. 513, 485 P.2d 1129 (1971). In Crane, a two and a half year old suffered burns on her hands and wrists while in the care of a baby-sitter. The sitter was paid for her services but also, simultaneously cared for her own two children. In concluding the injury was covered by the babysitter’s homeowner’s policy, the California Supreme Court stated:

Indeed, it is difficult to conceive of an activity more ordinarily incident to a noncommercial pursuit than home care of children.

95 Cal.Rptr. at 515, 485 P.2d at 1131.5 This approach has been criticized as too broad because the “ordinarily incident to non-business pursuits” exception swallows the “business pursuits” exclusion, at least in the context of child care. See, e.g., State Farm Fire & Casualty Co. v. Moore, 103 Ill.App.3d 250, 58 Ill.Dec. 609, 613, 430 N.E.2d 641, 645 (1981); see also Developments in Maryland Law, 49 Maryland L.Rev. 509; 812 (1990).

The third approach is illustrated by Gulf Ins. Co. v. Tilley, 280 F.Supp. 60 (N.D.Ind.1967), aff'd per curiam 393 F.2d 119 (7th Cir.1968). In that case, a child, while in the care of a baby-sitter, was severely burned by the contents of a coffee, pot. The court focused on the type of activity that caused the injury (serving coffee) and held that it was not an activity ordinarily associated with the function of child care.6 This approach gives effect to the exclusion and the exception but reaches conclusions that appear somewhat contrived. See Developments in Maryland Law, 49 Maryland L.Rev. 509, 824 (1990).

II.

In this case, the policy provides, among other things, that State Farm will pay *701all sums which the Reeds become legally obligated to pay as damages because of bodily injury. The policy also provides there is no coverage under the policy for “any business pursuits of an insured except activities therein which are ordinarily incidental to non-business pursuits[J” Neither party disputes that Ms. Reed’s home day care operation was a business pursuit. Thus, we must determine whether the exception to the “business pursuits” exclusion applies.

The cases from other jurisdictions support the conclusion that this exclusion and exception are susceptible to more than one reasonable interpretation. See, e.g., Stanley v. American Fire & Casualty Co., 361 So.2d 1030 (Ala.1978); Crane v. State Farm Fire and Casualty Co., 5 Cal.3d 112, 96 Cal.Rptr. 513, 485 P.2d 1129 (1971); Gulf Ins. Co. v. Tilley, 280 F.Supp. 60 (N.D.Ind.1967), aff'd per curiam, 393 F.2d 119 (7th Cir.1968); see also John Allen Appelman, 7A Insurance Law and Practice, § 4501.11, at p. 280-81 (1979). Under one interpretation, the Reeds liability arising out of home child care is always incident to a non-business pursuit. Under another reading, the Reeds’ failure to maintain the fence constitutes a failure to safely supervise children enrolled in a child care program. Thus, this activity is not incident to a non-business pursuit. Yet under another construction of the exclusion and the exception, the maintenance of the fence at a person’s home is ordinarily incident to a non-business pursuit.7

We must resolve the uncertainty of a policy exclusion by adopting the construction most favorable to the insured. See Nat’l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.1991). Based upon an examination of the text of this exclusion and exception and considering other possible reasonable interpretations, we conclude that the provision is ambiguous.8 Therefore, strictly construing the policy language against the insurer and adopting the interpretation most favorable to the insured, we hold that coverage exists under the policy for damages resulting from the death of Michael.9

For the above reasons, the judgment of the court of appeals is affirmed.

Dissenting opinion by PHILLIPS, C.J., joined by HECHT, J. ENOCH, J., not sitting.

.The homeowners policy contained the following language;

SECTION II — LIABILITY SECTION
Subject to the provisions and conditions of the policy, and of this form and endorsements attached, the Company agrees with the Insured named on Page 1 as follows:
COVERAGE D — PERSONAL LIABILITY
To pay on behalf of the Insured [the Reeds] all sums which the Insured shall become legally obligated to pay as damages because of bodily injury or property damage and the Company shall defend any suit against the Insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of the policy, even if any of the allegations of the suit are groundless, false or fraudulent; but the Company may make such investigation and settlement of any claim or suit as it deems expedient.
* * * * * *
EXCLUSIONS — Coverage D shall not apply:
1. to any business pursuits of an Insured except activities therein which are ordinarily incidental to non-business pursuits;
⅜ 5¡S ⅜! * * ⅜

. Among other things, the judgment stated:

3.The Defendants, JOE REED and Wife, FRANCES REED, were negligent in the maintenance of the premises where the accident made the basis of this suit occurred in that said Defendants failed to maintain the premises to prevent children from gaming access to the swimming pool, and such negligence was a proximate cause of the occurrence in question.

. Nevertheless, not every difference in the interpretation of a contract or an insurance policy amounts to an ambiguity. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex.1994).

