In Preferred Mutual Insurance Company v. Vermont Mutual Insurance Company, 87 Mass App Ct. 510 (June 17, 2015), the Massachusetts Appeals Court discussed several interesting insurance coverage issues when it addressed a dispute between a homeowner’s insurer and a CGL insurer. The facts of the case were as follows.
Frances and Eileen Munyon were the Named Insureds under a Homeowner’s Policy issued by Vermont Mutual Insurance Company. Their adult son, Joseph, lived with them. By virtue of Joseph’s status as a resident relative, he was an insured under the Vermont Mutual policy.
Joseph was also the Named Insured under a CGL Policy issued by Preferred Mutual Insurance Company. The Preferred Mutual policy was issued in connection with Joseph’s trade as a self-employed licensed electrician.
In October, 2009, the Munyons decided to renovate their second floor bathroom and hired a contractor to do the plumbing work. During the course of the renovation, an employee of the plumbing contractor fell off of a porch while removing debris. The day before the accident, Joseph had unfastened the porch railing in order to push an old cast iron bathtub into the Munyons’ back yard. Joseph then left the railing in an upright position so it appeared to be securely in place. While leaning against the unsecured railing on the following day, the employee of the plumbing contractor fell to the ground and was seriously injured.
The employee and his wife brought suit against Frances, Eileen and Joseph. The Complaint alleged that Joseph was a licensed electrician who resided with his parents and, at all times relevant to the action, had been in charge of the contracting work conducted at the Munyon home.
The Appeals Court first addressed whether Vermont Mutual, the homeowner’s insurer, had a duty to defend Joseph notwithstanding the business pursuits exclusion contained in its policy. The Appeals Court held that the business pursuits exclusion did not apply because the allegations of the Complaint, especially when read in light of Vermont Mutual’s knowledge that Joseph was the son of its policyholders and that the residence was their mutual home, did not conclusively establish that the plaintiff’s claims were ones “arising out of” or “in connection with” Joseph’s business as a self-employed electrician. The Appeals Court observed that there is “widespread agreement” that a two-prong functional test should be used to determine when an activity arises out of or is in connection with the insured’s business. The first element of this two-prong functional test is “continuity” – that is, is the activity in question one in which the insured regularly engages as a means of livelihood? The second prong is “profit motive” – that is, is the purpose of the activity to obtain monetary gain?
Applying this test, the Appeals Court held that the underlying Complaint left uncertain whether Joseph participated in the bathroom renovation in his capacity as a licensed electrician. More specifically, the Court noted that there was no indication in the underlying Complaint that Joseph’s alleged supervisory or disposal activities were ones in which Joseph regularly engaged in connection with his trade as an electrician.
With respect to the “profit motive” element of the two-pronged functional test, the Complaint did not indicate whether Joseph’s participation in the renovation project was motivated by profit. Also the court observed that, especially when considered in light of the extrinsic facts known to Vermont Mutual, the Complaint left it entirely plausible that Joseph contributed his labor to the renovation project out of a desire to help his parents and improve the residence in which they all lived. Accordingly, because Vermont Mutual bore the burden to prove that the business pursuits exclusion in its policy negated its duty to defend ab initio, and the facts alleged in the Complaint did not establish that the business pursuits exclusion applied to all potential liability as a matter of law, the court determined that Vermont Mutual had a duty to defend Joseph which it could not disclaim outright.
Having determined that Vermont Mutual had a duty to defend Joseph, the Appeals Court next addressed whether Vermont Mutual’s duty was obviated by a corresponding duty to defend Joseph by Preferred Mutual, his CGL insurer, because of the “other insurance” clause in Vermont Mutual’s policy. Vermont Mutual’s other insurance provision was an “excess” clause, providing that the policy would not contribute to a loss until other valid and collectible insurance was exhausted. In contrast, the “other insurance” clause in Preferred Mutual’s policy was a “pro rata” clause, providing that the Preferred Mutual policy would contribute to a loss in the proportion that its limit bore to the total limit of all available policies.
The Appeals Court recognized that when an “excess” clause competes with a “pro rata” clause, the “excess” clause ordinarily will be given effect. However, the Appeals Court ruled that this result only affected the respective indemnity obligations of the two insurers, and not their respective duties to defend. The Appeals Court observed that prior Massachusetts case law described “other insurance” provisions as designed to establish a policy’s relationship with other policies covering a “Loss.” In the liability insurance context, a “loss” is either a covered judgment or a covered settlement. Therefore, “other insurance” clauses relate only to an insurer’s indemnity obligation and do not even purport to address the allocation or apportionment of defense costs.
The court went on to observe that, regardless of how the “other insurance” clauses may have operated in the event that both Vermont Mutual and Preferred Mutual were required to indemnify Joseph, those clauses had no bearing on Vermont Mutual’s concurrent duty to defend him. Rather, when a primary policy like Vermont Mutual’s is not a true excess policy, but merely a policy deemed to be “excess” by virtue of its “other insurance” clause, the limiting language in the policy’s “other insurance” clause is directed only to the policy’s obligation to contribute to a settlement or judgment, and not to its obligation to defend.
A copy of the court’s decision can be found here. The decision is one which all insurers with a duty to defend should keep in mind when adjusting claims in Massachusetts.