.The following courts follow Stanley: Moncivais v. Farm Bureau Mut. Ins. Co., 430 N.W.2d 438 (Iowa 1988); State Mutual Ins. Co. v. Russell, 185 Mich.App. 521, 462 N.W.2d 785 (1990); MVG v. Lucas, 590 So.2d 1322 (La.Ct.App.1991); Felder v. Despinasse, 564 So.2d 1331 (La.Ct.App.1990); Susnik v. Western Indem. Co., 14 Kan.App.2d 421, 795 P.2d 71 (1989); McCloskey v. Republic Ins. Co., 80 Md.App. 19, 559 A.2d 385 (1989); Allstate Ins. Co. v. Kelsey, 67 Or.App. 349, 678 P.2d 748 (1984), review denied, 297 Or. 227, 683 P.2d 91 (1984). Other courts follow Stanley, although the non-business exception to the exclusion differs slightly in these cases: Landis v. Allstate Ins. Co., 546 So.2d 1051 (Fla.1989); Haley v. Allstate Ins. Co., 129 N.H. 512, 529 A.2d 394 (1987); Rocky Mountain Casualty Co. v. St. Martin, 60 Wash.App. 5, 802 P.2d 144 (1990), review denied, 116 Wash.2d 1026, 812 P.2d 102 (1991); Farmers Ins. Co. v. Wiechnick, 166 Ariz. 266, 801 P.2d 501 (Ct.App.1990).

. This approach was followed in the following cases: Bankers Standard Ins. Co. v. Olwell, 309 N.W.2d 799, 801-02 (Minn.1981); Western Fire Ins. v. Goodall, 658 S.W.2d 32, 34—5 (Mo.App.1983); Nationwide Mut. Fire Ins. Co. v. Collins, 222 S.E.2d 828, 830-31 (Ga.App.1975).

. Several other courts have adopted this approach. See Floyd v. Northern Neck Ins. Co., 245 Va. 153, 427 S.E.2d 193, 196-97 (1993); Rodriguez v. Safeco Ins. Co. of America, 821 P.2d 849 (Colo.App.1991, cert. denied); Economy Fire & Casualty Co. v. Bassett, 170 Ill.App.3d 765, 121 Ill.Dec. 481, 484, 525 N.E.2d 539, 542 (1988); Aetna Life and Casualty Co. v. Ashe, 88 Or.App. 391, 745 P.2d 800 (1988), review denied, 305 Or. 103, 750 P.2d 497 (1988); State Farm Fire & Casualty Co. v. Moore, 103 Ill.App.3d 250, 58 Ill.Dec. 609, 613, 430 N.E.2d 641, 645 (1981); see also Nationwide Mut. Fire Ins. Co. v. Collins, 136 Ga.App. 671, 222 S.E.2d 828, 832-33 (1975).

. We disagree with the dissent’s application of the Tilley approach. The dissent asserts that the Reeds’ failure to properly supervise Michael was the activity that caused Michael’s death. However, the trial court specifically found that the activity that proximately caused Michael’s death was the Reeds’ failure to adequately maintain the fence located around the swimming pool. Nevertheless, one of the causes of Michael’s death was the Reeds' negligent failure to maintain the fence.

Furthermore, contrary to the dissent’s assertion, it does not matter if the fence was repaired pursuant to a business duty. 873 S.W.2d at 702 (Phillips, C.J., dissenting). Instead, the court's focus is whether the actual activity creating liability was ordinarily incident to a non-business pursuit. Maintenance of the yard fence surrounding the Reeds' pool is ordinarily incident to a non-business pursuit regardless of whether it is required by a state regulatory scheme, a local ordinance or other law.

. The following courts have also held that this exclusion and exception are ambiguous: Robinson v. Utica Mutual Ins. Co., 585 S.W.2d 593, 598 (Tenn.1979); Foster v. Allstate Ins. Co., 637 S.W.2d 655 (Ky.App.1981); State Farm Fire & Casualty Co. v. Moore, 103 Ill.App.3d 250, 58 Ill.Dec. 609, 430 N.E.2d 641 (1981); see also Smith v. Allstate Ins. Co., 241 Va. 477, 403 S.E.2d 696 (1991).

.This case is similar to Foster v. Allstate Ins. Co., 637 S.W.2d 655 (Ky.App.1981). In that case, Foster provided home day care for compensation. While in Foster’s care, an infant died when he fell backwards on a coffee table in Foster’s home. The Kentucky Supreme Court reviewed the different approaches adopted by other jurisdictions and determined that from the varying interpretations of the business pursuits exclusion and ordinarily incidental to non-business pursuits,

the exception provision contained in the exclusion leaves some doubt as to its meaning, and is clearly susceptible to two reasonable interpretations, one of which would be favorable to the insured and one which would not. In such a case, the law of the commonwealth is that the interpretation favorable to the insured will be adopted.

637 S.W.2d at 657 (citations omitted).